Fonterra’s director of milk supply, Steve Murphy, said the changes to include an identified capacity adjustment payment in the advance schedule were designed to simplify and expose it so farmers could clearly see and understand it.
The co-operative has had a system that rewards or penalises farmers according to the shape of their milk curve since 2006-07 but feedback had been that it was complicated and difficult to understand.
The lack of transparency meant farmers were often surprised at the level of the adjustment made to their June milk payment and the lack of visibility meant they couldn’t easily plan cashflow through that period. The adjustment has been made as a matter of fairness within the co-op, in that it recognises farmers with a “peakier” milk supply curve than the overall co-op require a greater investment in capital to ensure their milk is processed.
Those with a flatter curve than the co-op’s require less of the co-op’s capital to be tied up in processing and they’re rewarded for that. Under the new arrangement the advance rate schedule now includes a capacity adjustment payment, this season set at 52c/kg milksolids (MS). It’s for milk supplied from June to August and from January to May and doesn’t change through the season.
It’s combined with what’s now being called the base advance rate – the advance on the milk price component of payout – to form the full milk price advance rate.
Murphy said the net result for the co-op to the change is neutral so it’s not affording it any advantages over the previous system. It’s also neutral for the co-op within the year because of the way it’s calculated.
But some farmers are concerned about the message the presentation of the adjustment is sending with payments now clearly being made in the shoulder months. Dairy Holdings chief executive, Colin Glass, said the new system is a fundamental change to the way farmers are being paid and he has no doubt some will see it as an incentive to produce milk outside of peak and respond to that.
“We’ve already had contract milkers and managers making those kinds of comments,” he said.
Fonterra had talked of a longer peak period and it was apparent its supply curve was flattening as the volume of South Island milk increased. He questioned the need for heightened transparency for something that was becoming less of a problem, suggesting the changes were made under the guise of doing something equitable when all it would do was drive behaviours that would shift costs from the processor to the farm.
He viewed the change as presenting a lower price for spring milk and argued that, given the extent Fonterra’s total supply had flattened, farmers whose milk curve had not changed were being paid less for their milk.
Autumn milk flows come with a greater Overseer nitrogen loss so initiatives like those taken in the past year by Lincoln University Dairy Farm to reduce nitrogen losses will be penalised by the capacity adjustment changes, he said.
The move to change the payment system should have been widely discussed within the shareholder base before it was implemented given the impact it could have on farmer behaviour, levels of investment on farm and increases to onfarm costs.
Fonterra Shareholders’ Council chairman, Ian Brown, said it hadn’t been involved in the development of the new system. The council had gone to the board following the 2013 drought when some farmers were hit by capacity adjustment charges and this is what had “popped out” of the work that management had done. Councillors were now fielding calls from farmers with queries about its intent. Some had voiced concerns at mixing a capital signal with a milk pricing signal when much had been done over recent years to try to separate the two.
Sharemilkers and farm owners with sharemilkers should look closely at the changes then talk over their approach to how milk payments should be apportioned, keeping in mind the intent of a sharemilking agreement.
Murphy was confident that any farmer unease would fade as they became more familiar with the detail of the system.
“The feedback we had from farmers was they wanted the capacity adjustment to be more visible,” he said.
“They said – give us the credit for being able to make the decision over what we do with our businesses, give us a signal that’s clear, don’t hide it.”
The size of the adjustment wasn’t big enough to drive changes in behaviour and the processing side of Fonterra’s business had not been behind the changes.
