Friday, March 29, 2024

Farmers expect Fonterra action

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Farmers will expect Fonterra management to start slashing internal budgets and costs as its shareholders are being forced to, a Federated Farmers leader says.
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Waikato Federated Farmers dairy chairman Craig Littin said while the downgrade of the forecast milk price to $5.30/kg milksolids was not unexpected, farmers will be demanding the company put its own systems and costs under close scrutiny to achieve savings.

The company would also be expected to ensure the commercial strategies it was putting in place would deliver benefits to shareholders, Littin said.

With more than 3200 Fonterra staff on a salary of more than $100,000 a year, Littin said farmers were starting to wonder if it was more economical to work for Fonterra than own it.

The milk price cut was not the only bad news Fonterra delivered in its annual results.

While its revenue for the 2014 year was up 19%, net profit after tax was down 76% at $179 million.

Earnings a share were down 77% at 10c.

Normalised earnings before interest and tax were $503 million, down 50%.

Shareholder watchdog, the Fonterra Shareholders Council, said while farmers were aware of the market conditions, the downgrade would add to challenges faced onfarm.

Council chairman Ian Brown said in these sort of seasons, farmers wanted to receive the full benefit from the integrated supply chain their co-operative provided.

The downgrade would put real pressure on some farmers’ cash flows, Brown said.

While today’s announcement was just a forecast, it was vital farmers continued to be very prudent with their financial planning.

Long-time Fonterra shareholder, Waikato farmer Lloyd Downing, said he hoped the newly-re-elected National government “had a Plan B” because the economy would take a big hit from Fonterra’s announcements.

He was frustrated by the financial results.

“We employ all these experts who are supposed to be the best brains in the world, and we are supposed to have the best brands in the world. How is it that some of these competing companies can keep their heads above water?

“It really upsets me to have to defend Fonterra all the time. When can we go out there and say we are the leading company, not the biggest, but the best?”

Fonterra, with 10,500 farmer shareholders, is the dairy industry’s biggest processor, collecting 87% of the country’s raw milk. When it was created from a mega-industry merger in 2001, it could claim 96% of national supply. Emerging processors such as Open Country Dairy and Synlait, which do not require farmers to buy shares to supply, have since made inroads into that supply.

Fonterra’s announcements today included news it had increased and widened its dividend range from 20-25c a share to 25-35c, making a forecast cash payout of $5.55-$5.65 for the current season.

The company was able to increase the estimated dividend because of the positive impact of the lower farmgate milk price on product margins.

But Downing said this would pump up the value of Fonterra’s publicly listed units, which would in turn raise the farmer share price and provide more incentive for Fonterra farmers to cash in their shares and leave the co-operative to supply competitors.

There is growing concern among Fonterra’s Waikato farmers that if rival Open Country went ahead with a consented plan to build a plant at Horotiu, it would quickly lure Fonterra farmers.

Meanwhile, industry-improvement organisation DairyNZ said with the latest milk price forecast fall, farmers needed to reassess the costs of their farm systems.

Manager of research and development David McCall said most farmers should cope with lower milk prices this season, provided there isn’t another drought.

But about a quarter of the country’s farmers, those with a lot of debt, could have difficulty meeting their farm working expenses and interest payments, he said.

Last season’s high milk price, payments for which are still coming through to Fonterra farmers, would help counter the low prices this season.

DairyNZ estimated farmers would lose $1 billion in income compared with last season’s production.

It was estimated farmers would have 40c/kg MS less to spend on farm working expenses this season. This reduction would impact regional economies and communities the most, McCall said.

DairyNZ’s focus would be getting farmers through this season, he said.

“We will be urging them to think about the next five years – are they running profitable farming systems that can survive fluctuating long-term trends in payout?

“Our analysis shows we are just within the long-term bounds of the trends for average dairy company total payouts, and if you can’t survive those, then you need to look at your farm system and what to change.

“We know there are dairy farmers who operate low-cost farming systems that are able to make a profit with a $5 farmgate milk price. There are lessons from their experience for our industry.” 

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