Fonterra has cut its milk-price forecast by 5c to $6.70 per kg and says it won't pay farmers and investors a dividend for the second half of the 2018 financial year.
Business leaders say Fonterra's back shift in the milk-price forecast will send jitters through the economy.
Fonterra has cut its milk-price forecast by 5c to $6.70 per kg and says it won't pay farmers and investors a dividend for the second half of the 2018 financial year.
The dairy giant is blaming a poorer-than-expected financial performance.
"The milk price is a very important signal for the New Zealand economy - it drives behaviour. If you get that wrong you scare the entire economy," said one, who declined to be named.
"I'm not saying the milk price should be higher or should be lower - but it should be right. Given 50 per cent of our agriculture exports are dairy, it's crucial that it's right," said a market watcher.
The council, which represents the interests of Fonterra's 10,000-odd farmer-shareholders, said the board and management had challenges ahead in rebuilding confidence through consistent performance and prudent mangement of shareholders' capital.
With the board effectively retaining an extra 20-25c, the council will want to understand how it will be used and to what extent the decision will influence Fonterra's gearing and credit rating, said Coull.
"While council acknowledges that part of governance is managing risk, another key responsibility is to create long term value for shareholders. Given today's announcement, the question is how effectively is this being done?
"Shareholders and all New Zealanders have valid expectations that Fonterra delivers," said Coull.
Federated Farmers is questioning the strength of Fonterra's auditing and financial processes following the announcement it is back-pedalling on its forecast milk price for the season just ended.
Andrew Hoggard from Federated Farmers. Photo / supplied
Vice-president Andrew Hoggard, a dairy farmer, said by this point of the forecast process "you think everything is locked and loaded".
"It's pretty weird given the [milk payout] formula [milk price manual] is what it is."
Hoggard said the co-operative had chosen a fine time to tell farmers they were going to be paid 5c/kg less for milksolids than they'd been told to expect, given they were in their busiest time of the year with calving.
"It's a good time to get low reaction."
Asked if a 5c/kg reduction was really material, Hoggard said even a one cent reduction had an impact on farmer balance sheets.
Former Fonterra director, shareholder Leonie Guiney said it was "extremely disappointing" that the board has "waited to be forced there".
"It was made very clear by farmers at the half-year results that they questioned how an interim dividend of 10c could be paid when there had been a loss," said the Southland farmer who is currently in a legal stoush with the Fonterra board.
"Once again we see an over-ambitious [milk price] expectation and a lack of ability to deal with bad news and reality at the time.
"So we're left in a position where the market and farmers now receive a shock. Worse, we've effectively paid the (10c) dividend now out of the milk price," she said.
Fonterra's decision will carve about $20,000 from the average dairy farmer's income for 2017-2018, said agriculture consultant Will Wilson.
"This is disappointing and again it's a confidence knock for a sector that's been struggling to get some direction and some real leadership," he said.
Fonterra's surprise move is simply because it can't afford to meet the guidance it gave, says a dairy industry leader.
"It's not about dividend or the balance sheet or poor performance, it's because Fonterra's totally contrived milk price, set by its milk price manual, is crippling the co-operative. It's unaffordable," said the leader, who declined to be named.
"The problem is the milk price manual - it artificially inflates the milk price. They're a co-operative so they're indifferent to whether they pay dividend or milk price. It's an artificial construct."
Fonterra's milk price manual is the specific methodology the company uses to calculate its base or farmgate milk price each dairy season. Because of Fonterra's dominance in the raw milk market, the price forecast by the co-operative sets the price guideline for the industry each season.
The Commerce Commission reviews the manual every season to assess whether it is consistent with the requirements of the Dairy Industry Restructuring Act (DIRA).
In its review of the 2017-2018 season manual the commission "encouraged" Fonterra to provide more transparency of information to provide greater confidence in the company's base milk price setting process and to better promote the purpose of DIRA.
