BusinessDesk: Dairy product prices drop to new 3-year low in Fonterra’s GDT auction

Prices of dairy products fell for the third straight sale in Fonterra Cooperative Group’s GlobalDairyTrade auction, reaching a new three-year low as China’s slowdown and euro-zone uncertainty weighed on commodities.

The GDT-TWI Price Index fell 6.4 percent compared to the last sale two weeks ago.

The average winning price dropped to US$2,618 a metric tonne, the lowest since August 2009.

The price of whole milk powder fell 8.9 percent to US$2,546 a tonne and skim milk powder fell 5.4 percent to US$2,573 a tonne.

The average price at the sales has now shed 41 percent in the past 12 months and this year prices have declined in eight of the 10 auction events.

The decline reflects a broader slide in commodity prices as traders factor in weaker demand from China, uncertainty in Europe that has helped drive up the US dollar and increased supply. The Thomson Reuters/Jefferies CRB Commodity Index has declined to its lowest since October 2010.

Anhydrous milk fat dropped 11.9 percent to US$2,499 a tonne in the latest auction.

Cheddar fell 0.2 percent to US$2,857 a tonne and milk protein concentrate declined 1.3 percent to US$3,940 a tonne. Rennet casein rose 0.7 percent to US$6,244 a tonne.

There were 136 winning bidders over 12 rounds, out of 147 participating bidders.

The number of qualified bidders rose to 635 from 620.

The NZ dollar fell in line with the slump in the euro.


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.... Some 25,000 tonnes of whole milk powder were up for sale at this auction, 5,000 tonnes more than the previous event, on May 1 - an increase which analysts at New Zealand-based Agrifax said most likely reflects a desire by Fonterra, the dairy giant which runs globalDairyTrade "to sell product within the current financial year".
'Global supply glut'
Indeed, milk production in New Zealand, the world's top dairy exporter, has soared in 2011-12, lifted by benign weather and herd expansion, at a time of buoyant output too in many other major dairy shippers, such as the European Union and the US.....

Its the co-op structure that makes Fonterra a stronger credit than otherwise...
And a reason financial types would love to come and play...
May 14 - Fitch Ratings has affirmed New Zealand's (NZ) Fonterra Co-operative Group Limited's (Fonterra) Long and Short-Term Issuer Default Rating (IDR) at 'AA-' and 'F1+'. The Outlook is Stable.
Fonterra's ratings are underpinned by the strong defensive characteristics of its ingredients business, the financial flexibility afforded by the effective subordination of its farmer creditors and the margin protection offered to it by its fully integrated business model.
The effective subordination of milk payments to farmers is provided in Fonterra's constitution, and results in the effective subordination of milk payments to principal and interest obligations (and other costs). Based on Fitch's understanding of the legal framework underpinning the subordination of milk payments and management's estimates of advance rates, the agency assumes a minimum 10% of milk supply costs at the end of each fiscal year (31 July) to service principal and interest payments. Notwithstanding Fonterra's ability to withhold the entire milk supply payment until all other costs have been met, it has traditionally, at its own discretion, advanced payments to farmers for milk supplied over the course of the season. Fonterra expects advance payments (before 31 May each year) to amount to around 80% of the total cost of milk for the season.
A positive rating action may be considered if debt to EBITDA reduced to below 1.5x (currently 2.15x) on a sustained basis. A negative rating action could follow if debt to EBITDA increases to 2.5x on a sustained basis or if overseas milk supply accounts for more than 30% of NZD cost (currently 11% of NZD dollar cost).

Thanks Henry_T. 
Given my ignorance in such matters; is it fair to assume, if Fonterra introduces external investment, which demands the sort of returns Bright Dairies demands from Synlait, that Fonterras credit rating would fall?

All other comments aside.
It could be something like this:
1. Outside money in and demanding max yields, then Fonterra borrows to use leverage to increase its "return on equity" - this is easier than making the dairy brands/assets really work like Nestle etc. does.
2. Management buy in cause running a global business is hard/full body contact sport, and they catch a ride as their performance is tied to return on equity ....... which is constructed by borrowing...
3. The financial investor gets their return by max the investment yield, and would probably pressure the co to return capital or "buy-back" shares etc, etc, etc,
4. After 3 to 7 years flog it, as the brands will probably be worth something. they don't care because the "capital returns/sharebuy-back" retuened their initial stake and some, so this last step is all profit - from no money down.
You see its an old -off wheeze, think of NZ Telecom etc, etc, or the current Oz example of Myer Bros. and Channel Nine and private equity and Hart-like etc, etc.
The rule they follow is:
Buy the asset (use to be that the buy "equity" was high lvr loan) (i.e. the investors funds were geared to begin with, thou the target company "sees" equity), then they get the company to either increase dividends/return on equity, and/butinvestors get the company to really gear up, make capital repayments to the investor, and dividends to boot. But the cream comes from on-selling trade sale/IPO...
It can take a couple of years, but its a one trick pony (only get to do it once), after everything is geared up, sell retail (some type of listing/trade sale) and then move on to the next shinny thing of interest.
In the Fonterra example what they see is value in the low geared balance sheet now (those ebitda numbers above are total debt, not as on the farm we are dealing in multiples of the interest alone) and in the dairy brands to an international food coy in 5 to 7 yeras.
So near term investor returns by making Fonterra borrow now, the farm suppliers get it up the clacker (technical term) as, Fonterra only pays them "what they can" - which is what the reuters folk are saying, farmers may be creditors, but as a co-op all other creditors come before them.
Opp of what people assume (how could you not pay supppliers due or well? A, easily).
So long way to answer your question: Yes
No one is looking after the farm suppliers interests, other than them,
Some farmers will think they are joining the feast, and be a "player". It doesn't happen, they only ever get played - see the Oz examples. why ppl think Fonterra would be "different" appears staggering, as it seems to be without evidence ......

I am positive we are all much on the same page as to conclusions Henry T.
i guess the real concern for Omnologo and others is how to educate the many involved prior to the event......
 You have broken it down (I believe ) quite clearly be a transmittable message of probable / plausable intent.

Its not rocket science, its what has been done in the past, its there for all to see. The "vision" being promoted is based on no sighted example, they offer no factual/science based evidence......

OH  Goody that must mean when I pop down to the dairy milk will cost less

Keep and eye out BAZ, because farmers are almost certain to be paid less.

Hey BAZ how much did the price drop in the supermarket in February when Fonterra dropped the price?  We buy milk but not necessarily at the supermarket, so genuine question. Dairy Dale/Cow Gate at the local service station is usually well priced so I don't bother with supermarkets.

CO - you are not doubt correct except for the outfit mentioned here
I notice the regular grocery outlets described this reported price reduction a gimmick.
I wonder what gimmicry the Germans are up to charging themselves 0.74 Euros per litre?
Whatever, they think that relative price per European shop is appropriate - You have to wonder if this is legislated for to stop the type of markups that get tagged onto the low NZ farmgate price as the milk passes through various agent's ownership to mine/yours/ours.

SH, the price for standard milk in Germany is about 0.50 Euros or some 85 NZ cents per litre. 0.74 Euros is more the rate for bio milk.
The gimmicry used by the Germans is called market economics. Supermarket chains buy huge quantities from farmers and can therefore push through discounts, to the farmers' immense frustration.
And because there are several rival retail groups, the competition is so fierce that prices get handed down to consumers.
NZ is not an open market. It lacks competition, and in many areas there are closed shops or cartels i.e. new entrants are more or less kept out. 

