Friday, March 29, 2024

More confidence in new contracts

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Fonterra has earned a bouquet from organic dairying advisor, Bill Quinn, for its efforts to get organic farmers back into the fold with new supply contracts.
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Hauraki Plains-based Quinn said after a round of meetings with farmers an open-ended supply period contract had been offered to suppliers south of Auckland. The earlier contracts had expired after three years, making the transitional entry into organic supply a high risk choice.

“Under the new contracts the supplying farmer is required to give 13 months notice before quitting supply, while Fonterra has to give the supplier 27 months notice,” he said.

“This can give greater confidence to farmers, compared with the three-year terms they had before.” 

Under earlier agreements suppliers would also not know definitely if their contract was to be renewed until February 1, only four months before the new season started.

There had also been good news for organic farmers in the lower North Island who didn’t have contracts for the past two years when Fonterra wound its supply catchment back to the Waikato region. As contracts expired for farmers outside that area, they reverted to conventional supply agreements.

Sue and Roydon Phillips of Okato, Taranaki have welcomed the opportunity to return to organic supply after almost two years absence.

“Being organic without having a premium is very hard work,” Roydon said.

“It was our choice to farm organically regardless of the premium, but it’s a hard road to travel.”

He welcomed the premium’s return, but was concerned about what the earlier decisions about organic supply would mean for the sector’s scale.

“We are down to 86 organic farms from 120 a few years ago. I am a bit worried we are not in a position to respond to the market’s growth.”

He questioned the possibility of Fonterra sourcing extra organic product from overseas.

“That doesn’t do anything for organic dairy farmers in Northland who have been told the economics of collection there do not stack up.”

Phillips farms in an area where there’s a small hub of seven organic farms. There are another two in northern Taranaki, but he said he wouldn’t be surprised if one or two dropped out once their contracts finished.

“Sourcing organic supplement is the biggest challenge.”

Organic supply farmers would continue to receive the $1.05/kg milksolids (MS) premium for their milk. At this stage the contracts were only open to farmers who had previously supplied organic milk,

Fonterra general manager for milk supply and technical assurance, Andy Goodwin, said it was still only part-way through a strategic review of the organics business that it hoped to complete by the end of the year. No new contracts would be offered until that review was completed.

He said the open-ended contracts offered more certainty to organic farmers in the Waikato-lower North Island areas.

“They do not have that axe hanging over their head every three years, and they have received that very positively.”

“Northland is still out of scope at this stage, but we will continue to keep an eye on it.”

The economics of collecting from farmers in that region and transporting their milk to Waikato for processing had not added up when the review started.

Goodwin said while growth in the organic dairy sector was often touted as a reason for expansion, it was important to examine where that was occurring in relation to Fonterra’s organic products which only form a small subset of the total organics market.

A report released last year by United States-based Transparency Market Research indicated the organic dairy sector globally was expected to experience an annual growth rate of 14.1% due in part to advances in extending product shelf life. Asian research indicated the annual growth rate in that region could peak at 20% a year.

Quinn said New Zealand risked falling behind in market share if organic herd numbers did not increase over the next two years. He estimated cow numbers were down to about 20,000, having peaked at 29,000 several years ago. About 1000 cows had dropped out in the past year through farm sales and retirement.

“We really do need to see some sort of replacement policy coming in to allow for this.”

He was heartened by the investment being made by NZ’s largest organic dairy operator, Marphona Farms, at Mangatawhiri, which is ramping up cow numbers to 3000.

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