Fonterra is paying farmers too much for milk, ComCom says

Commerce Commission deputy chairwoman Sue Begg says Fonterra is setting too low a cost on its processing operations

The Commerce Commission says Fonterra is setting the price it pays farmers for their milk too high because it is estimating too low a cost of capital, or, in other words, underestimating its risks.

“The Commerce Commission has released an emerging view that Fonterra’s estimate of risk in calculating the cost of financing milk processing operations is too low,” the corporate regulator says.

“The impact of this is that Fonterra calculates a higher milk price than would be the case if it used a more feasible allowance for risk in the cost of finance, consistent with other processors,” it says.

The commission is charged with monitoring the price Fonterra pays for milk under the Dairy Industry Restructuring Act because the dairy giant has market power over the purchase of farmers’ milk.

“For several years now, Fonterra has been unable to provide sufficient evidence to convince us” that using a lower cost of capital than comparable processors is justified, the commission’s deputy chairwoman, Sue Begg, says in a statement.

“We acknowledge there are differences between the risks borne by Fonterra and other comparable producers,” Ms Begg says.

“However, based on the evidence we have, we do not consider the differences in the risks are sufficiently material or relevant to justify” Fonterra’s low risk and cost of capital estimates.

The commission is calling for submissions on this by July 4.

The payout

In May, Fonterra announced an opening forecast farmgate milk price of $7/kg of milk solids for the 2018/19 season, one of its highest on record, which chairman John Wilson put down to global demand and supply dynamics. It also increased its 2017/18 forecast farmgate milk price by 20c to $6.75/kg of milk solids.

Although that was good news for farmers still recovering after the two years of lower milk prices in 2015 and 2016, the higher milk price puts pressure on Fonterra’s earnings, which are already suffering from its Danone settlement and Beingmate impairment announced in February. Because of that Fonterra has revised its forecast normalised earnings per share guidance range down to 25-30c a share (from 35-45c) and its forecast dividend range for the full year down to 15-20c a share (from 25-35c).

Political attack

Meanwhile, Fonterra and its chairman have come under fire from Regional Development Minister Shane Jones in yet another attack on a Kiwi corporate.

He said yesterday that it was time for a restructure at Fonterra and that its chairman should stand down.

His comments come just months after he took a swipe at Air NZ over regional airfares.

Mr Jones said he had been disappointed by the dairy co-operative and that in his view, its leadership had not accepted there has been a new government and should focus less on interfering in politics.


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Maybe Shane Jones is right

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Doesn't matter if he is right or not, it is not his place to determine who is the chairman of Fonterra. Just as it is not John Wilson's place to say who is in the cabinet. Jones comes across as just a self serving blowhard.

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Probably but just as he says Fonterra should stay out of politics, he should stay out of commercial matters. We're not a communist dictatorship just yet.

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You must be ignorance to think Fonterra stays out of politics. Its one of the biggest lobbyists, with its governance driven by short term earnings.

Now that its business plan of encouraging volume has hit the rocks with over intensive farming practices; the byproducts (polluted waterways & bovis cows) now staring them in the face and an indebted financial position, they have no where to run.

Fonterra debt to equity continues to grow to above 50% (see link: https://view.publitas.com/fonterra/fonterra-annual-financial-statements-...), and bulk dairy prices dont look bouncing back any time soon.

Governance has been a train wreck, and Shane Jones is just statng the obvious. With the bulk prices how lower, the opportunity to pick up value added business/brands has now gone; with their prices now doubled.

Fonterra's board is nothing but politics; short term thinking and very little business acumen, and its now showing in the financial results. Its a model of how to wreck a large business in 17 years.

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Read what I said. Whre did I say Fonterra stays out of politics ?

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The implication from both your and Stuart Parnell's comments is that both government and Fonterra should stick to their knitting. Plainly Fonterra does not, but gets involved in politics. Why should the government not get involved in Fonterra - beyond, of course, the socialist subsidising of irrigation etc. that's been the norm in recent years?

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You have something against rainfall harvesting; water storage ; enhanced summer flows, perhaps? All public goods , I suggest.

Or something else is bothering you?

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Very poorly managed. Excessive salaries in relation to performance.
Non farming shareholders certainly get the thin edge of the wedge with this company.

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Yes but isn't this basically a co-operative?
And what a great asset for the supplier shareholders (Management and Non-farming Shareholder issues aside).
The farmer basically puts the milk in the tank, goes to bed and wakes up to an empty tank and money in the bank (at a reasonable return).
Weaken Fonterra and watch the farm gate returns tumble!
Would love to see a strengthening of the co-operative fundamentals of this Kiwi Icon

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So you are saying that is the reason for Parliament to stitch together Fonterra?
Market power?
So the consumer is forced to pay more for dairy products than they otherwise would?
Is that not stealing away consumer spending from other sectors in the NZ economy?
With hands clasped and tears in my eyes, I beseech thee, please please answer.

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"Non farming share-holders certainly get the thin ....................."
SO!! Sell you shares! Nobody but the supplier is forced to own shares in Fonterra.

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Calm down, no need to blow a head gasket!!!!!
I sold out long ago for the very reasons i described, and moved to A2 at 60.5c average. Smarter company, and much better managed.

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Is anyone really surprised by the ComComs conclusion? Fonterra has to keep farmers happy, and as their financial situation has flat-lined for the last decade it is taking up a larger %age of total profits to keep up payments. Only ones who have seen real gain are the overpaid management (Theo's salary nearly tripled in the past 6 years of terrible performance!)