NZ is not an open market. It lacks competition, and in many areas there are closed shops or cartels i.e. new entrants are more or less kept out.
Such activities by the favoured if not enttitled are certainly contemptible and yet little opposition is seen or recorded in the public arena to curtail if not ban such non-competitive endeavours.
If we don't strike out this societal blemish we will forever be listening to the llikes of Key promising to rectify this or that deficit rather than getting on with running a truely competitive economy. 

Even lower – 0.45 Euros for low fat milk
An interesting article about price wars and dairy farmers reaction:

Milk is to my knowledge not subsidized any more, so you have a free market there, and this is also why the farmers are so upset.
Other parts of EU agriculture are, however, because France and the PIGS (who else?) are insisting on it, e.g. olives, are in fact subsidized by the European taxpayer, you are right. It would be good to get rid of that, too, but again France and the PIGS are blocking reform, as they do in most respects in a failing attempt to protect sclerotic structures.
Germany gets most of its milk from Germany and Italy, as far as I know.

A big Dairy farm owned by Mc Viti just sold in Sth Hawkes bay for 10 mil, bank financed I would think. Banks working on a 5.90 payout, in a market which dropped .22c a milk solid last night $ adjusted too.   Talk about catching a falling knife.

Its hammered our $ down to .76

so will we get the stagflation scenario from this...

The RB govenor should ring the BNZ and tell them to 'cut it out', before we need a taxpayer bailout.

A.J. I said ."and now we find out whether we really are a commodity based currency".... a month back....that said you'd have to believe Fonterra would have taken up the obvious hedge position without looking to smooth.
Now question it a controlled freefall...? pick the bounce..?
Is it a percieved controlled freefall with a painted glass floor.....and who is looking skyward on the other side smiling....and maybe waving too. 
I do hope you got on it....I don't normally invite people to risk their shirt, but  it was a gimmie for sure.

Christov, I hate currency speculation but so far so good.  Its the 1 bil + of extra farm lending over the past few months, its the bank lending into the sth canterbury dairy conversions at a projected payout of $6.35, its the lend lend and lend them more when the only way to pay down debt is to sell assets, and the asset trend is down, we hit a brick wall. What about fonterras exposure to redemption of shares?  Going to take them out with the billions of debt Fonterra  already has.
 I believe that Fonterra is now recieving $5.70 a kg for its sales so the big question is how low? and whats Bollard been doing for his 600k? It just aint good enough.  He needs to give the banks a ring!

A.J. as a non productive parasitic stategy do I....but I've learned this is the world we live in.....and we have to take measures to protect our productive investments. I ,as you know came out swinging a few years back here at the very notion Fonterra should involve itself to the extent of major effect on the currency......worn down by it...there is some , if you can't beat em.... well you know ,to it.....but and this is a BIG BUT....Fonterra may  be surprised to find they no longer have the reigns here....on every position there has to be an opposing position.
 As to the insanity of the lending gone mad , I think you have picked the market involvement in driving toward objectives not in the best interests of the farm gate.....manipulation by inducement....geesus it's not even cloaked.
p.s. if you got on...pick a stop...and get off regardless. 

Christov, be careful out there, JPM are calling in the credit lines, big money is being lost.

Too true A.J. as i said pick a stop ...get's the greed that makes em stay too long on the bottom.....hiccup airs gone,!!!

Yes - we all have 5 glasses of NZwine and seven glasses of NZmilk tonight, tomorrow and after tomorrow in support of our agriculture industry – hmm - before they (and us) drown.

Good to see you about a bit more Walter ..I'll raise a glass of which ever is the cheaper to your good health tonight......Stay well.

Christov yes – I’m not here often, because I think unpredictable events on many fronts will change the worldwide situation dramatically, making a lot of what we, experts, politicians, etc. currently say/ write worthless.
In today's world developments/ events are often far more correlated with each other then people think.

So glad we are staying put this season. $2000 plus cows mmmmmmm.

Yep, cow prices are out of kilter with a falling payout, being held up due to high export demand.

CO, so whats the price heading to? If you are selling your milk at auction for $5.78 a kg and Fonterras costs are around the $2, then its a pretty ugly figure.   So whats coming in next years payout? hows it going to affect the vote?  Aj.

I would expect that falling payout is more likely to mean a +ve vote for TAF as a lot of Fonterra suppliers believe in the co-op philosophy.  They don't want to be forced to supply a corporate (where that is an option), so will vote TAF in so that they can sell off their 33% of shares and remain in a co-op.  There will be some however for whom the corporate processor bell tolls.  Banks are especially keen to see their at-risk suppliers fly the co-op coop. Fonterra now allows new suppliers and growth production to be shared up over three years, so that will help some.
Payout 'smoothing' from some last of last years fx profit may be a bit of a help for this year, though I notice Com Com submitted against it being allowed to be part of the milk price.  This is a fundamental strategy of a co-op, though Sir Henry did stop it a few years ago, and then reintroduced retentions.   It could prove disasterous for the viability of the industry if Com Com win that one. It could decimate 50/50 sharemilking in a very short space of time and that is a critical part of our industry.
I'm working budgets on $5.50 and expect to produce a surplus on that, so if it drop below that we will still survive.  Also done some at $5.  Interest rates have potential to be either -tve or +tve.  We only get half of that as we employ 50/50. The Chinese are out of the markets probably until Sept/Oct so until then it's pretty much a guessing game just how low it will go.

Casual Observer:
You say: The Chinese are out of the markets probably until Sept/Oct so until then it's pretty much a guessing game just how low it will go.
Where are you hearing/seeing this?

Bernard, exports from the USA are up, we have competition for the Chinese market,
(by J. Kaczor)
Exports of the four major dairy commodities used in milk price setting formulas throughout the country for the first quarter of this year mostly compare well to last year with respect to volumes and average prices. Last year, exports of nonfat powders and cheddar cheese set new records, and so far this year their volumes are even higher. The experience with dry whey and butter is not quite as good. Dry whey export volume last year was high, the third highest, and cleared 54.6% of production, but so far this year is about 8% below last year. Butter export volume last year was the second highest, but cleared only 6.4% of production, and so far this year is 25% below last year.
Because of the surge in milk production in the five major global dairy product exporting countries, competition for export sales is intense. International market conditions received a lot of attention at USDEC’s spring meeting last week. Concern about possible loss of existing export volume was evident. USDEC’s press release this week said near-term market conditions are challenging. USDEC president Tom Suber “urged” U.S. suppliers to protect volume and market share gains accrued over the past two years. A Rabobank analyst at the meeting pointed out the obvious: “International demand has proved insufficient to soak up all the increased surplus generated in export regions.” Mr. Suber’s take on that was right on point: “We can’t take the hit and balance the world market throughourowninventorieseverytimesupplyanddemandrunintoanimbalance.” Amentothat.
However, even if the U.S. loses none of the export volume it gained, the consequence of New Zealand’s success in exporting all of the products produced from its 11.4% increase in milk production over the past twelve months is stagnant sales and growing inventories for Europe and the U.S. Butter removed from the market and placed into private storage in Europe was recently reported to have risen to 120 million lbs. U.S. inventory of nonfat powders in March was 60 million lbs higher than a year ago, and butter in cold storage rose to the same level it reached in March 2009.
 from the milkproducers council California

On every side of a position A.J. there has to be..........I said last week on "that thread" Fonterra may soon find itself bleeding at the nose from both ends,.....this looks a pretty good start to a bad outcome.

