Farmers are divided over Fonterra's guaranteed milk price

Fonterra Co-operative Group's [NZX: FCG] guaranteed milk price scheme has stirred a mixed reaction from farmers. Some view it as just another risk management tool while others are against it, arguing a co-operative should have the same milk price for all.

Given the volatility in milk prices, Fonterra piloted the scheme last year as a way of giving some farmers more certainty on what they'd get paid for a small portion of their milk supply early in the season. It also provides the co-operative certainty over a slice of its milk costs, which is useful when negotiating with end customers. The 75 million kilogram of milk solids offered under the two-year pilot is around four percent of the annual total produced by Fonterra's 10,600 suppliers.

The initial 15 million kg/MS offered under the scheme at the start of the 2013/2014 season was priced at $7 per kg/MS and was oversubscribed. Each of the 328 farmers that applied had the amount they asked for scaled back on a pro rata basis. As it turned out , that worked well for them given the end of season price ended up much higher than what they received under the Guaranteed Milk Price, at a record $8.40 per kg/MS. Farmers incur a break fee for reverting from GMP to the normal milk price system during the season.

For the 2014/2015 season, 40 million kg/MS was offered in June at the opening forecast price of $7 per kg/MS, but was undersubscribed with farmers taking only 26 million kg/MS. Ironically,the milk payout forecast has now dropped to the lowest level in six years at $5.30 per kg/MS. Those that did take it up are in the money. A further 20 million kg/MS will be offered in December at the then forecast price.

Fonterra head of origination Aaron Atkinson said he has had lots of farmer feedback about the scheme, with some seeing it as a good tool and others protesting a co-op shouldn't have different prices for its suppliers. "There's an education process to go through. I'm comfortable with where it is," he said.

Federated Farmers dairy chair Andrew Hoggard said he has a few concerns about the scheme's structure, particularly around the "Dutch auction" that takes place on the price if the offer is over-subscribed. When that happens farmers have to put in tenders for anywhere up to 40c per kg/MS under the forecast price.

"I have an uneasy feeling about it - I'm neither definitely for it or against it. But there has been comment from other farmers that it doesn't quite fit with co-op principles that everyone gets paid the same," Hoggard said.

It could have a negative impact over time on the co-operative ethos, said Fonterra Shareholders' Council chair Ian Brown. In his view a GMP is just another tool that will suit some better than others, particularly industry newcomers or those taking on more debt to expand.

"It's a national co-op and one of the challenges of these situations is having a number of shareholders with different needs and having to cater for all those needs," Brown said. "GMP has to be well-explained and well-understood."

But he said it should stay as a small proportion of the overall payout as otherwise it would send the wrong signals to farmers and allow inefficiencies to start creeping in.

It has the support of banks that are major lenders to the rural industry. They say some highly indebted farmers may have been encouraged to opt for GMP but they're not pressuring anyone to do so.

ASB general manager rural banking Mark Heer said that decision lies with the customers, in the same way getting a mortgage doesn't rest on whether the borrower wants a fixed or floating rate. The uptake of GMP really depended on people's risk appetite and how they wanted to structure their business, he said. Banks take a much longer term view over rural lending than just one season, with the trend in payouts considered rather than what small percentage of production is under a guaranteed price, Heer said.

Federated Farmers' Hoggard said he was unaware of any heavily indebted farmers being forced to sign up for GMP but he had heard of at least one being ordered by their local bank manager to cancel their Sky subscription and sell the boat as well. "If you get into too much debt then others will start making decisions about your business," he said.

(BusinessDesk)