Fonterra now paying the piper
Did Fonterra get too big, too far away from grassroots dairy farming and too engrossed in joining the big boys of the international corporate world to see the bull crashing through the gate?
It has been an exhilarating ride so far for some, playing with dairy earnings in the international arena. It seemed there was no limit to the world market for our single most important product: milk powder. Shiploads of the stuff were sent overseas and shiploads of money came back. Herds went from a couple of hundred cows to a couple of thousand in a few years. Daisy and Dolly were just cute names for cows in fairy stories. There was no place in factory farming for favourites or even time for an affectionate slap on the rump on the way to the cowshed in the peaceful half-light of early morning. Screaming quad bikes hustled vast multitudes of anonymous bovines along farm highways to an equally impersonal milking factory.
In the hinterlands, once productive cropping and dry stock farms were converted to dairy farms, some almost as big as small towns, with populations of migrant workers to match. In the South Island, high country land that once supported a few hardy sheep and thousands of rabbits has been converted, using massive irrigators in a process akin to outdoor hydroponics. Now there are green fields as far as the eye can see. The sheep have gone and the rabbits are in clover, which they share with massive herds of dairy cows.
To be part of this white gold rush, farmers were obliged to buy shares in the new system at a level decided by their farm production. Soon, everyone else wanted to get in on the exciting action. Within a short time, Fonterra had about two dozen senior staff taking home salaries of around $1 million (does anyone actually earn that salary level?) with the boss pocketing about four times that much. Not bad for a few dairy farmers!
For non-farming city folk, the temptation was too much to resist and the new system made dividend-paying shares available to corporate investors, shares that could be traded almost like any other shares. Most of this category of shareholder had little idea about one end of a cow or the other, but were milking the system nonetheless.
Unlike working farmers, however, when hard times come, these shareholders don’t arrange a new mortgage or overdraft to see them through.
Looking over the fence at this unseemly scramble, a few of the older generation of traditional dairy farmers shook their collective heads and muttered dire warnings about topheavy administration, imprudent investments in non-farming ventures, over-generous banks and unwise offshore projects. They also warned about the folly of showing potential competitors how to be as good at dairy farming as they were.
On the other side of the road, neighbours growled about the pollution of rivers and waterways and the loss of biodiversity. No one listened to the old farmers or the neighbours. They were all too busy dipping the billy into the vat with no end in sight to the cream and the good times.
And there were good times: a record payout of about $8 a kilogram of milk solids. Then someone turned the pump off. Farmers and corporate investors alike had sticky green stuff over their gumboot tops when the payout halved the following year. It has yet to recover and probably won’t until many have gone broke or sold up.
Some bank managers and finance company executives may now find they are up as early and working as late as dairy farmers, not milking cows and running farm homes but worrying about their heavily indebted clients who will not be able to meet mortgage payments again this year.
The downturn this past month would not have come as such a shock if they had listened to the older farmers and put a stop to expansion instead of borrowing to develop even more big dairy farms with even more cows producing even more milk for an international market that no longer wants it at the old prices.
The end was there, but few saw it coming until the splintering gate behind them, in the form of international market volatility, told them the bull was out and coming their way.
First over the rails and out of the way was the Government, which has said there will be no bail-out of Fonterra and market forces must prevail. That might come like a bucket of cold water down the gumboot on a frosty morning, but it is the only response the Government could morally give – unless, of course, the Fonterra meltdown flows over into stock markets, which it probably will before the cows come home.