Milk Price v Value Added
Being a non-shareholding supplier, my only vested interest in Fonterra is my cows and machinery.
In the perfect world I should be raking in enough cash to pay my lease, increase production and start buying my own shares.
But at the rate I’m going with drought and drying off early and doing eff-all production, it seems like a bad joke and I continue to rely on the farm owners’ shareholding to supply milk.
I am in a strange position as most dairy farmers own both cows and company shares, but I am also not alone because I bet there are many sharemilkers out there whose contracts changed after TAF and they are receiving milk price only and no dividend.
My faith in my dairy investment has weakened after TAF. Overnight, a large number of people who had sensibly invested in cows and hoped to move up the ranks into eventual farm ownership and shareholding through sheer hard work are now operating under the volatile whim of the milk price only.
Sure, the milk price is currently at a record high with prices so unexpected that the milk price formula promptly fell over. Value added and dividend generating products became uneconomic in the face of boring old commodity milk powder becoming the star turn.
So I am currently getting a good return on my investment in conjunction with a kick up the bum from mother nature who has failed to rain on my farm since Christmas.
So at the moment, the milk market is rewarding me ($8.65/kg milk solid) for my investment in cows, machinery and hard slog and the people that invested in a piece of paper are getting a poor return as the dividend has been reduced to just 10 cents.
Most farmer shareholders will have a foot in both camps and will be happy on one hand with milk price, and simultaneously disappointed with a low return on shares.
They would also probably be wondering why on earth the shares are still valued highly. It looks good on paper but not so good if you want to increase production (and have to buy more shares).
I suspect a high milk price and a big return on value added products are mutually exclusive. So it will be in the best interests of the non-farming investors to buy the milk at a low price, add value in the specialty plants where all their capital is invested and sell the products to international consumers at exorbitant profits and run laughing all the way to the bank.
Most shareholding farmers would probably like to see a good balance between reasonably high milk price and a fair return via the dividend because any other scenario is like robbing Peter to pay Paul. For me and the silent milk price only sharemilkers, it adds another reason to why you would never go sharemilking.
I was pleased to hear Fonterra is investing $500 million in future milk powder processing plants. But I am disturbed to hear marketing people pushing about adding value to the milk here in New Zealand, which I believe is the Fonterra strategy, instead of selling the milk powder as a commodity.
There seem to be marketers and politicians calling for a step away from commodities for more investment into value added, trying to raise the value of New Zealand milk and sell more luxury products to middle-class consumers.
My question is, with populations rising and economies tipping over, won’t people just be wanting to survive? Who is going to afford all the value added product?
And I’m wondering how my business fits in to all of this?