Pressure is going on dairy farmers over milk prices and Fonterra's capital structure. Allan Barber assesses the forces at work and how they will play out

Pressure is going on dairy farmers over milk prices and Fonterra's capital structure. Allan Barber assesses the forces at work and how they will play out

By Allan Barber

Fonterra chairman, Henry van der Heyden, says that monitoring the milk price is not necessary, but “we can live with it”, particularly with Commerce Commission oversight.

However Simon Couper, Fonterra Shareholders’ Council chair, believes it to be Draconian with the potential over time “to destroy New Zealand’s biggest, most successful and most important export industry.”

Federated Farmers’ dairy section head, Willy Leferink, inclines more to Couper’s view than van der Heyden’s, stating that Feds look forward to submitting on the bill at the Select Committee stage, because “If the policy settings for milk pricing at the farm gate become arbitrary, then it’ll not only shoot our largest export industry in the foot, it will directly affect the price consumers pay for their milk,” he warned.

Presumably both perspectives can’t be right.

Sir Henry appears to be more concerned with getting the enabling legislation for Trading Among Farmers (TAF) passed by Parliament which might explain why he is comparatively sanguine about the proposal to monitor farmgate milk prices.

Couper and Leferink who both represent the dairy farmers are much more concerned that the introduction of provisions for milk price monitoring may result in Fonterra being forced to reduce the price paid to farmers.

It’s a strange world where the government can effectively attempt to legislate for price control of our largest export earning industry purely and simply because it wants to appear to be doing something constructive for its domestic electorate.

Milk prices have acquired an unduly high profile in the New Zealand public’s mind because Fonterra’s export success has brought about high domestic prices, much like lamb, although nobody has dared to suggest everybody has a right to afford lamb.

It’s also strange to see attempts to monitor the price paid to the supplier when it’s really the supermarkets which set the prices; even if the price came down, the retailers wouldn’t necessarily reduce the retail price.

Fonterra’s apparent willingness to see price monitoring introduced suggests it is not too concerned that there will be anything untoward in what the Commerce Commission finds about its price setting process.

The other leg of the restructuring amendment, TAF, also continues to concern quite a number of dairy farmers, as well as the other political parties.

ACT is against it, Damien O’Connor has spoken out vigorously against it which suggests Labour won’t vote for it, the Greens aren’t in favour, nor is New Zealand First.

Therefore unless the government can drum up enough support, the bill may not even get past its first reading.

Fonterra is clearly keen to see TAF introduced early next year because the company has had several attempts at convincing its shareholders of its virtues, but there is still a vocal body of shareholders who aren’t in favour because they believe it is the thin end of the wedge leading to an eventual loss of farmer control of their cooperative.

Van der Heyden is adamant that shareholders will get to see the detail of any changes to the TAF scheme before it can be introduced, but it’s a critical aspect of Fonterra’s future funding structure. It reduces the redemption risk from a sizeable chunk of equity and introduces a listed investment vehicle which can attract outside funds without introducing non shareholder voting powers.

On the face of it this is a win-win situation for Fonterra the company and its shareholders alike. However unless it can convince shareholders this won’t be a Trojan horse and the government succeeds in passing the Dairy Industry Restructuring Amendment Bill, neither TAF nor milk price monitoring will be going anywhere fast.

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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country where he run a boutique B&B with his wife. You can contact him by email at allan@barberstrategic.co.nz or through his blog at http://allan.barber.wordpress.com

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For an idea of milk price breakdown, here's this article. I still suspect the middlemen have a lot to do with it.

'price paid to farmers may reduce
óh no
are the farmers not the ones who own beach baches,commercial properties in town,send their kids to high price boarding schools etc etc
i'm crying into my milk

Alan, mate, "Howevere Simon Couper..." opps.
We all make mistakes and sometimes they even make it into print.
Now I've pointed that blopper out can someone please fix it!
Ta.

Hi Bruce
Do you mean blooper instead of blopper?
It was my editor's error, as it wasn't in my original copy, but it's not that serious.
Cheers
Allan

Shareholders were suckered by that vote a couple of years ago, having thought they had squashed any idea of listing.
Its obvious now that the company emphasis will change from milk solids return to farmers to share price/dividend to shareholders. That is Fonterra will no longer be a cooperative.
Key and cronies 1.   Dairy Farmers 0

Proposed DIRA going to select committee. Some interesting points to come out of the parliamentry debate.
1. A petition circulating for a second vote on TAF by Fonterra shareholders has 10% of shareholders signed up - and it's still doing the rounds.  From memory it requires 5% of milk solids to cause the Board to act, which is different from 5% of shareholders.
2. MP said that they had heard in the last few days, that Fonterra's payout for next season will start with a 5.
3. Govt is pushing for select committee to report back to parliament on or before 1 June, which breaks with select committee guidelines that say 6 months for select committee hearings.
4. John Banks spoke for the Bill, but made as much sense in his arguments as gobbledegook. Makes one wonder if he was believing what he was saying.

I live in the Netherlands, I am a kiwi and have owned a dairy farm. Yesterday I brought 2 litres of milk form our local supermarket and paid equilivant of NZD$1.81. You have to remember that farmers are subsidised here, VAT is 6% on food  less than half the NZ rate.
You'd expect that if there was a big profit in fresh milk some one would set up a dairy factory to supply it. On the other hand there are only 2 supermarket chains in NZ, where as in the small town, where I live, there are four different supermakets and 2 are side by side. Every Friday there is a market in town, where you can buy meat, vegies, milk , fish, cheese and bread, this happens in most towns weekly so the supermarkets get a real run for their money. Of course the population is 16 million here! 
Similarly to NZ the Dutch now only have one large co-operative dairy company. Milk could come from the neighbouring countries but fresh milk is bulky and expensive to ship around, but could come form Germany and Belgium easily enough.
So go figure, I have found that most things have shot up in price each time I return home: http://j.mp/yE0rV4

Fonterra shareholder council said the retail price of milk is 4 times what farmers receive but for some reason the debate has only been about farm gate price, no word on the reported 30% the supermarkets are making.
 
DIRA proposals are not about the retail price - it is about the eventual listing of Fonterra and loss of shareholder control.

Agreed CO, as is TAF about eventual listing of Fonterra. I suspect it has been the governments and boards agenda since inception, facilitated by ethically misguided DIRA regulations, no leadership and push back from co-operative, and try this one out, an ineffective shareholders council. David Carter claiming that Fonterra is gaming the milk price and setting the farm gate milk price to high, exposes him yet again as champion of the privillaged few over the common good. Co-operatives were formed so primary producers could leverage some clout in the market. They are in it for the long haul and as a result responsible champions of the common good. Not so corporates where government is pushing for Fonterra to head with willing acceptance from our leadership and it seems 'silent majority'.
The role of the co-operative in collecting, processing and selling members milk, is to maximise the value returned as a result of that process. Hence the milk price paid to suppliers (members) is the sale revenue of milk minus cost of above process, whether value add, branded product, profit, whatever, all still the milk price.

Apparently Fonterra board obligated to call a 'special meeting' if 5% of supply wish. However board make decision when, where to have meeting, and will be stacked in their favor as  aresult, therefore pointless for those wanting another vote on TAF to clear the air.

I'm picking up that there is a chasm developing between the Board and Shareholders Council. I have also heard, whether it is correct or not, that some of the Board will be leaving - considering their 'job done' if TAF gets in. On the other hand I am also hearing of more shareholders who are prepared to 'take action' if DIRA is enacted.  The Board would be wise to hold another vote - if only to prove they have the mandate. 

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