Mymilk likely to get up noses of Fonterra shareholders

Rural News

Allan Barber is incredulous about the MyMilk offer from Fonterra, even more interested to know what Fonterra shareholding suppliers think

12th Dec 14, 1:41pm by Allan Barber

By Allan Barber

Fonterra has launched a new company called MyMilk which is specifically designed to attract supply from South Island dairy farmers who don’t currently supply Fonterra.

The website says it’s co-operative, but that’s a bit hard to see when the supplier has no obligation to buy any shares within five years and only has to sign a one year contract.

The website also says somewhat cutely the company is ‘backed’ by Fonterra, when it is actually a wholly owned subsidiary.

This new venture is no doubt directed at tempting Synlait and Westland suppliers to jump ship without having to stump up with any share capital (at least for five years).

It promises competitive payment – competitive with whom?

Fonterra or one of the others?

But it is not clear exactly how MyMilk will avoid paying the same price or even a higher one (shades of meat industry schedule premiums) to secure a new sign up.

Under Trading Among Farmers, it is expressly forbidden for Fonterra to have different classes of shareholders and under co-operative principles equality of payment is sacrosanct.

The website proclaims ‘limited spaces’. Seriously?

No doubt the volumes will be small, at least to begin with, but the principle is similar to pregnancy.

You either are or not, but you can’t be a little bit pregnant! Equally this new venture is either co-operative or it isn’t, not both.

Obviously bright new innovations like this don’t emerge after less than a serious amount of strategic analysis and brainstorming, but a look at the very uninformative website suggests it cannot have involved more than a brief planning session at the Mid Canterbury or Southland regional marketing office.

After the release of the damning independent report into Fonterra’s handling of the false botulism scare, this looks suspiciously like another example of the criticised silo approach.

Did Head Office know what was about to emerge from the brainstorming session?

I have no doubt somebody from Fonterra’s PR team will be able to explain to me how and why this new venture is entirely consistent with the company’s co-operative principles, but it’s not me that needs convincing.

It will be all those existing North and South Island shareholders who are wondering, particularly in the present times of severely reduced payout, why they have to continue to adhere to the much vaunted co-operative principles when a new class of suppliers can access all the same privileges except the final value added dividend.

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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country where he runs a boutique B&B with his wife. You can contact him by email at allan@barberstrategic.co.nz or read his blog here ».

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33 Comments

by dtcarter | 12th Dec 14, 2:09pm 1418346593

what about when the egg is fertalised but not attached yet. Surely that is a little bit pregnant?

by Boatman | 12th Dec 14, 2:42pm 1418348520

Here's a question .

Name for me , an organisation that :-

Operates as a syndicate on an island , but has wide "interests" globally
Runs price fixing cartels wherever it can .
Extorts extremely high prices from its customers
Manipulates economic activity on the island
Deals ruthlessly with competiton
Operates under a veil of secrecy
Denies or obfuscates involvement in businesses and activitties it effectively controls
Goes to extreme lengths to protect its members
Is perceived by many as a law unto itself
Powerful enough to lobby for new laws in its favour
And Governments are too scared to ever confront it

by Caleb | 12th Dec 14, 5:27pm 1418358437

Teachers Union?

by Boatman | 12th Dec 14, 6:09pm 1418360967

Correct , you win a Brand new Kia

by Grumpy | 12th Dec 14, 3:35pm 1418351700

This Fonterra Shareholder thinks its about time someone stops the new entrants to the Milk Processing Industry getting a free lunch.

The facts are

- that most farmers that supply the non - cooperative processors have issues whether it be financial or quality hence why they have been forced to leave the cooperative environment.

- the non - cooperative processors "only pay what they have to" to source their milk (therefore in their respective areas Fonterra/Westland/Tatua milksolids payments cap what the non-cooperatives pay for their milk). If Fonterra doesnt make life hard for them it simply means they push bigger profits out of NZ.

- Fonterra has spare capacity in some areas so it makes sence they source more milk to get greater economic efficiency from these factories (provided of course this benefit is not offset by lower market prices)

- the breakdown of the Co-operative Environment will change the course of NZ, this has already start so be very careful what you wish for (foreign owned farms that are fully vertically integrated will change the face of NZ in a very drastic way)

- if the Kiwi tall poppy syndrome keep going like they are the dairy industry will end up like Aussies industry - a pile of bulldust!!