Quite frankly folks falling payout is the least of my concerns as a dairy farmer at the moment. In no particular order the biggest impacts to me as a Fonterra supplier are:
95.39% planned rate increase this year increasing by another 91.4% the following year.  This is on top of at 59% increase last year.
With a falling payout so long as my debt level is manageable I can pull back expenditure. With the above though I have very little or no say, yet they have the potential to hugely impact my business.

CO ... can you define what you mean by "rate increases" please

Wow, CO the council must love you, why the massive rate increases.  Is your council taking the PM's advice and building a covered  stadium?

Ah, the joys of being a dairy farmer in Environment Southland's rating area.  They introduced a 'dairy differential' a couple of years ago and it is these rates that are rising.  You can be sure they would have received a few submissions to their Long Term Plan when they closed yesterday. ;-)

I should say that this is charged in addition to our 'general' rates and all the others such as biodiversity etc

Is it Ok to ask how much you are going to be paying?

It's based on capital value.  A 117ha $4.15m farm will pay $802.67 2012/13 an increase of $393.85 on last year, increasing to $1536.27 2013/14.

jeepers CO, you want to move North those rates are piddly. Ive 100 hectares and my rates are over 5k + reg council on top of that, and only going one way.

Hey Aj, sorry the full Regional Council rates for the example is $2192 2012/13 increasing to 3012.45.  Southland District Council rates on top of that.
Our rates for 218ha last year was >$10k. Haven't looked at what they will be 2012/13.
It's the principle behind the RC believeing that they can 'milk the cash cow' that is dangerous.  With falling payouts dairy farmers simply will not be in a position to continue to be the 'cash cow'.  Regional Council needs to get its financial fundamentals right. e.g. they have allowed for an increase of 10.35 staff - just for dairy, including sustainability officers to help farmers.  Well why don't they ask farmers if farmers want them or receive value from the existing ones?  Fonterra and DairyNZ have sustainability advisors to farmers. Is the RC just about creating jobs for jobs sakes?
I gotta go now.  Be back tomorrow.

CO - some of us have hammered away her e for some time, trying to explain why costs, rates and taxes have to increase beyond incomes.
There will be a push to ignore everything environmental, in favour of everything favouring individual/collective 'wealth' increase. Sadly, even totally trashing the planet, won't assuage that desire now. Mortgages are a demand from the future, and we're essentially half-way through in resource terms. The current future-demant in not underwriteable.
Which shows up as ever-increasing costs. And as ever-reducing incomes, even in esssential activities like food. Get used to it - had to happen beyond Peak Oil.

A level playing field is all we ask pdk. Farmers get issued infringement notices ($750) for situations that 'may' result in contaminant entering a waterway ( it actually hasn't/didn't). Sewage schemes only have to meet their discharge consents on a rolling 80% of the time.  That is they can exceed damaging discharges, without fear of penalty, infringement notices etc so long as that individual dishcarge doesn't cause the rolling average to be exceeded.
Farmers require consents for taking of bore water. On dairies this is used for stock and shed washdown.  These fees are going up 69% in the LTP.  Contrast that with farmers who have stock accessing waterways for drinking (sheep/beef) which also crap directly in the water. 
Level playing fields, pdk - not.
Here's a good news story for you :-):
I'm outta here now, prob won't be back till tomorrow.

Im with you, we have been poorly informed of the consequences of the NAIT scheme. I see it as a big hammer approach to a problem we haven't got.  Lots of farmers around here very unhappy. Ive a spare hunterway Im putting down as in charge, suggest we all do the same. 
 Why the hell don,t farmers chuck out the leaders in beef and lamb, we are a lost cause and only have ourselves to blame. We need civil disobedience, we need to refuse on mass what the hell are they going to do?   John Key thinks the media is being hard on him, whats happening is a lot of brainless decisions are coming home to roost, we are lead by people with very poor foresight, shit a blind man could have seen this bloody great disaster coming years ago. I believe the supporters of the NAIT were SFF, landcorp and the guys that make the bloody things. Landcorp made a profit but then they did revalue livestock up by 700 mil otherwise the loss would have been a bit ugly, and could have damaged the bonus pool.

There is a very good discussion forum on here about NAIT - where a NAIT administrator answers specific questions;
Nice to have a written reply to the various questions in the event of any 'problems' going forward.  They were quite specific about what Person in Charge of Animals (PICA) meant.
I would have thought that as a manager or a sharemilker you would always have been considered the person in charge of the animals from an animal welfare perspective (nothing to do with NAIT but theirs is the same meaning - not necessarily the owner of the land or the owner of the animals, but the person responsible for the animals day-to-day care, that is the PICA definition).
So, I'd have thought ensuring the animals had enough feed was indeed your responsibility - and in purchasing the supplementary food necessary, it would become a contractural matter (dispute) between you and the owner to sort out.

Gee, sounds like a problem if sharemilkers are "all care, best efforts" no responsibility, particularly where we have absentee stock (and perhaps land) owners.  No wonder that compliance becomes a problem.  Sounds like sharemilkers need some form of national representation?

Sharemilkers need more than national representation, it is ignorance to lay responsibility at their feet. Sharemilking was integral to the evolution of the dairy industry, as it provided a pathway for succession. The prospect of genuine sharemilking opportunites attracted motivated people into the industry, capable of looking after a land owners asset and care for their animals. Things have certainly changed now,
and this is what farm owners have too look foward too,

mist -  two conditions we have for our 50/50 sharemilkers -1. they live on the job and must milk in the shed
2. They get 50% of production based dividends paid out to us. It seems to be more a 'North Island' mentality not to share dividends.  Crazy.

Crazy - and this Government looks to be fully backing the corporate model, doing everything in its power to prop up land prices, and to promote further conversions. 
What's the saying ... this isn't going to end well.

If I were you I'd register on that website and ask NAIT the question - outlining your situation as a sharemilker with an absentee stock owner.  No sense in fudging the record - as you'd be the one fudging. 
Don't get me wrong as I think the NAIT system sounds horribly cumbersome - but it is what it is - and I tend to agree with your legal advice - although not just from a NAIT perspective.

Hi all,
Forecast for next year's payout due soon I hear. Any picks on what it'll be (the original announcement)?
Along with lower payout, how many are also facing new costs due to council policies etc? The reason I ask is my partner's parents have been given two years to stump up $70,000 for effluent ponds after their council decided everyone needed them. Just what they didn't need right now.
PS. Omno - sorry I've been a bit quiet of late - we can pick it up again here :)

Alex our effluent upgrade will cost >$100k but we decided a couple of years ago that we would change our system anyway so have been putting the $ aside for it.  Some councils have been found wanting in regards to farm effluent policies - head in the stand stuff and are now having to face up to the reality - and the farmers as well.  Payout announcement due after 22nd May Board mtg.

