Wednesday, 15 April 2015 14:16

Angry Fonterra farmers mull supply options

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Fonterra chairman John Wilson says farmers are rightly disappointed with its half-year results, with some threatening at recent farmer meetings to leave the co-op.

But Wilson says “accounting treatments, rather than performance issues” are behind its decision to cut dividend payout by 5c/kgMS. The move has angered farmers, many of whom are facing a bleak 2014-15 season with a $4.70/kgMS milk price.

The co-op board and management held 40 meetings throughout the country recently to explain why its half-year revenues were down 14% to $9.7 billion and net profit after tax down 16% to $183 million. Wilson and chief executive Theo Spierings attended meetings in Te Awamutu, Rongotai, Carterton, Hawera and Invercargill; average turnout was 160 at each meeting. 

Wilson told Dairy News the meetings generated “real good discussion”.

”They asked questions I would have asked myself,” he says.

“We explained the accounting treatment that occurred due to rapid drops in commodity prices during the half year.”

Wilson says some farmers talked about leaving the co-op.

“Of course the issue came up at meetings; it’s a very competitive environment but not a level playing field because Fonterra has to operate under DIRA,” he says.

Farmers also questioned why the co-op failed to pay a higher dividend when the milk payout is low, as Fonterra’s consumer business milk is a raw ingredient and a lower milk price means lower production cost.

But Wilson says the milk pools in three key offshore consumer business markets, Brazil, Chile and Australia, the local milk price is not linked to global prices.

He says Fonterra also incurred a 12c/kgMS loss on inventories. At the end of the last financial year the co-op was left with a high inventory of powder products; milk powder prices plummeted late last year, shaving off $182 million in value.

 Waikato University agribusiness professor Jacqueline Rowarth says the Fonterra half-year result was poor.

Rowarth, a Fonterra shareholder, attended a meeting in Waikato; the meetings in the region were packed, she says.

“There was standing room only and in at least one place – people couldn’t get in, farmers had huge concerns about the dividend in particular and the payout in general.”

Rowarth says she is also hearing talk about farmers mulling supply options.

“Word is 500 queued up for Open Country Dairy – and that OCD is deciding about an extra processing plant,” she says.

Currently it isn’t taking on new suppliers, similar to other independent processors, Miraka and Synlait.

But Rowarth says farmers are indicating that they would like to switch.

“That would give them share money from Fonterra to invest in their own farms (or not carry debt) – but the problem is selling shares to people who want to increase supply in a dismal payout and dividend year. “

Rowarth says farmers remain baffled with the drop in dividend when milk payout is low.

“Farmers understood the explanation last year of why the dividend was low. They don’t understand why it isn’t higher this year based on the same logic.

“The big problem is that Fonterra has so many expansions and deals going on, that the company is being drained financially and shareholders are feeling that the returns will not be seen in their lifetime. 

“As many are not farming the land for their children to take over, as their children are seeing easier and better money in ‘not faming’, they are thinking for the shorter term and their own sleep at night. 

“All this is very complex and very difficult for Fonterra management and directors to make reassuring statements about the future because it is uncertain.”

Pukeatua farmer James Houghton says switching supply has crossed his mind.

“Miraka is offering us milk price plus 10 cents; I have $1.5 million tied up in Fonterra shares and not generating any returns,” he says.

“So economically, it makes sense to leave Fonterra.

“Fonterra talked about changing behaviours six months ago but they have come out with a disappointing result.”

Time to change tactic

Agribusiness professor Jacqueline Rowarth says Fonterra must ensure the official cash rate is high on the Government’s agenda.

Fonterra must also push for the DIRA provision - allowing new processors to have Fonterra milk for three years while they set up their companies and pick the eyes out of the local suppliers - to be reviewed, she says. 

“I’d also be wondering about costs within Fonterra which include the bonus structure.”

Rowarth also questions the effectiveness of the Fonterra Shareholders Council.

“The council, though comprising well-meaning people, has been unable to show that it has had any effect in being the link between the board and the farmers,” she says.

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