If you are responsible and intelligent then surely you understand the importance of the dairy industry to NZ's furture and could put forward a positive response to this news rather than this continual negative bullshit that the media spins on Fonterra. Sure theyve made some cockup's but realise that we are the biggest company in NZ and trying to sell to the world on your behalf.

by redcows1 | 12th Dec 14, 6:48pm 1418363306

-Financial issues. Not surprisingly the main one is they don't wish to pay the rediculous share price with its poor return.

-"only pay what they have to". No surprises there.

-Spare capacity. Seems they really stuffed up then having to dump product last year.

-Breakdown of the cooperative. That was broken with the advent of a fair value share and dumping of the nominal share. Fonterra is NOT a cooperative.

-Tall poppy syndrome. Myth, put out by those who believe in their own exalted place in the world.

by cowboy | 14th Dec 14, 7:49am 1418496560

It's their farm, their product who are you to try and put illegal Restraint of Trade in play?

Sure myMilk from Fonterra is an insult to all those shareholders whom Fonterra FORCED to fully share up.

But if there's alternative processors, and there always will be when Fonterra is not a Co-op, why can't suppliers choose them instead.

by xingmowang | 12th Dec 14, 4:23pm 1418354628

Fonterra's share of milksolid collection in the South Island has been dropping really fast and it is likely that it will be below the 80% threshold set in DIRA, in 2014/15.

That is the driver for this Mymilk.

More competition is good for farmers and consumers.

The interesting thing is indeed how Mymilk pays its farmers:

a. same price as Fonterra pays but no dividends?

b. a bit higher prices?

Or will Mymilk use transportation costs as an excuse to justify the difference between its and Fonterra's milk price?

by Omnologo | 13th Dec 14, 12:00pm 1418425233

Great points Grumpy and redcows, not so xingmowang.

Saying competition is good for farmers and consumers is a crude generalisation in the context of NZ primary producers and traditional cooperative structures. The trainwreck that is the sheep and beef industry, (one that Fonterra is heading towards since DIRA and demutualisation) is testament to this. After years of non cooperative processors underming each other, hasn't Affco proposed a moratorium on new processing facilities, thereby eliminating competition.

Does anyone knoe if Allan Barber has a working relationship with Talleys? As that may explain his opposition to mymilk, as divisive as it will be for Fonterra.

By the way Allan Fonterra, does have different classes of shareholders, as voting rights are relative to shareholding, much the same as any other run of the mill corporate company, such as OCD. Suppliers with scale (and most probably debt), have a much greater say on the direction of Fonterra than the average supplier, that's why TAF got voted through in the first place.

by tim12 | 13th Dec 14, 4:53pm 1418442836

I went to a meat company farmers meeting recently. It is interesting that you call the meat industry a train wreck. The meat company and farmers were mostly in agreement that we don't want the meat industry to end up like dairy. I don't see the question is to have a cooperative model or not it's more do we want to sell all of our product to one market ( that being China ) and the risk of price volatility associated with that. The amount our nation lamb kill going to China has risen from %30 to %40 in the last couple of years I think the last thing we need is a Chinese buy out of one of our struggling companies, and that company coming in and trying to take over the industry by paying high prices for 3 or 4 years. I think price stabilty is more important than high prices.Have people have forgotten about risk? Unsustainable booms tend to be what causes a bust.

by Omnologo | 13th Dec 14, 6:10pm 1418447421

What do you want the meat industry to end up like? There are already foreign owners of plant? If meat farmers don't own the processing and marketing of their product, what say do they have in where the product is sold?

by cowboy | 14th Dec 14, 7:51am 1418496703

Or more importantly, as Fonterra company is proving; for what price.

They can just vertically integrate and pay great company and distribution chain salaries, and have nothing left for the farmer, because of the backwards invoicing. There's no interest to protect the financial improvement of the farm. farmer, or farm staff. Certainly not from goernment, whose job it is to make sure Contract has good public benefit on both sides of the contract.

by tim12 | 13th Dec 14, 6:45pm 1418449536

What say do dairy farmers have in what Fonterra is doing? China is a big market. It's not that we don't appreciate them buying our lamb, but they could easily buy all of our lamb. and we would lose all of our traditional markets. Meat companies and farmers do have some relationship with each other, realising that we need to look after each other to protect the future of the industry.

by Andrewj | 13th Dec 14, 7:04pm 1418450653

Isn't it a case of China being the only market or at least the only growth market? If you don't sell %40-50 of our lamb to China who will buy it instead, and what will they pay for it? In reality marketing of NZ ag products is mostly a joke.

