31 May 2013

Farmers quit Fonterra for smaller companies

1:35 pm on 31 May 2013

New Zealand's small dairy companies are benefiting from Fonterra's Trading Among Farmers (TAF) schene as farmers quitting the big co-operative to join them.

Since TAF was launched late last year the price of the shares farmers need to match their milk supply to Fonterra has leapt from $5.50 to about $8.

Radio New Zealand's rural staff say this is providing an incentive for Fonterra farmers to cash in their shares, reap the profits and join another company. It also creates a higher hurdle for new farmers to join Fonterra and for existing milk suppliers to increase production.

Fonterra is worried about the increasing number of farmers who've been jumping the fence to supply smaller dairy companies since it introduced TAF.

Its director of milk supply, Steve Murphy, says farmers have always switched companies but the number leaving Fonterra has increased of late, and the company is well aware of the financial lure of the high share price.

More new dairy farms coming on stream are also choosing to supply the smaller companies.

Mr Murphy would not describe it as an avalanche of farmers leaving, but says it is a concern for Fonterra which will fight as hard as it can to keep its existing suppliers and get new ones.

The co-operative has introduced a range of measures to try to ensure it is the preferred supplier including a new supply offer, a bonus share scheme, varied contract options for new suppliers and a dividend reinvestment scheme.

The head of one New Zealand dairy company told Radio New Zealand many Fonterra farmers have joined it for the coming season, which starts at the weekend, and its plants are now at full capacity. The dairy company head said TAF has created a powerful incentive for farmers to leave Fonterra.

However, Westland Milk Products chief executive Rod Quin says while it has gained a couple of existing Fonterra suppliers for the new season, most of its new supply comes from newly-converted dairy farms in Canterbury.

One Fonterra dairy farmer says the only thing stopping more suppliers leaving is that the smaller companies don't have the capacity to take more farmers.