Alex, no need to apologise, you're doing well covering a wide range of issues. 
We upgraded our effluent system last year, and it cost about $125,000 in total for 500 cow farm. Includes: earth works, liner, new sediment trap, stirrer, reconfiguring start of effluent main line, electrical, and no doubt other costs I can't recall off the top of my head. We've got a nice pond, but it still takes a bit of time and skill to apply it  responsibly. I hope your partners parents can make it work out. It's crucial to get the best advice if upgrading. Effluent is a major issue and rightly so, I think we still have ways to go as an industry. 
I hope they aren't re;ying on a +ve TAF vote to release capital to fund the pond. For what good TAF will do for future generations of farmers and non-farmers alike, might as well let the effluent flow down the river, because we'll be up the creek anyway.
TAF is massive Alex, bigger than Crafer saga, and the politicians and Fonterra directors are trying to push it through silently as possible.
I disagree with COs comment above that shareholders will vote for TAF because they believe in the co-op philosophy, it couldn't be further removed. Shareholders will vote for TAF to feather their own nest and to hell with the future. External dimension will destabilise co-op completely, investment funds will trade up share value, and farmers will be at the bottom of the heap

Cheers Omno,
Yeah they're waiting to see how the neighbours' ones work out, and see what works best.
They're pretty savy on TAF. Not relying on it for cash.

Alex Tarrant, what are your partners parents going to rely on for cash if TAF is implemented? Milk Price?

Partner, dont tell me hes playing on the other side. Unbelievable how many mates have changed sides, whats wrong with having chicks and girlfriends. They dont make men like they used to.

I disagree with COs comment above that shareholders will vote for TAF because they believe in the co-op philosophy, it couldn't be further removed. Shareholders will vote for TAF to feather their own nest and to hell with the future. External dimension will destabilise co-op completely, investment funds will trade up share value, and farmers will be at the bottom of the heap...
   I'm going to keep that extract Omnologo because I believe you are probably right about the outcomes.....
In the regard to TAF voting.... it will have been geared to generate the desired outcome. Is the philosophy. of the Co-op going to remain relevant to the evolving market business model.? who's interests are likely to be served in the longer game.?.... those taking part have a responsibility  to ensure that their vote comes with full awareness of any undisclosed probable outcomes that may remove their very rights as voters down the track or indeed dilute the importance of the Co-op itself.
 I hope  you, and others like you ,find the platform  to express your concerns and educate those who may not be as informed prior to the vote.
Good luck

Thanks Christov, your comments have certainly given me a greater appreciation of the forces at play. Speaking of which I hope the parents of Alex's partner use their saviness like Luke Skywalker used the 'force', for good to reign over evil.

I agree with you Christov. Fonterra is a vertical structure sitting over the top of a co-op. The capital funding requirements of the business divisions at the top exceed the funding capacity of the co-op division at the bottom. As Colin Riden observed last week, the needs of the co-op are incompatible with and conflict with where the rest of the business is going. Structural seperation of the 4 divisions is one possible solution. However there is an even more elegant and simple solution to that, and retains ownership.

This is where the debate should get interesting and I suspect along several dimensions.
Are you going to keep us in suspense, or let the answer out of the bag?

This is not a repeat of "iconoclast's lessons in the dark arts of deception". It's a serious proposition. I charge big bucks for that type of consultation. Yesterday I invited you to submit a contact email address so I could run it past you. You have far greater penetration in the industry than I do. If you search in pages for "iconoklast" spelt with a "k" you will find my email address. It's a cut-out, but you will find me and I will reply.

Any headsup iconoclast of 'hard' questions we should b asking at our shareholders TAF mtg tonight? The bright TAF lads will b there. The local attitudes to taf are a bit of a problem for the shiny suits.

In my business, if I have a problem area that is producing defective results I never ever modify the existing system, I go back to base and examine systems and solutions that will solve all previous problems plus the "new problem". Never add a new layer on top. Solve the real problem. If you add a new layer and have a problem later on you waste a lot of time finding out if it's an issue you hadnt contemplated or a product of the added layer conflicting with the old layers.

Thanks.  By the way "the government is making us do TAF - if we don't they will run our share value".  Forget the rest of the b.s pr spin.  This is what it really comes down to.  From the meeting last night.

CO: Could be truth in this.
However when we look at pure Co-ops, it was never about the share value, the value is in acting as a united group in the face of commodity markets for the members.
My understanding was its Fonterra that has tried to tie the income from brands to a dividend stream, which by implication provides the notion of share value in the context of a coprporation. Co-op shares in the pure sense are only worth the money paid for them....
An interesting question might be: "Why is the government making us do this". What does the Government want out of this. Did the coversation get that far?

I'm inclined to agree with you Henry.  I've spoken to some pollies recently and they are as clear as mud when closely questioned/challenged re the 'if TAF doesn't go through we will set your share value' clause in DIRA.
There's a 'rumour' in the South that JK desperately wants FTA with USA.  'Break Fonterra and we will favourably consider it', is how the 'rumour' goes.  Ask the pollies and none of them have yet come out and said 'Baloney' (or words to that effect).  In other words I have had no outright denial from those I have asked.
Conversation last night didn't get that far - I wasn't present but the MOTH was. DIRA has always required Fonterra to set a 'fair value share' but it seems govt no longer accepts a share value based on a restricted market is ok if TAF is a no-go.  Has to be 'market value' dressed up as 'fair value'.  As you say - I believe the key question is why - and that needs to be asked of the pollies.

There's a 'rumour' in the South that JK desperately wants FTA with USA.
Spot on - you bet he does - and he it needs to happen this term. 

Hmm but can he do  it or does he need to get a mandate in the next election?  and then legislate.  I really wonder if he's that silly to do anything that would throw away even say 2% of his vote....and dumping Pharmac and Fonterra seem 2 good ways to do that and more....
Look at the Grey power voting block, very sensitive to medical bills'n stuff....

Pure speculation on my part but I think he's sick of the posting yet needs to get certain jobs done for the bosses before they'll release him from the secondment. :-)

Thanks Kate. A perceptive summary that appears to fit well with the behaviour we are seeing.

Yes, not out of character with the USA. They are bitter that NZ powder sell in export mkts at a slightly higher price than USA produced and really want Asian export mkts. If they wanted to knock off Fonterra, just cut it into 2 - North Island and Soth Island co-ops.
But what does government care what the fonterra share price is, it could be 50 cents, of $10, what does it matter? One would think they would like a lower, rather than higher price as production volume means export earnings.....
Taking a classical co-op position, let them set the co-op "share price". We are not planning on selling up, so we need our shares for supply. And if we did sell, the shares would accompany the farm. Farm prices are often done land plus shares/or shared-up.
Operationally on the farm, within our whole banking facility lvr, the bank is happy to lend 100% the $4.52 cost, and the dividend still pays the interst cost of about 6%.
Synlait is not a co-op but its shares but could it be called a raging success? The shares trade thru an accountants register.
Open country recently went thru an equity raising and lost their bankers..
So what are we missing here?

Synlait and OCC a depressing prospect.
Wouldn't splitting into two co-ops solve our problems regarding DIRA? We could 'work together' to optimise marketing. 
Am I correct in recalling you pointing out the benefits of a FTA with U.S.A, Henry_Tull? That is there is none.
At a meeting David Carter told us DIRA is necessary to satisfy the U.S.A. I told him why not cut U.S.A free, and he mockingly laughed at me, putting me in my place and pointing out to everyone in the hall that U.S.A is a vital trade partner.

USA trade didn't seem so vital when Labour was in power and stuck steadfastly to Nuclear Free.

"vital" LOL, its a basket case and full of snakes. We are small and Congress and its lobbyists wouldnt blink in blocking us doing anything that threatens their benefactors IMHO.
Good on you for standing up to the idiot....

