9 Jun 2015

Caution urged for dairy farmers 'jumping ship'

1:17 pm on 9 June 2015

Some farmers loyal to Fonterra are warning against a backlash against the co-operative.

The country's biggest company has been under pressure as farmers have switched their supplies to rivals - some Chinese-owned - which have been offering better deals.

Fonterra sign on a farm. Rural Rapid Number.

Not all farmers see advantages in switching supply from Fonterra. Photo: RNZ / Diego Opatowski

Fonterra is also facing a corporate shakeup after calling in outside consultants to review its operation.

Some Fonterra farmers who have sold their shares and taken up offers from competitors have criticised Fonterra's strategy.

Disgruntled Waimate farmer Rod Hayman sold his $1.5 million worth of Fonterra shares and switched supply to South Canterbury's Oceania Dairy, owned by China's largest dairy producer, Yili, when it offered 10 cents more a kilogram for his milk.

"The no shares is obviously a financial attraction, it's the biggest one at the moment, we don't have to own shares in it and we're not indebted to Fonterra to supply them," he said.

Mr Hayman was against outside investors in Fonterra, saying the shift away from the pure co-operative to a corporate model was not working.

But Northland farmer Chris Hutchings said those disgruntled with the low payout for their milk were blaming Fonterra for something it could not control.

Fonterra last month lowered its forecast milk payout for the current season to $4.40 a kilo of milk solids with a dividend of 20 to 30 cents per share on top of that, and its opening price for the new season, starting this month, is $5.25.

"The low payout tends to cloud people's judgement at present time. I'm not blaming Fonterra because of the low payout, its the international marketplace which is dictating the payout," he said.

Mr Hutchings said while there was room for improvement, and he questioned some of Fonterra's overseas strategies, he remained confident in the co-operative.

"Generally speaking I think they're doing it to maximise the return for their shareholders which is us the dairy farmers."

Mr Hutchings said so far he wasn't tempted to switch supplies.

"You know, a lot of these new companies that are being set up with Chinese backing, there's no history behind them, we don't know how well they're going to perform long term.

"They might get a quick gain up front by selling their shares in Fonterra but then as a Fonterra shareholder you actually share in the profit of the business."

Otago dairy farmer Stephen Crawford said farmers needed to see some results from the dividend.

He said the Fonterra Shareholders Fund units floated on the sharemarket at $5.50, and rising as high as $8 were now trading at around $4.40.

"That's a reflection of how people see Fonterra performing. That's really the bottom line and I guess there's a real carrot there for people to, especially when times are difficult like they are at the moment, there's an incentive for people to sell shares and supply someone else and just receive milk price and probably reduce debt or whatever. So it is a risky period for Fonterra for sure," he said.

Mr Crawford, who is chair of Otago Federated Farmers Dairy said in his area, the French dairy firm Danone currently collected milk from about 10 farms but had indicated it wanted to grow the factory to receive milk from 60,000 cows.

"There's options for farmers popping up all over the place. All over the country we've got factories popping up which is a real concern," he said.

"I think that farmers need a strong Fonterra so it really comes down to whether you're taking a shorter or a longer term view. and that's why its important for Fonterra to start delivering on this strategy. They really need to because if they don't, I think there's a lot of people hanging in there at the moment with that view, but that view will only last so long. They need to deliver with results."