It’s a simple way to boost milk supply, certainly in the short term, without including all the duties and benefits that becoming a member of a co-operative such as Fonterra includes.
But as has been shown recently, there are quite a few fish hooks to be sorted through first. Some of these are initial eligibility, contract term and the milk price received.
There’s no way those farmers who have sunk their money into Fonterra shares want to see newcomers who’ve not made that financial commitment get an overly large piece of the business that they value so highly. So everything about the mymilk proposal, launched last week, will be getting a very thorough going over as more details come to light.
mymilk is backed by Fonterra but operates as a standalone entity. The Christchurch-based company is being created is to compete with other milk processors, initially in the South Island, then perhaps in the north, for milk supply. So Canterbury, Otago and Southland farmers not supplying Fonterra at present are firmly in its sights to make up milk to a limit of 5% of Fonterra’s total volumes.
Chairman John Wilson makes the point that every extra kilogram of milksolids will mean improved cost synergies and adds that Fonterra currently has large scale, efficient plants in the South Island with spare capacity.
mymilk chief executive Richard Allen describes what it’s doing as a “flexible, reliable and smart offering which is pro-farmer and supports the Fonterra co-operative model which underpins New Zealand’s dairy industry”.
Farmers who want to supply the co-op but are not ready to purchase shares can apply to send their milk to Fonterra for a maximum of five years. Some of the benefits, Allen says, are short-term flexibility and long-term stability, all backed by Fonterra’s scale, systems and global reach.
So far so good, and farmers will have no argument with the fact that an initial one-year contract will allow those supplying mymilk to keep their options open, while being paid what he describes as “a competitive milk price”, not as high as that fully shared-up farmers receive.
Farmers who supplied the new company would know they were supporting the New Zealand dairy industry, and making a smart choice for their business, he said.
This was a good alternative to supplying a company offshore in which they don’t have to buy any shares, but with the trade-off of being paid a lower price than Fonterra farmers.
Allen squarely puts new dairy industry entrants in the frame when he goes on to make a comparison with young Kiwis wanting to buy their first house but falling below the deposit threshold, which for many seems further and further out of their reach.
Older dairy farmers will have no issues with giving these people a leg up, particularly as they can probably well remember a time when getting on to their first farm, or buying the property next door that came up for sale unexpectedly early, created a huge financial hurdle they thought they’d never surmount.
Their concern will be around farmers who formerly supplied Fonterra but for whatever reason decided to cash up their shares and move to a new player in the industry. The grass proved not to be so green on the other side for some and those who stuck with Fonterra might find it galling to have these farmers welcomed back without the need to buy shares upfront.
Exactly what period of time will be required before former Fonterra shareholders can supply mymilk hasn’t yet been made clear. Every indication is they will have to have been away from the co-op for a reasonable amount of time and their eligibility will be decided on a case-by-case basis.
But here’s one of the big problems.
Fonterra has very much hung its hat on winning back milk supply, as well as retaining what it already has. So the lure of large former supplier returning to the fold, especially if they have future conversion plans or intend to boost herd numbers significantly in the short term, could be something the co-op can’t resist.
That runs the risk of upsetting loyal suppliers, particularly if in their time out of the co-op those who left have been outspoken critics of all it’s doing.
Sure there are safeguards, with renewable contracts giving greater flexibility than the multi-year contracts which other some processors offer, for processor and farmer alike.
But there’s plenty of detail still to be filled in about how continuation of the contracts will be negotiated, especially if there’s a rush of farmers all from one geographical area.
Fonterra shareholders will almost certainly want to see a robust review of the costs and benefits of mymilk before it makes any move north.