The MOTH said tonight we should split in to Nth Is co-op and Sth Is co-op with joint ownership of a  'Dairy Board style' marketing arm. :-)  But would this be allowed under DIRA? Pollies concerned if Fonterra structure isn't right, then that will create distortions across all agriculture sectors 'especially in regards to land price'. Apparently its inhibiting sucessors to the industry. ;-)
Is there a TAF meeting near you soon? We will be graced with the Chairman and CEO presence at our June meeting here.  Apparently so to, will Canterbury.
ALL directors will welcome direct feedback/contact from suppliers and aren't averse to debate as it raises issues that may not have been realised by those writing the proposals. Sounds scary this late in the game?????

The land "value" is an interesting one, it really depends on what the banks do when the next payout is announced (cows on trucks?). Yes interesting to see what EG is thinking...
seeing will be believing...

CO a couple of good points there. 
I wonder if TAF will ultimately have the effect of reducing land values, as undermining of cooperative principles (which I believe have been severly undermined by the board since formation), and decoupling share and dividend from supply?
I believe directors welcome feedback in the sense they can consult with spin doctors to develop a position which suits their agenda. I also believe Fonterra is governed by a more corporate philosophy with the insidious notion of 'selectively informing' shareholders to suit the boards agenda. Rumour is this practice may have created division within the boardroom.
A cynical position I know.

Just thinking out loud here ...
I'm guessing Fonterra is just a minor annoyance to the US powers-that-be ... one that needs to be knocked on the head in order to get to the real prize - NZ's socialised medical system.  It's not the volume of sales the US pharmaceutical industry want from NZ - it's the purchasing model - and they want it gone.
I imagine the pharmaceutical lobby pays alot more for its policy in Washington than the dairy sector does.  So as I see it, if the US can get this minor milk issue resolved - it removes the principle objection from what I imagine they see as a rather insignificant industry (US dairy, that is) - and paves the way for the disestablishment of that annoying little purchasing house, Pharmac. 
JK recently hinted he's 'open to discussion' on Pharmac - whereas when the matter was initially raised he (I think) said it was "off the table". 
Perhaps where Fonterra are concerned he's match fixing - and the beauty of it - killing two ideological annoyances with one stone, so to speak?

From what I have read the US dairy industry is powerful and is I think calling for a Fonterra boycot as its a monopoly?  However yes Ive read that Pharmac gives the US pharmas the jitters.  I would suggest any govn that does away with Pharmac faces a far bigger medical bill and huge consumer/voter backlash, I find it strange they would go there....and Ive not seen anything from JK saying otherwise, got a URL?

Dairy lobby calling for a Fonterra boycott is a bit of a Clayton's call.  Fonterra is the biggest exporter of USA dairy products. Dairy America is single largest American provider of milk powder and sells 'a significant proportion' of it's export powder on GlobalDairyTrade.

The pr spin is to accept that the government is making us do it, and not standing up for what is right

If you want to make them uncomfortable ask them to explain the major variation in equity between the parent (which is what suppliers/shareholders own) and the consolidated accounts. The equity of the parent is much the lessor, but the consolidated is what is focused on.
Quite convenient. 
The difference used to be small and accounted for by minority interests. That is no longer the case.  
In supporting my recent submission to the PNCC council I finished with a suggestion to watch your shareholders council over the next few weeks as perhaps a model residents/ratepayers might wish to emulate. 
Best of luck with suits.


TAF is a financially-engineered contrivance that shifts a balance-sheet problem off balance-sheet. Like how banks shifted and hid dud investments off balance sheet into SPVs special purpose vehicles

It is at essence a debt for equity swap with a lot of smoke and mirrors surrounding it.

Have you ever seen the Groucho Marx skit where he handed a pan-handler a $1 note with a piece of string attached to it.? As the pan-handler stuck it in his pocket and walked away Groucho pulled the string and got his "donation" back.

Possibly. I can certainly see why you make the connection.

.. toying around with structures has been disastrous for many Australian farmer co-ops. Most are now fully owned by investors.
Investors see co-ops as "ripe plums on a tree ready for easy picking". Incentives that drive corporatisation include success fees for lead consultants, executive bonus shares, prospect of increased director fees and equity distribution to current co-op members.
Capital raising is also a tactic. However, once investors have their foot in the door, things begin to change.
"Investors seek better returns than what they would get from the banks... this means growers are no longer in the equation. Directors work for investors."
Wally Newman is deputy chairman of Cooperative Bulk Handling (CBH), owned by Western Australian grain farmers
The examples of corportised co-ops is just across in Oz. There appear to be no examples where the farmer members are better off (consistently higher returns, or sustained increase in property value) corportising compared to not.
As posted before, why don't supporters of TAF quote $ numbers as to the benefit of such, ie. ongoing increase in farm income.

Thanks once again Henry T...your input has been enlightening to say the least.

Omnologo, I know suppliers in the situation I described. Bank pressure to sell shares, but they don't want to supply the corporates. So are going to vote for taf. It may b greed, but also desperation? TAF meeting locally tonight with Jim van der Poel fronting up.

CO, I understand, but find unpalatable. Maybe there were higher forces (finance industry ie banks), that helped us get in this situation, along with our own greed. I believe if TAF goes ahead, it's the final nail in Fonterra as a co-op. In many ways it already is a corporate as alluded to in many posts in recent days on this site. This process is a last chance to get it to return to co-op principles.
It was a crime that previous generations hard work and sacrifice in developing a cooperative industry were transfered to a few privilaged farmers balance sheets, who now want to cash it in. Heads should roll.

Omno: While you're on the topic of "previous generations" .. you could give some consideration to the enormous amount of taxpayer funded subsidies that went into the farming industry (prior to the 1990's) as it now exists today .. if there is any TAF and transfers of "equity value" the government should get first dig and claw some of that back in the form of "shares"

Good point iconoclast

South Island, thats most of the irrigation schemes, here its all about the water. Take it away and we are back to ryecorn and down lambs.

Mist we have to have an engineer design ponds in Southland.  We also have a legal contract with ours that does make them liable if the pond fails/fails to meet ES/Fonterra rules. Also have a contract with the digger/pond builder, despite knowing him really well. I know of one case where the pond was built closer, only by a few metres, than 45m from the cowshed, and as a consequence fell foul of Fonterra rules.  Pond had to be shifted - all at no cost to the farm owner because they had a contract.  I have friends that have had Fonterra/DairyNZ Sustainability advisors design their ponds for them - free but with no contract.
A bouquet for Environment Southland is that they do actually look at who is responsible for an infringement.  If a sharemilker's employee decides to unhitch the pipe and let effluent run into the drain rather than fix a leak, then the employee and sharemilker will get charged, not the farm owner - real case.  If it is due to lack of maintenance and the owner is at fault they get charged.  Nowadays we have to advise ES of sharemilker details and contact person details so they know who to go looking for - so long as they have updated their database ;-)
Are you looking at mechanical separators? We looked at them but there are more and more coming on to the market and prices are still quite high so have designed our system so that one can be added later if we decide to do so.  A few farmers are going for weeping walls instead - I find them disgusting.  They are so at the mercy of the skill level of the people managing the day to running of the farm. We will still be using our sump with the pond being used for storage at times when we can't irrigate.  Have a stone trap at sump with a concrete pad which solids from the trap will be put on and once dry, then spread on farm. Silage leachate (when/if we have any) will also be gravity fed to pond. 

