Fonterra will collect milk from non shareholder suppliers for first time in history

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

Fonterra Cooperative Group [NZX: FCG], the world's biggest dairy exporter, will start sourcing milk from suppliers who are not also shareholders through a new milk sourcing subsidiary, mymilk, for the first time in its 13-year history.

Christchurch-based mymilk will initially focus on attracting milk in the Canterbury, Otago and Southland regions where competition for milk supply is most intense, but chief executive Richard Allen said the plan is to eventually include the North Island as well.

Suppliers that are not currently supplying Fonterra will be offered one-year contracts, renewable for a maximum of five years without the obligation to purchase Fonterra shares. At any time, mymilk suppliers can apply to join the cooperative, purchase shares and supply Fonterra directly.

Fonterra chairman John Wilson said the cooperative wanted to be the first name on the list for farmers considering their supply options. "We know there are farmers who support the cooperative model, but are in the stage of development where sharing up is currently beyond their financial reach."

Mymilk's Allen said other processors, including offshore entrants, had been attracting farmers on the basis of "no shares" despite paying less than Fonterra for milk.

The price paid for supply will be "competitive" but will never be above the farmgate milk price paid to shareholder suppliers," Allen said. Fonterra yesterday slashed its forecast farmgate milk price by 60 cents per kilogram of milk solids to $4.70/kgMS.

Allen said it would depend on what competitors were paying, but the price offered through mymilk would either be the same as the farmgate milk price or up to 15 cents below.

Fonterra's Wilson said providing a different pathway of supply through mymilk to farms not currently supplying the dairy company enables farmers to ultimately weigh in behind the cooperative model.

"Every additional kilogram of milksolids will generate improved cost synergies and we currently have large scale, efficient plans in the South Island with spare capacity," he said.

Still, "we stand firmly by the cooperative principle that supply should be backed by shares" which is why mymilk volumes will be limited to five percent of Fonterra's total volumes, Wilson said.

Mymilk's Allen said he expected that to be between 100 to 200 suppliers in the first couple of years, though that depends on the size of the farms involved.

Fonterra aims to lift the volume of the milk it processes to 30 billion litres a year by 2025 from the current 21 billion litres.

In a report entitled "Why is Fonterra losing grip of market share in the dairy industry", Infometrics said Fonterra's share of the dairy market had fallen from collecting 96 percent of New Zealand's total milk production in 2001 to 87 percent this year.

The report also said between the 2003 and 2013 seasons, the quantity of milk collected by Fonterra's competitors increased four and a half fold, while Fonterra's total milksolid collections rose a more sedate 27 percent over the same period.

(BusinessDesk)