The heat is on, time to act

No doubt Fonterra is facing a supplier crisis of confidence; it risks haemorrhaging milk to independent processors.

The half-year results make poor reading: profit and revenue are down on last year and the co-op has sliced its dividend payout by 5c. It’s a small drop but this is a difficult year for many farmers: after a record 2013-14 season many are struggling to stay afloat on a $4.70/kgMS forecast milk payout.

We hear that farmers have been blunt at the meetings – putting Fonterra on notice to shape up the business or risk losing suppliers.

With the forecast payout at $4.70, Fonterra’s production costs would have been much lower than last year and its margins higher. This had left farmers expecting an increase in the forecast dividend.

There had been no warning and farmers had invested heavily in Fonterra’s value-added business, counting on that to ease the misery of a season to forget. 

Fonterra has been forced to drop its dividend forecast by 5c/kgMS. It blames higher milk prices in some overseas milk pools for squeezed margins. In Australia, Chile and Brazil milk prices are influenced by in-market dynamics rather than global prices. 

Farmers are right to put Fonterra on notice; there should be some serious soul-searching going on there now. 

For its part, Fonterra admits the results are below farmers’ expectations; they blame it on the tough conditions in the dairy industry. It is asking farmers to remain cautious in their budgeting, given the volatility still buffeting international commodity prices.

But farmers are understandably disappointed with the co-op.

The Fonterra Shareholders Council is worried that suppliers may leave the co-op in droves. Certainly the risk of losing milk will worry the co-op, and angry long-term loyal suppliers will be an even bigger worry. They probably won’t leave, but they’re mighty disappointed and want answers.

The half-year result was the tipping point for farmer-shareholders agitating to know how comparatively tiny milk processors which don’t require suppliers to buy shares could match or better Fonterra’s milk price in a tough global market year.

The council urged farmers to voice their concerns to the board and management; they did so at the 40 meetings last month.

The ball is now in the Fonterra board and management court. They must salvage farmer confidence, and quickly.