Fonterra shareholders use AGM to flag concern over lower milk payout

Wednesday 12th November 2014

Fonterra Cooperative Group shareholders used their annual meeting in Palmerston North to raise concerns over the reduced 2015 milk payout, the dairy giant's forecasting and the way the milk price is set.

The forecast milk price it pays farmers was slashed in September from $6 per kilogram of milk solids to $5.30/kgMS plus an additional dividend payment of between 25c to 35c per kg of milk solids. It comes on the back of a record $8.50 total payout last season.

Shareholders today expressed concern this season’s payout could go below the $5 mark given the continuing volatility in world markets.

Dairy prices through the global dairy trade auction have stabilised recently but chief executive Theo Spierings said they were still only stable. The volatility made forecasting difficult, particularly when the first indication had to be made in May the year before the actual payout was made, he said.

Chairman John Wilson said the forecast would be updated in December but in the meantime he urged farmers to be cautious about their spending during the current season as he couldn’t see any upside for a while yet. Wilson pointed to a recent Rabobank report that predicted there would be no upward movement in international dairy prices until the second half of 2015.

Wilson said the current global dairy prices don’t support the cost of production and it would “take a while for those prices to come back”.

“I think that is going to be our world for at least the next decade,” he said.

Although milk volumes were already up 3 percent in the year to date compared to last year, Wilson said he expected that farmer budget cuts and reduced feed on farm would see that volume growth decline over the summer.

Fonterra rejected suggestions that there needed to be changes made in the milk pricing mechanism with Wilson saying he had confidence the manual had served farmer shareholders well over the past five years. That same confidence was echoed by Fonterra’s Shareholder Council chairman Ian Brown who said it was “robust and transparent”.

Brown said however, return on capital was the lowest it has been for five years.

Shareholder Murray Brown put a resolution that all Fonterra investment spending and New Zealand development projects be put on hold until the farmer receives a minimum of $7 per kg of milk solids. He said last season’s 10 cent dividend which amounted to $160 million, was a poor return on $4.7 billion of investment.

Wilson told the meeting Fonterra was a cyclical business with significant price volatility and it was important to follow its strategy and continue to invest for the future.

“The world, where obviously we have strong competitors, won’t stop and let us catch up," he said. "We have a demand for high value products we can’t meet and if we stop investing, competitors will fill that space.”

Spierings spoke of sticking to the strategy of building a globally relevant cooperative. The aim was to boost revenue to $35 billion by 2025 on the back of processing 30 billion litres of milk provided from six milk pools globally.

The strategy included investing in New Zealand production, some $1.6 billion currently, to make it more efficient while giving priority to driving five key consumer brands in eight key markets here and offshore. The overall point of the strategy, he said, was to maximise returns for its farmer shareholders.

The Shareholders Council chairman Ian Brown said Fonterra’s share of the total milk produced was sitting at 86.8 percent against a target 88.2 percent. That was an important metric for farmer members because it was crucial to maintain a critical mass in order to compete in the global marketplace, he said.

BusinessDesk.co.nz

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