Fonterra MyMilk Subsidiary Plan Sparks Fears Among Farmers

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Source: NZME News

Shareholder says plan to let farmers supply milk without buying shares ‘shifts goalposts’.

Fonterra’s plan to allow non-members to supply it with milk has sparked fears that it could end up eroding the group’s co-operative base.

In mid-December, Fonterra moved to shore up its supply base by forming a subsidiary – mymilk – to take in more milk without suppliers having to buy shares in the co-operative.

The initiative is aimed at farmers in the high-growth provinces of Southland, Otago and Canterbury and may involve others in the North Island over the next 12 months. As it stands, mymilk will be limited to providing 5 per cent of supply.

Up until now all suppliers have had to buy shares in Fonterra in order to supply the co-operative, but with mymilk farmers will be invited to apply for one-year contracts, renewable for a maximum of five years, without the obligation to buy shares.

Fonterra said prices paid to mymilk suppliers would never exceed the farm gate milk price set by the co-op, and prices could be up to 15 cents lower.

The Fonterra Shareholders Council, noting that Fonterra’s share of milk collected nationally had fallen from 96 per cent since its inception in 2001 to 87 per cent today, said it was “broadly supportive” of the plan.

But one Fonterra shareholder said the co-op had “shifted the goal posts” with mymilk and had not adequately consulted its farmers, in sharp contrast to the exhaustive consultation and voting process that was required to bring in the Trade Among Farmers share trading scheme late in 2012.

Part of the reasoning behind mymilk was that it would enable Fonterra to maximise usage of its southern plant, which it is already in the process of expanding. But the shareholder said the reason there was extra capacity in the South Island was that farmers had opted to sell their Fonterra shares to supply other entities who don’t require their shares to be bought.

“Fonterra is effectively losing the race because suppliers are going elsewhere,” she said.

“Fonterra is shifting the goal posts because they are not winning the race and what is happening is the rest of us suppliers who did not abandon Fonterra are actually going to be subsidising those suppliers who can come in without buying shares.”

Federated Farmers Waikato provincial president Chris Lewis said farmers were questioning the plans.

“Shareholders are asking where the co-op is heading, and I think it’s a fair question,” said Lewis, who does not supply Fonterra.

“You have got to give Fonterra credit for trying something to make sure that they are competitive and that they are the first choice for New Zealand farm owners.

“I just hope that they have got a solid business case where they can be competitive enough without offending their shareholders who are fully shared up,” Lewis said.

“In some cases farmers have paid millions of dollars to buy shares and they have borrowed that money, so I guess there is tension there with shareholders saying ‘Why have all this money borrowed if I can get the same prices without having all those shares’.”

Miles Hurrell, Fonterra Co-operative’s group director of co-operative affairs, said there would always be discussion within Fonterra’s large shareholder base.

He said they spent “quite some time” talking on the farm to various shareholders about mymilk.

“Once they have talked through the detail and the rationale behind the initiative, they understand and come on board,” Hurrell said.

“To remain globally relevant we have to ensure that our number one asset – New Zealand milk – is secure for the long term.

“It is a stepping stone, so it is supporting the existing shareholders by ensuring we bring in milk to the co-operative for the long run.

“We are certainly of the opinion that a fragmented industry is not in the best interests of New Zealand as a whole and we see that the strength of the co-op is paramount,” he said.

Hurrell pointed out that mymilk suppliers will not have access to its farmer initiative, Farmsource, which will have additional benefits rolled out this year.

“You only have to look at the number of new entrants to our industry – in the last five years in particular – to know that it is evolving and that Fonterra needs to ensure that we are doing the best thing in the interest of our shareholders,” he said.

Lewis said Fonterra should be congratulated for trying to ensure the co-operative remains competitive, and that it remains the first choice for New Zealand farm owners.

“But in the end, the market will decide.”