Eroding share of milk worries Fonterra shareholders
Fonterra shareholders are concerned with a further decline in the co-op’s share of milk collected in New Zealand.
"The base milk price is critical to an industry generating almost 26% of New Zealand's merchandise exports," says Andrew Hoggard, Federated Farmers Dairy vice-chairperson.
"This base milk price is critical to farmers' incomes, the price we farmers have to pay in order to supply Fonterra, the level of Fonterra's dividend and ultimately, the price of milk in the Raw Milk Regulations.
"We were clear the new subpart 5A is deeply flawed. It doesn't give the Commerce Commission guidance to get the base milk price right and Federated Farmers has advanced an alternative in our submission.
"That said, Commerce Commission oversight will be positive with one important caveat. True oversight must not allow inputs to be juggled in such a way as to game the base milk price.
"If the base milk price is gamed or interfered with, confidence, investment and ultimately exports will be undermined. This is why farmers and industry need certainty enshrined in statute.
"It's also fair to say the base milk price helps underpin the rural land market. If we get it right many other pieces may fall into place.
"This could include Fonterra's proposal for Trading Among Farmers (TAF). Fonterra's supplier-shareholders, who we represent, are truly concerned about losing full ownership.
"Fonterra must remain in the hands of its supplier-shareholders. It is that simple.
"We also asked the committee to define what an 'Independent Processor' actually is.
"We did this because of plans to time limit regulated raw milk if an independent processor has its own milk supply. We expressed to the committee our concerns over the existing "20% rule" in the current Dairy Industry Restructuring Act.
"This rule allows Fonterra farmer suppliers to divert up to 20% of their milk every week to an independent processor. With the shutters coming down on regulated milk, it may become a backdoor for processors needing additional milk volume.
"In order to protect legitimate boutique cheese makers and small independent processors, we argued the "20% rule" should be either dropped or replaced with a secondary volumetric limit. Another option was to tie it to the amount of milk taken in October.
"We were also clear it is not the government's role to set the method of a cooperative's share price; that is what shareholders do. If TAF does not happen we disagree with legislating Fonterra to provide a share priced at the "fair value.‟
"The status quo has proven beneficial and those farmers who have entered or exited the cooperative have done so. It is wrong to make Fonterra set its share price differently to the other dairy cooperatives," Hoggard concluded.
While technical difficulties prevented Federated Farmers Dairy chairperson, Willy Leferink, joining the committee by phone, he says Federated Farmers is concerned about the lack of detail shareholders have before a crucial second vote on Trading Among Farmers.
"Less than eight weeks before a shareholder vote, details about TAF still seem sketchy. Farmers still don't have a value proposition before them and supplier-shareholders need this to make an informed choice," Leferink says.
"The onus is on Fonterra to provide shareholders with it.
"If a Fonterra fund does eventuate after the vote, we told the committee we would like to see added legislative protection around our largest and most important company.
"We suggested a cap on the number of shares a farmer-shareholder can place with the Fonterra Fund. We also asked for safeguards preventing Fonterra from diluting its supplier-shareholding. There must also be a restriction, in legislation, on the maximum amount of fund securities any one party can hold.
"Federated Farmers is also clear it is not the role of the government to set a cooperative's share pricing method; that's what shareholders do. If TAF doesn't happen we disagree with legislating Fonterra to provide a share priced at the "fair value‟.
"The status quo has proven beneficial and those farmers who have entered or exited the cooperative have done so. These entry and exit clauses are tough enough so it is wrong to make Fonterra set its share price differently to the other dairy cooperatives.
"Given the importance of Fonterra to the economy, the Dairy Industry Restructuring Amendment Bill will be arguably the most significant piece of legislation in this Parliament.
"We have to get it right; there isn't any other option," Leferink says.
