The co-op’s chairman, John Wilson, said despite the price being 55c below that produced by the milk price manual calculation there were no smoke and mirrors when it came to setting the forecast for last season. Historically stream return volatility had been in the order of $150 million which had been noted in the co-op’s trading among farmers prospectus.
Last season it had blown out to $800m. The peak production period had also gone from 14 days, four or five years ago, to 50-60 days.
Wilson said farmer and Fonterra Shareholders’ Council feedback following the half-year accounts was that they were happy with the transparency and level of information given to explain the variance from the milk price calculation.
The Milk Price Manual model assumes an efficient processor processes its milk into powders whereas Fonterra’s processing asset mix didn’t allow that during the superflush of milk production last season.
Wilson said the board’s decision to set the forecast 55c below the model’s $8.95/kg calculation had not been driven by a desire to support other areas of the business, namely New Zealand Milk Products by dropping the cost of goods to it, so that it met its cost of capital.
“We carved out the asset base impact, that’s all,” he said.
The milk price manual remained robust and the board had every confidence in it although that didn’t preclude it from being challenged and tested. The board could move to change what was included in revenue to take into account cheese and casein but the stream return gap was expected to close and more importantly such a move would weaken the co-op and the New Zealand dairy industry, he said.
The manual was set up “to drive at the efficient frontier” in that it purposely produced a milk price based on powders where the best returns have historically come.
Fonterra could take steps and reduce what it paid farmers over the peak but it wouldn’t do that either as it would cut returns to farmers and drive inefficiency onfarm.
“Everything we do is about maximising returns to our farmers,” he said.
That meant driving efficiency onfarm, in processing right through the supply chain to the end customer.
“Ultimately it’s about protecting the co-operative. Our farmers expect that of the board.”
The level of transparency in the model was unprecedented in the history of the NZ dairy sector and, Wilson suspected, globally.
“Transparency and integrity about what we’re doing is absolutely fundamental to our board and certainly to myself as chairman.”
When actual numbers were available at year-end farmers would see clearly how the milk price had been set.
The 2013-14 dividend remains at 10c/share and the 2014-15 season forecast milk price has been set at $7/kg MS.