When will we see cheaper milk at the supermarkets here?  Pak N Safe is still selling 2L bottle of standard milk for $2.98 today.

Fonterra will annouce their 2012/13 advance payout on the 28-29 May. It wont be pretty.......

Still the Irish don't have a problem with Foregin Investment in Dairy


A group of foreign financiers is examining the possibility of investing up to €50m in Irish milk production. Irish agri-investor Jim McCarthy has been approached by the group to assess the feasibility of buying into Irish dairy farms. He declined to reveal the nationality of the investors but he said that the group had already invested to €400m in agricultural sectors around the world. "They are now looking to invest in an older, more mature, grass-based market like Ireland," he said. He added that land ownership rules in some countries such as NZ made it difficult to invest in dairying. It is understood that the investors want to partner with Irish dairy farmers by buying land from or in conjunction with them. "These people have no interest in getting into processing, retailing, co-ops or wholesaling," he said. "They want to get involved in dairy farms and land ownership." Joint-ownership arrangements, where the investors would own 49% of the farm business and the farmer would retain 51%, are being mooted. Based on current land prices of around €10,000/ac, an investment of €50m in Irish dairy farms could equate to some 5,000ac of land.


Greetings colin, Christov, iconoclast, AJ et al.
Colin would you be able to explain what consolidated accounts are, and where they fit into the equation. 
From my simple take on things TAF is the final step in transfering generations of cooperative development to external investors hands via a short stint on a few priviledged (kindest descriptor could think of) bsuppliers balance sheet.

Cheers Andrew, much appreciated.

Thanks Andrew.
Omnologo, lets face it there is a lot of accounting - shall we politely describe it as everything between creativity and fraud - out there. National accounts and government departments included. We for example have the national rail network on the books as worth over $12 billion but they are probably worth half or less than that (I am working off figures that their chairman suggested). If NZ truly marked its assets and liabilities to market we would likely be insolvent (similarly banks and insurance companies). I note John Key has finally given away talking about how strong our national accounts are - maybe he has learnt something, or simply been told not to go there.
As a Fonterra supplier you own shares in the company which Fonterra's accounts describe as "the parent". Fonterra (the parent) owns or majority owns 50+ businesses with "the parent" controlling them. Your senior management, board and a few others work for "the parent" but just about everyone else works for what is in effect a subsidary. 
The sort of interesting things that happen from there are that "the parent" charges everyone else for their services. Quite how debt and derivatives are shared around is unclear to me. But somehow the equity and debt ratios (the things the media notice) of the consolidated accounts look better than those of "the parent" And the two no longer reconcile although they used to perfectly.
Another thing that happens in this space is that the intangible assets of the consolidated accounts get laundered (become tangible) when being accounted for by the parent. 
Who a company uses as accountants can tell you a lot.

Thanks very much ColinR, complicated stuff, but much appreciated.

"The average price at the sales has now shed 41 percent in the past 12 months and this year prices have declined in eight of the 10 auction events.'
If this correct what the devil is the real reason  for the retail prices of milk and cheese that we see here in NZ   today - surely it cannot be the friendly local grocery chains ???

Super margins at the super markets, they like the banks are laughing all the way, and its us in the chains...

Read NZ Herald tomorrow (I can't find it in todays, but perhaps it is) opinion by Willie Leferink, Fed Farmers, Dairy Chair.

Casual Observer
"the government is making us do TAF - if we don't they will run our share value"

Problems faced by agricultural cooperatives
There are many problems faced by cooperatives
The five major ones are:

  •  Tough competition from Multi-National-Corporations
  • .A lot of government intervention i.e. the various policies and legislations that affect these cooperatives
  • Inadequacy of professional and dynamic managers with complete knowledge and understanding
  • Inadequacy of capital
  • The extent of participation by the members and method of empowerment of members should be revised

Totally agree iconoclast, and good questions Henry_Tull. Would it be newsworthy for a journalist or more to look into government intervention in current evolution of dairy industry and identify incompetence and hidden agendas? Yes I agree, nothing newsworthy in that, despite the immorality.
I believe this has been MAF and government agenda since formation of Fonterra re DIRA. Why are so many politicians ex and current aligned with so called 'independent' processors? Surely not because of their superior ability in whatever it is they need to have.
CO we need to take our co-op back, and not accept the complicit propoganda fed to us by our board and executive. Why haven't they stood up for us and what is right for the cooperative? There are so many examples of co-ops failing once been pressured to do as we are proposing with TAF, and just as many of success and prosperity if only stick to the knitting and an intergenerational focus. The cooperative will best serve supplying shareholders and NZ. A true co-operatives core principle fosters community development, so will therefore be best for NZ. TAF will best suit a few in the financial industry. The government and Fonterra board are way out of line, even if the have created themselves a whole lot of wealth by transferring the sacrifices of generations in cooperative development, to their own balance sheets.
Over the next few weeks members of the executive are going to try and bambozal us with figures supporting the performance of Fonterra and the need to implement TAF to take us to the next level. Ha-Joon Chang argues the complexity evident in todays financial mechanisms contributes to their instability, and the executives peddling such products don't understand them themselves, best illustrated in collapse of major financial institutions and banks in 08 crisis. I'd say this is the case with TAF and the Fonterra executive.
Henry_Tull has pointed out the pitfalls of futures markets on the price suppliers receive for their milk, and Colin Riden has suggested duplicity in some accounting practices of Fonterra, and as a financially illiterate shareholder, I don't think I'm alone in not understanding. Do you think the executive respect the evolutionary development of the cooperative and have our interests at heart?

accounting practices of Fonterra
Have a look at the 2011 annual report of Tatua Co-operative. A nice clean Balance Sheet. An (almost) clean Profit and Loss Statement. Only 48 pages. Easy to read. Easy to understand. Then have a look at Fonterra's 121 page report. Difficult. A dogs-breakfast. As Colin Riden says - smoke and mirrors. Mushroom country.

Thanks iconoclast. Can't say I know my way around annual reports, but am thinking I should learn. I appreciate you pointing out a fundamentally important difference. Tatua is smaller, but still operates in many markets with different products. Goes to show the strength of retaining cooperative principles to maintain a strong balance sheet.
Can't help you below, suffice to say I think the term monopoly when applied to Fonterra is convenient when trying to destabilise it as a cooperative. If we had leadership that honored cooperative principles, I believe we would have found a way to fairly satisfy other processors who wanted to enter the market, provided they could add genuine value.

Actually went looking for the IFRS and IAAS accounting bodies to see if there were any exemptions applicable to co-operatives that allows them to not produce a "Balance Sheet"
Unfortunately the Accounting bodies are about as obscure as Fonterra.

Currently have two questions floating around.
How can I measure Fonterra's profit components that are attributable to:-

  • profits due to economies of scale, and
  • monopoly profits

Cant see any and there should be.

Don't know if this is useful to you - I'm not up with the play of reading balance sheets etc.  This is in Waikato Times today.

Don't know if you read my article last week about the sun not rising on the 1st of June and Colin Ridens response referring to it as a "lesson in the dark arts of deception"

The article in the Waikato Times by Alex Duncan (Fonterra general manager group strategy and corporate finance) states Total Assets rose to $15.5 billion in 2011 compared to $11 billion in 2002. What he doesnt say is what happened to borrowings and liabilites in the same period.
For the 2011 year
Fixed Assets went down $112 million
Current Assets went up $530 million
The rise in Current assests was entirely due to Derivatives

Liabilities went up by $400 miilion.

