Fonterra mulls options - sale or IPO
An outright sale of Fonterra’s global consumer business is more likely than a float, says Forsyth Barr senior analyst equities, Matt Montgomerie.
Fonterra's Co-operative Difference Payment follows that same principle. Acting as an incentive for farmers to make changes now that will better position their business for the future, the scheme is Fonterra's investment into the future of New Zealand dairy farming.
What do I need to know?
While dairy farmers will be aware of The Co-operative Difference framework introduced in 2019, the milk payment is still relatively new, coming in during Q1 2021.
From 1 June 2021, Fonterra changed the way farmers are paid for their milk through the introduction of a new milk payment parameter. This saw a certain proportion of a farm's milk payment influenced by the farm's progress under the Co-operative Difference framework by up to 10 cents/kgMS, baked into the current price. Progress is determined by the farm's sustainability credentials and milk quality.
The Co-operative Difference Payment is divided into two parts:
Seven cents per kgMS for achievement under four focus areas:
- Environment: Have a farm environment plan in place and be achieving 3 out of the 4 key practices
- Animals: Have an animal wellbeing plan signed off by your vet annually
- People and Community: Achieve 100% on the Dairy NZ Workplace 360 Assessment at foundation level
- Co-op and Prosperity: Maintain a full and accurate online Farm Dairy Diary
Three cents per kgMS for milk that meets the 'Excellence' standard under the Milk Quality framework, once the previous criteria have been met.
To find out more about how to achieve the criteria for the Co-operative Difference Payment speak with a local advisor.
Why should I change my business for 10 cents?
The Co-op Difference Payment may seem like yet another piece of compliance to add to a growing list... and only for 10 cents.
But as mentioned, this is Fonterra's investment into the future of New Zealand dairy farming. By incentivising practices that improve quality and sustainability, Fonterra can help New Zealand hold its position in the market and respond to the growing expectation for sustainably produced, high-quality dairy from over-seas markets.
It also represents an investment for farmers. For those farm owners that make the changes to meet both 7 and 3 cent criteria, they are not actually doing it for cents per kgMS. They are doing it to secure the future of their asset, that their dairy will continually be selected and sold, and to enable them to continue producing high quality dairy.
While it's 10 cents today, the Co-operative Difference Payment framework also has the flexibility to evolve and change over time, potentially increasing the payout total. So, positioning your business to reap the small rewards of the scheme for today could have big benefits down the track.
Fonterra's Co-operative and the future of dairy
Fonterra is on a mission to be a more attractive option to farmers, recently passing a vote to adopt a more flexible shareholding structure, among other changes.
It's not alone. Dairy companies like Synlait and Open Counrty both have similar sustainability initiatives to meet the demands of government and the market, demonstrating that this is not a single organisational shift, but an industry one.
It can be a hard decision to invest in changing your business for what may not feel like a large yield. And in the case of the Co-operative Difference Payment, farmers may have to increase overhead costs that result in less output. On top of finding ways to meet the new 190kg nitrogen cap rule imposed in July this year, this can seem like too much, too fast.
But these changes won't be the last. Sustainability and good practice are going to be the leading narratives for the foreseeable future, so continuing to meet these changes when they come into effect will position your business for future success. Making incremental changes now will be far easier than having to do a total overhaul of your farm and its practices, which could slow or stop business for a period of time. Spreading the cost of improvements over time by making ongoing changes is also easier than having to front up with the full cost of a radical rebuild.
Chris Gawler is a rural consultant at Baker Tilly Staples Rodway.
