Friday, March 29, 2024

Better returns trump loyalty

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Fonterra must put more effort into understanding why it is losing market share and therefore its shareholder capital is being diluted, major supplier Trevor Hamilton says. Family-owned TH Enterprises (THE), which has 10 big dairy farms in the North and South Islands, has “driven a bus through Trading Among Farmers (TAF)”.
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Founder and chief executive Hamilton said THE directors, including two independents, had exposed the weaknesses of TAF by making perfectly reasonable and sound business decisions over the past 30 months to cash in shares, to buy more farms and divert half of the milk supply to other processors.

Because TAF removed redemption risk from Fonterra and put it on individual farming enterprises, those enterprises had to protect their own balance sheets.

Where possible, that could be done by diversifying supply to processing companies and using share capital to grow milk production, Hamilton said.

Fonterra’s whey protein concentrate precautionary recall in 2013 had shown the wisdom of having diversified processors.

The returns on share capital Fonterra had produced or forecast following TAF were simply not good enough and some farmers could make better use of the money.

Hamilton remained a strong supporter of Fonterra and dairy co-operatives but THE had both converted wet shares to dry shares and sold supply shares at an average of just under $7 to put a considerable amount of money into better-yielding ventures.

TH Enterprises now had three dairy farms and one part-owned farm at Rerewhakaaitu and Reporoa, south of Rotorua, with more than 3000 cows, and most-recently bought the very large Hawke’s Bay Pastural at Takapau, to be milking 1600 cows.

It also had four farms in Central Canterbury, averaging 850 cows each on 220ha irrigated platforms producing an average of 1900kg/ha milksolids annually plus a recent 275ha 1100-cow dairy conversion in Darfield.

In the South Island they supplied Synlait and Westland Milk.

The decision to switch companies in the south was not taken lightly and if either of those two processors got into difficulties Fonterra was obliged to take THE South back, Hamilton said.

“When we left Fonterra no one called to discuss our reasons. 

“You fill in a cessation of supply form and no one comes to talk it over and learn the lessons.

“MyMilk did call recently but I said to the person who rang that its concept was flawed.

“Why would we take 15c per kg  lower milk price and still be obliged to share up to earn the low rates of return on share capital?”

“When we left Fonterra no one called to discuss our reasons.”

Trevor Hamilton

TH Enterprises

MyMilk was an example of using non-co-operative rules to fix a growing problem of lack of farmer loyalty.

Hamilton said the directors of THE asked themselves if they could expect Fonterra to produce returns greater than THE historically had produced and the answer was “no”.

TH Enterprises had grown consistently by 20% annually, upping the pace to 33% since TAF through the sell-down of shares.

“The TAF model is doomed to failure, in my opinion.

“If it doesn’t perform then Fonterra will bleed milk to its competitors and if it does and the share price goes high then Fonterra will lose milk because of the high entry cost.

“We support co-operatives and we are not sitting around trying to find ways of sticking it to Fonterra.

“Fonterra needs to be strong because the non-co-operatives will only pay what they have to for milk.

“But our 100% support of Fonterra would have come at a cost we were not prepared to carry.

“If TAF is there to be used why not use it?

“It was a business decision on the use of funds.”

He added banks would include only 75% of the current share price in a farmer’s shareholding for equity purposes, which was not ideal when looking for expansion opportunities.

Hamilton stood for director of Fonterra in the large field of candidates in 2011 when his election material supported TAF.

But by the time the vote was taken in mid-2012 he had changed his mind and did not support TAF.

He acknowledged the THE experience would likely draw criticism from Fonterra loyalists in other regions, especially where there were no alternative processors.

“But it worries me when I hear dyed in the wool Fonterra suppliers in Waikato, for instance, saying if they had an opportunity they would go.”

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