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Fonterra says its holding its own in Canterbury as farmer suppliers look to new processors

31 Mar 15

Fonterra Cooperative Group, New Zealand's largest dairy processor, says it's holding its own in the dairy-intensive Canterbury region, despite reports some of its 10,600 farmers shareholders are lining up to supply milk to its competitors in the wake of its weak interim results last week.

Farmers were disappointed with the half-year results, which included a 16 per cent drop in profit to $183 million and a trimming of the forecast dividend payout for the year by 5 cents to a range of between 20 cents and 30 cents. Faced with a low forecast payout of $4.70 per kilogram of milk solids this season compared to a record $8.40 kg/MS last season, farmers had been expecting a fatter rather than skinnier dividend from its value-added activities.

Federated Farmers dairy chair Andrew Hoggard cited a source from Open Country Dairy, the country's second largest processor, saying it had had 100 inquiries from Fonterra shareholders in just two days last week, on top of the 500 it already had on a waiting list in the Waikato, Taranaki and Southland regions.

Newcomer Miraka, based in the central North Island, also said it had a number of farmers on a waiting list and that most of its current 100 suppliers had come from the dairy giant.

Open Country Dairy wouldn't confirm its waiting list numbers and Fonterra won't confirm if there has been a significant shift in its own suppliers.

Most of the dairy processors are reluctant to talk about competition for milk supply with only Oceania Dairy, Synlait, and Fonterra confirming they were actively seeking to sign up new farmers.

Fonterra responded to the growing competitive threat by launching its mymilk subsidiary in September, which allows it to source milk from suppliers who are not also shareholders for the first time. It has been limited to milk from the Canterbury, Otago and Southland regions, where competition is most intense, but could eventually extend to the North Island.

Stuart Gray, Fonterra's head of cooperative affairs in Canterbury, said the cooperative had been gaining more supply than it was losing in Canterbury with a number joining through mymilk, though he wouldn't provide numbers.

"I have no sense of us losing a lot of farmers in Canterbury and we have gained some this year," Gray said.

Under mymilk, suppliers get a one-year contract to supply Fonterra which can be renewed for five years at which point they have to decide whether or not to become shareholders. Last September Fonterra said it hoped to attract between 100 and 200 suppliers in the first couple of years, though that depended on the size of the farms involved.

Gray said while farmers were rightly disappointed with Fonterra's interim results, most can see scale is important for efficiently running the cooperative's plants and that the short-term difficulties it currently faces don't detract from the better returns that should be delivered from its global strategy in the longer term.

But Hoggard said the mymilk initiative hasn't gone down well with some existing Fonterra shareholders, who question why they should have to go to the expense of having shares when others don't.

While he's a Fonterra shareholder who believes in the cooperative structure, Hoggard said there's a prevailing mood of farmer dissatisfaction that Fonterra's value-add strategy is not yet producing better results for the business.

"What I've heard from people is that there is a bit of disenchantment and a feeling of disconnect with the supplier base from Fonterra," he said.

Fonterra's share of the total raw milk pool has diminished from 96 per cent when it was first created 14 years ago to a claimed 87 percent today, although the total amount collected has grown overall from increased production and dairy conversions.

The latest Dairy Industry NZ figures, based on the industry levy paid, puts Fonterra's share closer to 86 percent with Open Country Dairy at 4.6 percent. Westland says it has a 3.5 percent share though the Dairy NZ figures put it closer to 3.8 percent, while Synlait is at 2.6 per cent, a 1 per cent rise in the past four years. Tatua, which has consistently made the highest payout to suppliers, accounts for just under 1 percent. Other processors, which include newcomers Oceania Dairy and Miraka, now account for a further 1.44 percent.

Shares in Synlait Milk fell by 12 percent yesterday to the lowest level since August 2011 after the dairy company turned in a first-half loss of $6.4 million and cut the outlook for its full-year profit to between $10 million and $15 million compared to last year's $19.6 million annual net profit.

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