Thanks iconoclast appreciative of your patience.  I'm getting the picture :-)

CasO a read  I think you, iconclast ...omnologo and other interested parties should read.

Thanks Christov, interesting assumptions made in valuations.
I agree Henry_Tull. We are leveraging our access to water and benign conditions when profitably exporting (something not to be taken for granted) our ag products. It's our strategic advantage, our iorn ore or gold mine.
However what exactly could Fonterra be teaching the chinese. The cows are all F12 fresian (fertility), there feed is cut and carry (peak oil?). Wouldn't the chinese be better partnering with the U.S of A or european farmers?

Look to where the raw milk from the China farms is going Omnologo.

I assume the Chinese consumer. What I ponder is the availability of water, and good quality soil to facilitate conversion of sunlight into protien via the cow. I know very little about the Fonterra farms in China, but believe there method of production differs significantly from that successfully used in NZ. 
Another point I'm pondering; is any other NZ processor selling product with the same margin as Synlaits baby formula? Will Fonterra recieve all the value from milk processed and sold from Chinese farms. Theo says we don't need capital outside the supplier?shareholder base to fund China, so TAF is most definetly not about capital raising as suggested by the government. How are we funding China?

dairy Jim, but not as we know it...
inhouse, milking 3x's a day, "24/7" operation..

Got it. Excellent. See response below. Any more reports? Did it get any traction?

The article he was replying to is worth a look too:
...........  Let's hope that Fonterra does the same, simply by sticking to its knitting of adding value to all milk and getting better prices, rather than building empires in China, USA and South America.
The worst thing about what it has done and is doing, is that it is teaching those countries our low-cost dairying, which is New Zealand's production advantage, which I thought everyone knew, so would not give away at the expense of our farmers. They are teaching China low-cost farming after which China will refuse to pay us more for ours...........
A video of Fonterra Farms China:
Video: Fonterra's new venture in China
Reuters Video
Thursday, Mar. 22, 2012 6:36AM EDT
The world’s biggest milk exporter, Fonterra, was embroiled in China’s 2008 tainted milk crisis. But the company is starting afresh on the mainland with thousands of cows shipped from New Zealand

For a co-operative to grow for the farmer, the farmer must own the cooperative.
Business serves capital. The purposes of public investors and farmer investors are conflicted and will result in lowered returns for farmers.
Re Kerry Gold: One long-serving Kerry executive described the tension created in the
business as:
“Riding two horses with one arse.” - Anonymous interviewee
His graphical description highlights that it is extremely difficult to serve both farmer and investor interests.
Despite Kerry’s spectacular business success, it would seem today’s generation of Kerry farmers are financially no better off than the farmers supplying DairyGold Co-operative.

Whats happening in South Canterbury this week is highlighting the feature of credit risk that farmer suppliers take on when dealing with corporate milk processors.
Dairy farmers owed about $30million were told yesterday they would have to wait
Should the independents be paing a premium to suppliers for "credit risk", and how big should it be?

Henry. More to the story than that. Are you trying to frighten the horses? Which horses? NZ Dairies was in trouble as far back as last year. Curious that there are any horses still hanging around to be frightened. In terms of credit risk, NZ Dairies "must" have been paying over-the-odds in order to calm those horses that didn't bolt. So, what do they have to complain about. They knew the risks. They were being rewarded. Whether it was enough is a business decision only they could make.

Iconoclast ..just going ove the 2010 risk management report you should have a look see.
77% exposure is to the USD.......backs up the DIFL submission.

Searching for profits from a cooperative is not likely to be fruitful. A producer cooperative produces a "payout" which is the claimant of the residual income left over once all costs and retentions have been deducted from total income. In effect the cost of the supply of the primary raw material (milk) is a variable price set post purchase and production on accounting for the annual transactions of the Coop.
Fonterra was forced into a proceedure called "unbundling" at its formation to satisfy the Treasury suits and politicions who felt they knew best about business transprency and a profit was demanded to be shown on Fonterra's capital investments in downstream non processing operations to enable the profitability of these investments to be shown on its balance sheet. However, the pricing complexities of internal product transfers and the apportioning of other inputs seemingly could not be satisfactorally managed within the normal rules of accounting leading to a scheme where a so called "profit" equaling 9% return on the estimated downstream capital invested was devised and deducted from general payout and declared as "dividend".
It is this sort of slight of hand that Fonterra shareholders should have uppermost in their minds as they vote for or against TAF.

I understand the principles of cooperatives .. I'm not looking for "profits" per-se, in the usual corporate measuring sense. Looking at "profitability" as a measurement of the payout to members plus retentions ... I understand that .. can I make the distinction between profits and profitability?

In effect the cost of the supply of the primary raw material (milk) is a variable price set post purchase and production on accounting for the annual transactions of the Coop.
Yes.  That was the conclusion of a short sharp debate on the subject about 2 years ago. All that learning and wisdom has though effectively disappeared.
Instead we have allowed Fonterra to frame the debate around (a) its 'dividend' and (b) competition between processors.
Regards Fonterra's dividend: This is an arbitary figure that is determined by where the residual is split between milk and dividend payments. While the dividend may be allowed to vary a little year to year for the sake of appearances it is simple enough for the board to broadly control by setting parameters like return on capital and the allocation of overheads.
If you were to do an analysis of payout (milk price plus dividend before retentions less FX gains/losses) over the years to 2002-2010 (I haven't updated to 2011) versus export returns for commodities all gains in dividend are at the expense of the milk price, except for the years: 
2005 - gains from the profitable sale of National Foods and
2009? - losses due to Sanlu
Regards processors competing with Fonterra: The processors competing with Fonterra may complain about it overpricing milk but that complaint is relative. All processors want cheap milk, and that is why N.Z.'s dairy industry strategy is in essence: "NZ Dairy producers shall provide processors cheap milk".
Underpriced milk matters a little less if you supply a co-operative that returns the initial difference as a dividend, but over the longer term you may as well be supplying a corporate. The fantasy that your co-operative is returning a 'dividend' leads it down a path to extreme complexity and high overheads - where Fonterra now finds itself. Struggling.
While I am happy to debate these subjects I am not at all happy doing so on a forum that treats its contributors with contempt, and then quickly relegates contributions made to obscurity. I would like to see this discussion move to somewhere it won't be drowned out by debate over real estate and an incessant stream of press releases masquerading as news.
I am open to suggestions, but if necessary could provide a better forum for the debate we are having. I would hope any consensus on that forum is against advertising and trolls.  

Underpriced milk matters a little less if you supply a co-operative that returns the initial difference as a dividend, but over the longer term you may as well be supplying a corporate.
Technically I agree with you, but, there are philosophical reasons why suppliers choose to supply a co-op and not corporates.  It is not ALL about payout for co-op suppliers.  Ask NZ Dairies (in receivership as of yesterday) suppliers if they maybe wish they were supplying a co-op.
For me I am not too worried if I receive a single payout - it is the total that I receive that matters at the end of the day. Though in a strictly financial sense maybe I should be receiving dividend + milk price, the reality is it all goes in to the same place to be used for the same purpose - running the farm and generating a profit on farm. I can remember years of only receiving 2c dividend and other years of not receiving any.  Times have changed, are more financially 'PC' but am I any better off for it?  I don't believe so.

