RESEND2: Fonterra warned it has to stay competitive on milk payout

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By Fiona Rotherham

Nov. 12 - Fonterra Cooperative Group had to set the benchmark for a competitive farmgate milk price, former director Jim van der Poel told the diary exporter's annual meeting in his exit speech.

His comments came after shareholders raised concerns over the reduced forecast milk payout for the 2015 season. The forecast farmgate milk price it pays farmers was slashed in September from $6 per kilogram of milk solids to $5.30/kgMS plus an additional dividend payment of between 25 cents to 35 cents. It comes on the back of a record $8.50 total payout last season, including a dividend.

Shareholders at the Palmerston North meeting today expressed concern this season's payout could go below the $5 mark given the continuing volatility in world markets.

Van der Poel said it was important that Fonterra set the lead on payouts that its competitors would then have to keep up with.

"This is not just good for our farmer shareholders but also good for New Zealand," he said. "New Zealand milk has to be seen as a premium product and valued as such because the milk price has such a flow on in rural communities."

Chairman John Wilson said the board and management were well aware of the significant impact a lower milk payout would have but he wouldn't be drawn on whether the forecast, due to be updated in December, was likely to slip further.

He said the company was anticipating whole milk powder demand to be evident in the "next little while. It's not a matter of if but of when". But he warned farmers to be cautious in their spending this season with prices likely to remain volatile for some time.

The decline in dairy prices through the GlobalDairyTrade auction have stabilised recently but chief executive Theo Spierings said they were not more than stable and he didn't expect 2015 to be an easy year for milk prices. The volatility made forecasting difficult, particularly when the first indication had to be made in May the year before the actual payout was made, he said.

The annual meeting comes as the Reserve Bank today indicated falling dairy prices increased the risk some farmers may default on their loan repayments. Farmers had used last year's high payout of $8.40/kgMS to repay debt, and Fonterra's early warning has given them time to manage their operations for the 2015 season, it said.

The stability report cited DairyNZ estimates that about a quarter of farms could struggle to meet interest and working expenses on a $5.30 payout.

Wilson said the current global dairy prices don't support the cost of production and it would "take a while for those prices to come back".

Although milk volumes were already up 3 percent in the year to date compared to last year, he expected that farmer budget cuts and reduced feed on farm would see that volume growth decline over the summer.

Only 19 per cent of shareholders voted towards Murray Beach's defeated resolution that all Fonterra investment spending and New Zealand development projects be put on hold until the farmer receives a minimum of $7/kgMS.

He said last season's 10 cents dividend which amounted to $160 million, was a poor return on $4.7 billion of investment.

But chairman Wilson said Fonterra was a cyclical business with significant price volatility and it was important to follow its strategy and continue to invest for the future.

"The world, where obviously we have strong competitors, won't stop and let us catch up. We have a demand for high value products we can't meet ... and if we stop investing, competitors will fill that space."

Spierings spoke to sticking to the strategy of building a globally relevant cooperative. The aim is to boost revenue to $35 billion by 2025 on the back of processing 30 billion litres of milk provided from six milk pools globally.

The strategy includes investing in New Zealand production- some $1.6 billion currently - to make it more efficient while giving priority to driving five key consumer brands in eight key markets here and offshore. The overall point of the strategy, he said, was to maximise returns for its farmer shareholders.

One shareholder raised concerns about other milk pools offshore meeting the required food safety standards. Andrew Hoggard said it would only take smartphone footage of an offshore milk supplier doing something they shouldn't in terms of animal welfare to put the hard work of New Zealand farmers at risk.

Wilson said there was still work to go within New Zealand as well but there needed to be complete compliance on food safety here and offshore within the next two years.

Despite robust debate from shareholders, Wilson said there was still resounding support from the majority of its farmers towards the strategy of increasing investment offshore while growing the value add component of its exports.

"That's the power of the coop to discuss and debate. You heard that out on the floor today, there's real enthusiasm for the strategy."

The meeting comes as the Reserve Bank today indicated falling dairy prices increased the risk some farmers may default on their loan repayments, and posed a greater threat to the wider financial system that with a payout. The bank expects dairy prices to pick up early next year.

Units in the shareholders' fund, which give outside investors exposure to Fonterra's dividends, rose 0.5 percent to $6.13 and have gained 5.2 percent this year.