If you want to increase production there must be increased sales somewhere, China was it, now the EU and US are jumping on the band wagon.

We are painted into a corner, as is Fonterra with its redemption risk, I don't see happy outcomes anymore.

by cowboy | 14th Dec 14, 7:45am 1418496341

Farmers have no say.

Sharemilkers even less.

by tim12 | 13th Dec 14, 7:37pm 1418452655

Here's the problem i see with China. If we were'nt letting them come here with all their cash pushing up our land prices we could afford to take less for our meat. The world seems to crave growth, but if farmers get higher prices we only pay higher prices for farms and are no better off.

by Andrewj | 14th Dec 14, 7:10am 1418494254

On farm costs were up %6 for sheep and beef and %8 for dairy, according to my bank. Now thats getting to be a problem.

by David Chaston | 14th Dec 14, 8:28am 1418498908

Actually I doubt they are giving you correct information. That might be true if you include 'livestock purchases' in farm expenses, but it certainly isn't true for all other farm operating costs - according to the comprehensive MPI/StatsNZ data (on a national basis).

We chart that series here, for various types of farms.

Rising cattle and sheep prices aside, farm operating costs are rising at very low levels. Only dairy 'might' have an issue (+2.7 pa), but it clear few others do. There will be exceptions however; some farmers may have made decisions that result in higher rises, but on average farm costs are rising very modestly indeed. With fuel and fertiliser costs actually declining, this may continue for a while yet.

One area (a small one in the overall scheme, but annoying anyway, are things like legal and accounting fees. You can track these on a national basis here.

by Andrewj | 14th Dec 14, 8:45am 1418499952

Thanks David, I was thinking about where my costs had gone up, mainly they were, insurance,rates, user pay regional council fees, accountancy,transport and aniumal health.

by cowboy | 14th Dec 14, 10:40am 1418506847

labour, electricty, compliance updates, supplimental feed (balage)

So fuel (diesil?) is down? but hold it... I was told we needed to keep the dollar up to keep everyones fuel bill down. dollar now 77c US, 10% down. But fuel at pump is down, not up....

by Andrewj | 14th Dec 14, 11:11am 1418508713

Cowboy, how much are your costs up by this year? My bank manager was quite emphatic.

by cowboy | 14th Dec 14, 1:49pm 1418518155

I would have to pull out the accounts and look.

I'm only aware of it because I do the account processing, and mail, so I notice that the unit rate for power is up (got letter from power board), ACC up (had to update budget), wages lifted because I had to update the Automatic Pament, Insurance up because I had to lift it in the budget, same as had to increase the payment numbers for the rates.

Mating was also up. But that was because we used some sexed semen and the rest was selected - so don't know if the individual changed, that would be a memory thing but the total was up due to good submission rate and higher quality straws = bump in the cashflow = cowboy only got half his wage that month.

suppliment was $ 45-55 bale, but now I'm looking at $ 70-75 but that depends on time of year.

Dental and doctor bill was also up, but that was the dentist & doctor doing itemised cost recovery on individual consumables which previous were considered part of the job. That was one of the reasons I had had enough of dairying - get asked for more but no way to pass on the increases, yet the people failing to get the increase in sales still got their full paychecks...no half pay for them.

by redcows1 | 14th Dec 14, 2:43pm 1418521431

It's a wet day, bored. So I watched Theo and John explain the reasoning, well half of it only cause I it just rubbed me up.

Two things I took, #1 growth is king more milk more milk and then more milk that's their only way to prosperity. #2 the volume of spin over actual information is just sickening. Lucky I don't own shares these guys are killing me without that added stress.

by Andrewj | 14th Dec 14, 2:51pm 1418521890

EU cow's milk collection increased by 4.9% in September 2014 compared to the same month last year. The cumulated deliveries in the first nine months of 2014 were 5.5% higher than in year 2013. The milk is processed into 26.0% more SMP, 11.2% more WMP, 4.8% more cream, 4.1% more butter, 2.6% more cheese, 2.4% more concentrated milk and 0.1% more drinking milk. Negative fig NZ milk production increased by 14.2% in the first eight months of 2014 compared to 2013. In the first three months of the new 2014-15 season (June 2014 to May 2015), milk production has been 5.1% over 2012-13 levels. In September 2014, the milk price recorded for NZ slightly decreased by 0.4% to 26.86 c/kg, cumulating a 34% decrease in four months. o Australian milk production up to September 2014 has increased by 4.2% compared to the same period in 2013. In the first three months of the new 2014-15 season (July 2014 to May 2015) milk production has increased by 2.8%. o Milk production in the US increased by 4.0% in September 2014 compared to the same month last year, being the biggest surge this year. http://ec.europa.eu/agriculture/milk-market-observatory/pdf/market-situ…

by cowboy | 15th Dec 14, 9:56am 1418590597

6 months and counting down.....

