Fonterra has nobody but itself to blame
Equity manager on a 1000-cow dairy farm in mid-canterbury
Nobody was surprised when Fonterra’s competitors vociferously objected to the co-operative’s plans to change its capital structure.
Vigorous objection to anything Fonterra does is just what independent dairy processors do on days that end with a Y.
Recently Open Country Dairies hired a firm to compile a report full of laughably dire warnings about what Fonterra’s capital structure changes would do, including an increase in the domestic price of dairy products.
It’s worth noting that Open Country Dairy exports all its products, so its sudden concern for the New Zealand consumers is questionable.
The reason every processor has an opinion about Fonterra’s capital structure is simple: they are all fighting for a share of the declining milk pool.
Once again Fonterra finds itself begging the Government to change the law, so it can fight off these advances. And once again, Fonterra has nobody but itself to blame.
Fonterra’s current capital structure, Trading Amongst Farmers (TAF), came into effect 10 years ago and was designed to protect the co-operative’s balance sheet against farmers exiting the company and cashing in their shares. But the ink was barely dry when production began to slow, and Fonterra’s share of the pool declined.
This new proposed structure is attempting what the architects of TAF were too short-sighted to do; give farmer shareholders a reason to keep supplying the cooperative instead of cashing in their shares and supplying an independent processor who does not require farmers to buy shares in their company.
It’s no secret that the Minister for Agriculture, Damien O’connor, dislikes Fonterra’s current shareholding arrangements so intensely that he’s pushing for the changes to progress. O’connor and MPI have wrung several concessions out of Fonterra, not to mention dropping a review of milk quota allocations in their lap.
For its part, Fonterra has acquiesced to nearly every demand the Ministry for Primary Industries (MPI) demanded of it, so desperate is it to see the changes go through. Changes, it must be said, that have the support of an overwhelming majority of farmer shareholders, myself included.
This week the Parliamentary Commissioner for the Environment (PCE), Simon Upton, called for a pause in proceedings, stating that he was ‘‘concerned these changes hold the potential for negative environmental consequences and these need to be properly understood before any amendment proceeds’’.
I find Upton’s concerns bizarre as everyone agrees that the milk pool is shrinking, which should result in the opposite of increased environmental impacts. Government regulations around freshwater and land use change have all but stopped dairy conversions dead in their tracks, and more land is moving away from dairy.
It could be argued that, as an extremely efficient processor, there is potential for less environmental damage if more people supplied Fonterra. That argument makes more sense than the one that says allowing farmers to free up capital could somehow be damaging to the environment.
Upton’s argument is that the changes Fonterra want to make could make farmers more profitable and incentivise them to milk even more cows.
However, producing milk has got increasingly expensive over the past two seasons with rapidly rising interest rates and input costs easily outstripping the gains made in the Farmgate Milk Price.
If anything, freeing up farmers’ capital will allow them to more easily comply with increasing environmental regulations, thus doing exactly the opposite of what Upton suggests.
There are legitimate issues to be raised with regard to dairying and the environment, but which processor a farmer chooses to supply and how much capital they’re required to invest to do so just isn’t one of them.