New milk price tool for Fonterra farmers — but at a price
Fonterra is offering its farmer share holders a new financial tool to manage global milk price volatility — but they will have to pay for the privilege.
New Zealand’s biggest company will provide a new fixed milk price programme referenced to the NZX milk futures market for the imminent 2019-2020 dairy season, with farmers required to pay to participate.
A service fee of 10c per kilogram of milksolids will self-fund the programme, said co-operative affairs managing director Mike Cronin.
The average New Zealand dairy cow herd produces about 158,000kg of milksolids per season. Farmers will be able to fix the price of up to 50 per cent of their milk production over the season. But farmers, who already have to pay to supply Fonterra through the purchase of shares linked to their production, aren’t being asked to fund the new service because of the company’s financial squeeze, which saw it post a historic first annual loss of $196 million last year and debt of $6.2 billion.
Farmer advocate, the Fonterra Shareholders’ Council, unanimously approved the new scheme, said chairman Duncan Coull.
The payment requirement was so co-operative shareholders who didn’t participate weren’t unfairly burdened with the administration costs of the programme, he said.
A previous fixed price scheme called the guaranteed milk price introduced in 2014 did not require farmers to pay a service fee. That scheme was based on the company’s forecasted milk price, whereas the new fixed price offer is based on an independent market price.
The previous programme provoked dissent among some of Fonterra’s farmer-shareholders who said it was against the spirit of cooperative principles. It was scrapped after three dairy seasons in 2016.
Farmers will be able to participate up to 10 times a year in the new fixedprice programme. The previous scheme was limited to twice a year participatory events.
The risk of fixing is, like bank interest rates, the fixed milk price could end up being higher or lower than Fonterra’s final farmgate milk price. The company is advising farmers to know their break-even point and consult a financial advisor about their best options.
Fonterra will make at least 1 million kilograms of milksolids available at every monthly event, up to a total of 5 per cent of New Zealand milk supply available in a given season, Cronin said.
Fonterra controls about 80 per cent of the country’s raw milk production. Last year it collected 1.5 billion kg of milksolids.
A well as benefiting farmers, fixed milk prices helps Fonterra lock in longer term contracts with customers at set prices, which attract an additional premium for doing so, he said.
Despite complaints that it wasn’t in the co-operative spirit, Fonterra’s previous guaranteed milk price scheme still attracted plenty of applications. The scheme was introduced for the 2014-2015 season after a successful pilot with 328 shareholders who supplied 15 million kgMS for a guaranteed price of $7/kg.
The $7 price was based on the opening forecast for the season.
The country’s second biggest milk processor and exporter Open Country Dairy offers a fixed milk price scheme and does not require suppliers to pay to participate.
Much smaller than Fonterra, Open Country is privately owned and does not require farmers to buy shares to supply it.
Dairying in New Zealand is a $15b industry, responsible for 28 per cent of total annual exports.
The country’s second biggest dairy manufacturer and exporter, Open Country, says expansion is on the cards in dairy heartland Waikato — most likely on the site of its new Horotiu plant.
Chairman Laurie Margrain said Open Country hadn’t committed to a firm plan but the company’s next expansion would be either at its Waharoa site, near Matamata, or at the recently-commissioned Horotiu dryer plant.
Margrain said that the expansion would help meet strong overseas customer demand for higher-value ingredients.
Both the company’s Waikato plants had full milk supply, he said.
There were no space restrictions at the Horotiu site, which sits alongside the headquarters of the Affco meat company, owned by Open Country’s majority shareholder, New Zealand food company Talley’s Group.
The publicity-shy Motueka-based Talley family owns 76 per cent of Open Country, with Singapore’s Olam International a 15 per cent shareholder and the Dairy Investment Fund holding 6.6 per cent.
Auckland-headquartered Open Country, which had revenue last year of $1 billion, also has processing plants in Whanganui and Southland.
The indication that it is eyeing further manufacturing growth in the Waikato comes on the heels of a warning from Fonterra farmers advocate, the Fonterra Shareholders’ Council, that the big cheese of the dairy sector needed to sharpen up its ideas about the way it pays for, and collects, milk in the future.
Council chairman Duncan Coull recently told the Herald that when Fonterra — the country’s biggest company — had finished the strategic review of its business, it should turn its attention to these areas to counter the risk of growing competition for milk entering important
dairying areas like the
Waikato.
Fonterra has several manufacturing sites in the Waikato.
Listed Synlait Milk is set to be one of the newest competitors in the region.
The Canterbury-based infant nutrition company is building a $250 million plant in Pokeno.
But it has recently run up against a Court of Appeal finding that it has effectively been building in breach of covenants on the 28 hectares it bought last year for the new plant, but the company has said it is confident of resolving the issue.
Synlait’s purchase of the site was conditional on the seller removing the covenants. Pokeno also hosts Chinese milk manufacturer Yashili. Former Synlait managing director John Penno at the time of the Pokeno land purchase said the Waikato was the “least competitive” major dairying area in the country.
Waikato has the biggest concentration of dairy herds in the country, according to DairyNZ.
Synlait’s new plant would only contest 2 per cent of the region’s milk production, Penno said.
Meanwhile, Open Country’s Margrain said construction of a $17m wastewater treatment upgrade at the Waharoa plant was well under way and elements of it would be completed by the start of the new dairy season on June 1.
Open Country has been in hot water with neighbours and the Waikato Regional Council over odour issues at the plant.
The company has been exporting since 2004 and is the world’s second largest exporter of wholemilk powders.
It has customers in the Pacific, Asia, Americas, Africa, Middle East and Europe.
The company won’t reveal production volumes or the cost or details of new plants for commercial reasons.
The new Horotiu plant created 30 fulltime jobs, excluding tanker drivers.