Fonterra Shareholders Council gives nod 'with caveats' to new milk supply plan

The Fonterra Shareholders Council is "broadly supportive" of plans for the cooperative to start sourcing milk from South Island suppliers who are not also shareholders, with a couple of caveats.

Fonterra Cooperative Group [NZX: FCG], the world's largest dairy exporter, yesterday announced a new milk sourcing subsidiary, mymilk, which would try to get milk in the Canterbury, Otago, and Southland regions where competition for milk supply is most intense from new suppliers on contracts on up to five years without the obligation to purchase shares. The feedback, particularly from new farmers who have recently spent a large amount of money converting farms to dairy, is that they can't currently afford to now buy shares in the cooperative but would do so at a later date.

Shareholders Council chairman Ian Brown said the competition for milk supply at the farmgate was one of the biggest changes he'd seen in his farming career. "It's a changed mindset to how to attract suppliers whereas in the old days it was what to do with new supply. That's a mindset shift."

But Brown said the two caveats the council has to the mymilk initiative is that the aim is to have fully shared up Fonterra farmers which is why the five-year limit on the contracts was included, and that the level of milk collected within the cooperative from non-shareholder farmers remains at a very small level of the total, limited to 5 percent in the case of mymilk.

Brown said it was of concern to the council that Fonterra's share of the total milk collected nationally had fallen from 96 percent since its inception to 87 percent today, but he pointed out the overall market had grown significantly as well and the addition of new milk pools in other countries would also help meet the needs of its global customers.

Kiwi farmers supply 16 billion of the 22 billion litres of milk Fonterra processes annually and it also sources milk from suppliers in Australia, Chile, Brazil, Sri Lanka and North America, and its own milk from farms in China. The aim is to grow the total milk processed to 30 billion litres by 2025.

The price paid for the mymilk suppliers will be at the same or up to 15c below the farmgate milk price.

Fonterra slashed its forecast farmgate milk price for the 2015 season to $4.70/kgMS this week due to following global dairy prices and continued weak demand from China for whole milk powder. The forecast dividend was left unchanged in a range of 25 cents to 35 cents per share but will be reviewed at the time of the company's interim results in March.

Brown said it was part of the strategy that when the milk price payout dropped, shareholders would benefit through an increased dividend.

"The pressure is on to deliver a dividend that is greater than what is forecast today," he said.

(BusinessDesk)