Friday, March 29, 2024

Opinions vary on price scheme

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Divisive, anti-co-operative, long overdue, another step to demutualisation, a sop to corporate farmers – Fonterra’s new guaranteed milk price programme (GMP) has been called all this and more, but for Waikato farmer George Moss only one label applies.
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The Tokoroa “mum and dad” farmer has 75% of the budgeted 70,000kg milksolids (MS) from one of his two dairy properties covered by the GMP this season, and said his only criticism was that the scheme was well overdue. 

So far, he and wife Sharon are in the money. The couple will receive $7/kg MS for the GMP-contracted supply, while Fonterra’s general milk price forecast has tumbled to $6 on softening international commodity prices and a strong Kiwi dollar.

But while Moss wishes he’d backed himself more in his prediction earlier in the year that the forecast would go south, he knows the season is still young and that acceptors of the “fixed” $7 GMP rate could end up out of pocket behind the majority of Fonterra’s supplier-shareholders who are on the “floating” forecast price.

But the couple didn’t sign up to GMP to second-guess Fonterra’s board of directors.

“We are interested in it because we are working on trying to build our farming businesses into robust, resilient businesses around the whole nutrient space as well as the financial space. We saw this as a tool that can help us build that resilience,” Moss, a Northlander who has been farming in Waikato for 32 years, said.

GMP is a learning curve, he said.

He thinks it highly likely that the couple will be regular applicants, depending on their own observations of international markets.

“We have our own criteria. We tend to watch what’s happening in the grain market in the Northern Hemisphere, you can get a fair idea of where the milk price is going to go.

“If grain becomes short and expensive in the Northern Hemisphere there’s a very good chance milk prices will climb.”

The grain market is currently in surplus, Moss said.

It’s early days but he thinks the scheme will be advantageous to cashflow. The GMP advance rate is locked in when the contract is signed with Fonterra, which has said it has no plans to change the rate during a season.

Fonterra is accepting 60 million kilograms of supply under GMP this season. The first offer for 40 million kilograms was in June and in December the co-op will invite applications for another 20 million kilograms. While the pilot was heavily oversubscribed, response to the June offer was soft.

GMP-covered milk is currently less than 4% of Fonterra’s total annual collection, which last year was 1.4 billion kilograms.

‘We are interested in it because we are working on trying to build our farming businesses into robust, resilient businesses around the whole nutrient space as well as the financial space.’

Introduced to give shareholder-farmers income certainty during market volatility, the programme has been criticised by some as breaching co-operative principles by creating payment differentials.

Some critics claimed GMP was a further erosion by directors of farmer-ownership of Fonterra. Other brickbats included GMP being confirmation big production farms and investors with an eye to dividends were running the company, and that it was another step to demutualisation of the co-op following the public listing of units in Fonterra shares.

“We don’t charge differentials for transport and distance, so why set up something where some farmers get an advantage over others,” a South Island farmer who spoke on condition of anonymity said.

“So many things are shifting us away from transparency on the milk price. We’ve got GMP now and changes to the capacity charge. I can’t find a farmer who can work out what their milk price is going to be next month. These are shifts away from the Milk Price Manual and just add more and more complications.

“These things just seem to happen now from the top down, and that in itself is an issue.”

George Moss sees it differently.

A former Fonterra shareholder councillor, he said he was a loyal supporter of co-operativatism, particularly as a small farmer, but that there had been a seismic shift in farmers’ requirements of their co-op.

“The co-operative principles we were able to have in a regulated Dairy Board environment are totally different to what we can actually achieve in a deregulated environment. I can absolutely sympathise with people who yearn for the principles we had in the past where we socialised all the costs and socialised the benefits, it’s a lovely model.

Phil Journeaux – scheme offers certainty.

“The challenge we have now is that we are in a competitive environment with a massive range of stakeholders from overseas-owned dairy farm businesses to little mum and dad farmers like us, everyone from the highly geared to the lowly geared.

“The challenge for the co-operative now is to meet the aspirations of all those different disciplines.”

Moss said Fonterra had been slow to deliver some of those aspirations such as a fixed milk price, and as a result it had lost supply to competitors. He is calling for a shareholder debate on how Fonterra could meet the new challenges.

The country’s biggest corporate farmer, state-owned Landcorp, had 5 million kilograms of the total milk collection of 9 million kilograms from the farms it controls covered by GMP this season.

It was Landcorp’s second year using GMP.

Chief financial officer Steven McJorrow said the company was interested in any mechanism that gave it some certainty on pricing in a volatile climate.

Landcorp was also likely to be a GMP regular, though volumes committed might vary.

Former Waikato Federated Farmers president and Fonterra supplier James Houghton supported the GMP scheme though he was not a participant.

“It’s a way of diverting risk and creating a guaranteed price for both parties. It’s a good idea if farmers want it, otherwise it’s a free market.”

But Houghton agreed that if GMP milk volumes rose significantly the scheme could create its own volatility.

‘It’s part of farming risk management, a good tool. It allows those farmers more sensitive to payout to manage risk in their own way.’

He didn’t agree that GMP was against co-operative principles, which were “to collect the milk every day and that sort of stuff”.

“You could say winter milk or speciality milk (supply) is against co-operative principles.”

Fonterra Shareholders Council chairman Ian Brown had been contacted by some shareholders concerned GMP was against co-operative ethos, and said the watchdog was monitoring the scheme.

“I have some sympathy for the farmer view that when you start to get differing payments within the co-operative you have to be very sure they are for the benefit of all farmers.

“We’ve had quite consistent dialogue with management on how it works. The volumes are very small. But we do need to watch and listen to our farmers’ reaction to it. We get continually updated on it.”

But Brown accepted Fonterra’s argument that GMP, in matching farmer and customer demand for stable forward pricing, gained the company customers it might not otherwise get.

Waikato specialist dairying accountant Nigel McWilliam of Diprose Miller was a GMP fan.

“It’s part of farming risk management, a good tool. It allows those farmers more sensitive to payout to manage risk in their own way. Quite a few of my clients signed up this year and last. Some who it didn’t work for last year could see it working for them this time. They are being consistent with their risk management which is what it’s all about.”

Like farm consultants, accountants had to be cautious giving advice about GMP, so as not to fall foul of financial advice law.

“It is a hedge product you could say. It falls into that realm of risk management so when we are looking at budgeting we keep it in that context,” McWilliam said.

“We look at where the sensitivities are, where the breakeven point might be. We say if we look at locking up 25% in $7 this will be the effect on the budget, are we comfortable with that? That’s where we have the discussion.”

AgFirst consultant Phil Journeaux thought GMP was a useful option, mainly for those heavily in debt or sharemilkers “sailing close to the wind with significant expenditure” because it offers price certainty.

Farmers considering applying for the December GMP offer should be deciding how financially tight their operations are, he said.

“It comes back to the individual’s appetite for risk. And it depends on the offer price. The general perception is that most of the price risk is on the down side.

“If they come out and guarantee the price at $6, I’d say to my guys who are really up against it that they need to have a very good look at it … but then it becomes a very dangerous thing for consultants to advise on.  You can give an opinion but you have the Financial Advisors Act in the background and the vast majority of farm advisors are not covered for that.”

Waikato dairy farm valuer and consultant John Sweeney of Fergusson Lockwood had no problem with GMP being attractive to large-scale farmers.

“These guys are taking a huge risk. They are big players and I applaud them. They are good farmers and it’s a business decision, a good risk management strategy.”

Sweeney said banks lending to dairying also needed certainty.

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