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Bring this place into line and quick.
The alternative will be a train wreck.
Quess who suffers from a train wreck.
The outcome will be no easy task to repair....so don't let it happen.
The payout is too high there is no doubt but so is the farm indebtedness.
That part is disgusting.

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The Fonterra structure being a cooperative was established purely and simply for the benefit of the Farmer shareholders and noone else and there is an obligation to put them first.
That is the essence of it and shapes its behaviours so untill thats not the case there is a lot of hot air floating.

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There are alot of other cooperatives that are better run; Foodstuffs being one of them. Take your head out of the sand, and recognise poor governance when is stares you in the face.

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We could see the writing on the wall that's 1 of the main reasons we sold our farm - too much hot air from too many over paid execs with no accountability for their stuff ups. Theo pocketed twice as much for one year's salary than we received for our farm sale so after 40 years we have called it quits. He will also no doubt receive agolden hand shake when he goes. Just watch how he will use his "learnings" (his words) against NZ in a few month's time when he is CEO of an opposition dairy co op.

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I think given the quality of some of the recent investments I think farmers might be asking if they are paying too much for Fonterra.

Note I say farmers.... nothing to do with government or Shane Jones' opinion.

Extremely concerned with the following comment from Shane Jones "the leadership has not accepted that there's a new Government and there is a new narrative and I've had a gutsful of them".

Nothing to do with you mate.... privately owned organisation. New government? New narrative?... maybe only a new form of arrogance and incompetence.

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You say, "nothing to do with you mate" (meaning Mr Jones I presume?).
Well excuse me Mr Andy, Fonterra owes its very existence to Parliament and the last time I looked Mr Shane Jones was a Member of Parliament, and a Government Minister to boot!
I have said for many many years to farmers, "Beware of a Government that comes bearing gifts. They will slowly choke your industry to death. And it will be a death by a thousand cuts."

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Could someone please explain to me. When has it become the business of a Gov. dep't to be "charged with" (in this case comm comm) making sure commercial business does not pay to much for its raw product?
Please do not answer "DIRA" or "Parliament created fonterra".
What I want to know. Why do have this socialist nonsense in NZ?
Shane Jones might have a point, but he is a Member of Parliament. Parliament!! the "thing" so full of commercial experts that created Fonterra.

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I think that perhaps I can explain.
Fonterra must sell milk to competitors who wish to start up.
But at what price?
Well obviously as much as it can get, so as to discourage competition.
The price to competitors is based on the price Fonterra pays farmers.
See now?
The Comcom needs to go a lot further yet, before added- value dairy start-ups have even half a chance.
The Fonterra Milk Price Manual was designed to keep competition out.
And the Commerce Commission swallowed it , hook ,line , and sinker.

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I think you will remember that when Parliament set out to create/invent Fonterra, they, the Parliament, used a law that ordered the commerce commission "to look the other way". In the public good.
I well remember it for the sheer hypocrisy of it.

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Has Sue Begg, who runs a Government Dept, ever run a business? This Government should be looking at it own profligacy. Shane Jones is a massive hypocrite - I refer to the Provincial Slush fund - and his own commercial skillsets in dairying are unknown.

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The regime is part of some small protection for Fonterra competitors given Fonterra was given special dispensation to be a near monopoly buyer and seller in the NZ market.

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So maybe Fonterra is more successful than the original architects of DIRA envisaged? So now the best way to hobble Fonterra is keep shifting the supply threshold goalposts, and when that doesn’t work accuse it of setting the milk price too high. Fonterra exists to maximise the total return to its farmer shareholders. If it’s not doing that, it’s not doing it’s job. ComCom is still smarting because it was bypassed when Fonterra was formed. Get over it and let the co-op do its job.

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So you are arguing that Fonterra is entitled to overstate the value of raw milk in the farm vat ( i.e. inflate the price of DIRA milk sold to independent processors), and understate the return on the shares, because that maximises the return to the farmer shareholders, at the expense of the non-farmer shareholders?
Why?

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Who says Fonterra is overstating the milk price? In my view it is only the unproven (biased) assessment of ComCom. The interests of farmer shareholders must always rank ahead of non-farmer shareholders. Non-farmers can choose to be (or not to be) shareholders. Farmers must be shareholders to supply Fonterra, therefore Fonterra has to be more attractive to farmers than its competitors in terms of total returns or the co-op loses supply to those non-share requiring competitors. Erosion of supply has a much more serious effect on the co-op than the loss of a few non-farmer shareholders.

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"Why"??
Coz they can then on charge that (alleged) inflated price to their competitors.
Over the years I have found "farmer co-ops" seem to be forever looking for ways to knock out their competitors using Government "favourable" regulations.
I would rather they knock 'em out using superior business acumen to steal consumers away from their competitors.
It is called free market economics in a free democracy. Natures way?

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The idea of non-farming shareholders within a co-operative structure was always going to create conflicts of interest, and it does make me wonder where the CommComm enquiry has emanated from.

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Righto Ive cracked it... The Ministry for Alphabet has identified industries and businesses starting with F are evil. This explains why Farmers and Fonterra are being targeted.

Now if you will all just pay my levy of $x to my ministry of anti-F I will be moving along.

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yep you've cracked it. Add a few more $s to the levy and you'll gladly screw up Forestry and Fishing as well.

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