Watch dog agrees to lower price

 But they have expressed full confidence in the manual, set up to determine Fonterra’s farmgate milk payout to suppliers. 

The forecast farmgate milk price calculation is based on processing and manufacturing milk powders; the calculation is also based on the costs of production for an efficient manufacturer of Fonterra’s size and scale.

In its 2013-14 annual report, the Fonterra Shareholders Council says it questioned the board’s decision in December to pay farmers $8.30/kgMS for milk, rather than $8.93/kgMS as calculated by the manual.

After discussions with the board and management, the council was satisfied with the explanation, says council chairman Ian Brown.

“The council’s view is that borrowing money to distribute revenue that was not earned in order to meet the milk price panel’s recommendation would not have been in the best interest of our farmers.

“However, in the absence of a market for milk in New Zealand the milk price is of such importance to farmers that any movement away from the price outlined by the manual, positive or negative, must be scrutinised and the board must be clear in their justification of any change.

“The manual and its principles are in place for good reason – to drive the correct behaviours and actions at farm and business level.”

In December last year, Fonterra chairman John Wilson said the co-op was “in an extraordinary position”. Milk powders were fetching record prices due to strong global demand; a huge gap had opened between prices for milk powders compared to cheese and casein.

Fonterra’s asset base includes a number of cheese and casein manufacturing plants which means it was not able to maximise profits from these plants.

“In such abnormal circumstances, the board has the discretion to pay a lower farmgate milk price than that specified by the manual, if it is in the best interests of the cooperative,’ Wilson said.

An independent review of the milk price adjustment by PricewaterhouseCoopers (PwC) found it appropriate under the circumstances.

Brown says the council understands that view. But he points out that the milk price principles in Fonterra’s constitution provide for a competitive milk price to be paid to suppliers.

“The milk price should be the maximum amount which Fonterra – reflecting its status as a properly managed, efficiently run and sustainable co-op – could pay for the milk supplied to it in a season.

“The council continues to have full confidence in the manual. The events of the 2014 financial year do not show issues with the manual, rather they show the transparency now in place because of its existence.

“This transparency provides confidence to the council and clarity to farmers in the continued use of the manual; it puts pressure on Fonterra to perform at a farmgate level, to add value above the milk price and to invest in the success of the co-op.”

More Bite or a lap-dog?

THE FONTERRA Shareholders Council is asking farmers to approve a budget of $3.5 million for this financial year.

Last year farmers approved a budget of $3.6m; the council used $3.1m.

There is no change to remuneration paid to the councillors: the council chairman gets $90,000, deputy chairman $55,000 and councillors $30,000. The council is made up of 35 councillors – 25 in the North Island and 10 in the South Island. Fonterra shareholders will hold their annual meeting in Palmerston North next week.