Milk Price v Value Added

Matamata Chronicle - - Rural Delivery – Opinion - By LYN WEB­STER

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?

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