Technically I agree with you, but, there are philosophical reasons why suppliers choose to supply a co-op and not corporates.
I have no problem with co-ops per se. I am just pointing out that once they go down a certain path they can end up behaving no differently - perhaps even worse - than some corporates towards their suppliers. Whether that happens will depend to some extent on their scale, arrogance, and age. US dairy co-ops included.
For me I am not too worried if I receive a single payout - it is the total that I receive that matters at the end of the day. Though in a strictly financial sense maybe I should be receiving dividend + milk price, the reality is it all goes in to the same place to be used for the same purpose - running the farm and generating a profit on farm. I can remember years of only receiving 2c dividend and other years of not receiving any.  Times have changed, are more financially 'PC' but am I any better off for it?  I don't believe so.
I agree with you. I was in effect arguing that Fonterra's increased dividend in recent years is not real - it has simply been taken out of the milk price. But a good looking dividend taken out of the milk price makes management/governance think and behave like they are corporates.
Or maybe it happens in the reverse order - once they think and behave like they are corporates they think they should take a good looking dividend out of the milk price.

Yes, corporate tails wagging the dog.  :-)

An edit that got caught in time and space:
Or maybe it happens in the reverse order - once a co-operative starts to think and behave like they are a corporate they feel entitled (and probably get bonuses) to take a good looking dividend out of the milk price.

Bonuses attached to performance, the classic corporate ploy to disenfranchise shareholder interest for the sake of the executive, with negative downstream consequences on performance, resilience and longevity.

Deja Vu Christov. Grant Samuel Letter. How long you been sitting on that one? Uncanny that you should produce that today.

Have pondered the issues at length over the past month as CO and Omno and Tull and Riden have canvassed the various issues. Have no vested interest in the saga. Find it more than interesting in a "Harvard Case Study" sense and will be interested in how it develops, and the final outcome.
While I'm not across all of the minutiae, one thing that I can do is cut to the kernel of a business problem (cut out the unnecessary bullshit) and come to conclusions. In several posts I have already done that so won't canvas them again here.

The Grant Samuel letter to the Board of Fonterra dated 1 December 2010 contains the essence of an obvious solution to two of Fonterra's pressing problems. And that is TAF and Capital. Item 2.1 paragraphs 4 and 5. Those paragraphs would read as financial jargon to the average person. Sounds good, but what do they imply. Pity it wasn't spelt out what they really meant and how it would work and even arbitraging. I wonder if the directors questioned it.

Yesterday I put to Colin Riden the following proposition (without knowing about the Grant Samuel Letter)

(b) Keep the existing structure and float an Exchange Traded Fund (ETF) for $1 billion and have it managed by State Street or Street Tracks ( an example is STW.AX an exchange traded fund that tracks the ASX200.

Fonterra would issue $1 billion of "B" class non-voting shares to the ETF. And the ETF floats on the market in an IPO. The manager can't be sacked or replaced. Farmers can / could buy and sell the ETF shares on market as they see fit. Street Tracks act as a market maker. Price of the shares are set by the market. Fonterra pays dividends on the "B" class shares to the ETF, the ETF pays them to the shareholders, the cost of which is met from the benefits below.

That was my solution. It's obvious. Grant Samuel beat me to it by more than a year. Might be some flaws in it. But it retains ownership, (preserves the co-operative control) provides $1 billion of new working capital, pays out some of the interest bearing capital notes and eliminates the draining effect of share redemptions.

Such a Fund cant be busted. A Corporate raider cant take it over. A some time in the future Fonterra could ask the manager to wind it up, hand the shares back to Fonterra and pay $1 billion+ back to the manager. Or buy them back on market and cancel the shares.

Yes indeed iconoklast.....As Henry T put it though, I am interested to know what Fonterra took from the report...if anything...or if they used the report to form persuasive counter proposal positions.
The ideal is to have a really  good argument for in order to  argue against.
 I'm going to dig some more.....that said I think CasO should copy the report and disscuss it widely.  

I understand what you are saying re ETFs iconoclast, however, for many suppliers, TAF is not about protecting share redemption positions and providing Fonterra with investment, it is about  being able to realise capital from their shares whilst remaining Fonterra suppliers.
So it is the classic what the corporate wants is not the same as what shareholders want.  They both have wants but they are different wants.
Before anyone decides to have a go at me for daring to say the above, I am not at all wanting to sell any or all of my shares.  But the above is the reality for many over indebted shareholders.  Under TAF these shareholders have 3 possible options -
1. sell a portion or all shares (related to production), to their 50/50 sharemilkers/VOSM (This option is currently available now)
2.  Sell their shares via the 'farmers market' on fencepost.
3. Sell shares via the Shareholders Fund.
There will however, be shareholders who will not be looking for the 'what's best for me as an individual' but will be considering 'what's best for the future of Fonterra remaining a 100% farmer owned and controlled, co-op. If they are a majority or minority only time will tell.

Understandable points CO. Is there another solution, eg could Fonterra buy shares back off supppliers balance sheets over time, the share remaining at 4.52 and paid down to a stable nominal value. Lets not let DIRA be an excuse, time to stand up for what is right.
Reading the Farmers Weekly today, confirms to me that once TAF is voted in, it's every man for himself, so much for a cooperative, even now it's marginal. Page 6

Is milk a big deal Bernard...?
I take it most have read the submission to the Commerce Commission  from Fonterra in regard milk pricing inquiry.....well..mmmmm..most that want to know.
 A lot of cross reference interest  for those who might like a bit of conflicting information .
Dated Sept 2011 worth the read.
For those who just want to know under what circumstance milk prices may be lowered locally proceed to 23.
Bernard I do hope your taking some interest in this subject as it has the potential to have the widest impact to the Market economy in N.Z. in the short or long haul.

What a mix that submission is!
I have sympathy with Fonterra regards aspects of DIRA that are pure idiocy (who to blame - an incompetent mix of cabinet, MAF, TSY the Dairy Board, NZ and Kiwi Dairies, and the wider dairy industry circa AD 2,000?) but struggle to reconcile that with their contention:
The creation of Fonterra in 2001 and the custom-made regulatory framework have been a success story.
The submission makes statements that true, statements that are contestable, and statements that are blatently untrue. All mixed into a prime example of the dark arts of deception. All in a context where very few people would have a clue about how to unravel it all. God help us. 

Colin R ....Yes ..! reminds me of the shell game of find the pea (truth) watch closely now..!!
I return to my thoughts of earlier this year that the Beast has outgrown it's host and is looking to survive..?...continue to consume and grow...?..
 Needless to say the process usually involves an empty shell being discarded.....
This once again demonstrates the prevailing condition of leaving it to somebody else to sort most often how we get sorted..........OUT>

I had hoped you would take the lead there Bernard as the PeterPen comment is still  your current C.of t the submission under perception of "Fair Value" Fonterra put milk at $4.99 p/4lt local...then go to 23. and read  the short passage there.
The circumstances of falling currency don't enter into it my lad as they are only very, very recent events.

It's Friday , Count ...... got a little " funny " to raise the hickeysterical gloom around here ?
..... Gummie's offering :
The Baby Cabbage was sitting in her row , in the veggie patch , worried about something ..... " Mummy " , she asked her mother , " I'm sitting here in this row with all the other baby cabbages , growing bigger day-by-day ...... how will I know when to stop growing ? " ......
" Aha , my child ...... the secret to life , is to quit when you're a head . "