by Wilco | 14th Dec 14, 4:19pm 1418527161

We have reduced our cows by fifty, reduced our production target by 10,000 kg ms, cut PKE, reduced our labour requirement by .5 staff. Revised budget looking okay and more importantly sustainable and I am feeling less stressed - but imagine if other dairy farmers did the same - what would happen to all that stainless steel?

Fonterra is forcing farmers to ensure the best possible manufacturing margins instead of tailoring the manufacturing to maximise farmers profitability.

I am not a dissatisfied Fonterra supplier more a disconnected one and with a smaller herd and shareholding a feeling that I have no real say in our industry despite Fonterra's efforts to fill my letterbox with information.

I have become a barely interested bystander in my own industry.

Such an attitude makes me ripe for recruiting to another company like a number of other farmers and contrary to previous comments it is neither a case of financial need nor meeting supply standards but a loss of participation.

by cowboy | 15th Dec 14, 9:48am 1418590100

Is your rent 4% of property and capital improvements ("RV") value?

by redcows1 | 14th Dec 14, 6:18pm 1418534322

My daughter reckons I shouldn't milk by myself, too much thinking.

But it's bugging me. Why a little over twelve months ago did Fonterra need outside capital bought in to grow and move forward. Now they can process and sell 5% more with no need for capital? Bit contradictory?

Nice post Wilco. The exact perspective they are not listening to.

by DJ Dave | 15th Dec 14, 9:46am 1418589976

Great points Redcows and Wilco.

The Farm Source inititive is another cracking Fonterra idea. No consultation with the Co-op owners, and apart from now offering a reward scheme, what exactly has changed?

RD1 was fine as it was. No need to be 'tied in' with the Fonterra 'Brand"

Word on the street is that big farmers (with shares) are pushing hard for Fonterra to maximise the dividend this year....thinking 60c +.

Thats great after last season when they resticted milk price to enable the value added side of the business to be profitable, and now with low commodity returns they will drive the value added side hard to extract money out, and the non-share holding farmers and more importantly the sharemilkers suffer.

by cowboy | 15th Dec 14, 9:50am 1418590207

Like my real estate agent is finding...

It's far easier for Fonterra to sell services and advertsing to it's locked in suppliers, than it is to fight it out finding revenue in the market

by Casual Observer | 15th Dec 14, 8:11pm 1418627490

DJ Dave. I agree it is the sharemilkers who get screwed. I was concerned that some of the 53c withheld from milk price last season, was clearly from value add. Questioned it and got a real politicians answer. I'm a farm owner, but I really feel for the sharemilkers who will get screwed again unless Fonterra add back in to the milk price what they took from it last year, that came from value add activities. Of course they won't..........

Fonterra says it it hoping young farmers will be the ones to switch to mymilk. Why would they do that when other companies will reward them for low somatic counts (Fonterra give you a free dinner and a certificate). Also with more and more farm owners moving not to share dividend, unless there is something else that is traded for that, sharemilkers could potentially lose out being a Fonterra supplier. Then again I have heard some of them say they like dealing with RD1/Farm Source.

I do not understand why 'Big Farmers' would be pushing for a high dividend-unless they want the share price to spike as they plan their exit. I know some say that is what they use to pay interest for share purchases, but what difference does it really make if it comes from milk price or dividend to them?

The industry does need a strong Fonterra, but one does wonder if we aren't going to be 'hoist by our own petard'.

by DJ Dave | 15th Dec 14, 10:34pm 1418636097

Casual,

It was probably more that the Big Farmer, or loudest Farmer will want the dividend maximised so they get to keep as much of the milk cheque to pay their own bills, rather than the sharemilker getting it.

by Henry_Tull | 17th Dec 14, 10:40am 1418766037

BF & corporates have 12 months to a financial year (and often accurals), not the 24 months that many suggest we use (cash-mouth-hand).

The dividend seems to be more like a royalty, if it every was a dividend, or they ever were shares.