More Fonterra milk price falls could lead to clawback of farmer relief payments

Fonterra Cooperative Council chairman John Stevenson says the farmer-watchdog is mindful of higher advance rate risk. Photo / Supplied

Fonterra shareholders’ watchdog has warned the dairy company may have to claw back some of its cushioning advance milk payments helping farmers through the dairy downturn if its milk price forecast falls again.

Fonterra Cooperative Council chairman John Stevenson said with Fonterra paying a higher advance rate in an effort to get cash, more quickly, to farmers, there was a risk it will have overpaid for milk if it has to chop its milk price forecast further.

“There is a genuine risk if Fonterra overpaid they would have to claw it back. If the milk price drops they have to move more quickly...so it avoids the risk of having to claw back money which would be devastating for farmers.”

The council was supportive of Fonterra’s move to get cash to farmers sooner but had raised the risk with the company.

“It’s a case where, as farmers, we can’t have our cake and eat it.”

Stevenson said the council had “significant feedback” from farmer-shareholders on the size of two Fonterra milk price forecast drops - a fortnight apart - just six weeks into the start of the new season.

“We plan to ask further questions and I’ve spoken to the board chair around the reasons and rationale for that significant drop over such a short time.”

On August 18 Fonterra announced it expected to pay farmers between $6 and $7.50/kg milk solids in the 2023-2024 season. That was a downgrade on an already revised forecast announced two weeks previously of $6.25 to $7.75/kg.

The mid-point of the latest price revision, $6.75/kg, which farmers are paid from, is down from the previous forecast mid-point of $7/kg, and a steep fall from the $8/kg mid-point of Fonterra’s opening season forecast. Industry body DairyNZ said the national breakeven milk price for a farm was $7.51/kg.

Asked if Fonterra had been too slow to advise farmers of the significant price downturn brewing globally in the second quarter of the year, due to weaker-than-expected Chinese demand, Stevenson said the farmer-elected council was looking into the situation.

“Fonterra’s announcements were broadly in line with dairy futures markets at the time.”

Fonterra did not answer the Herald’s query as to how farmers would have to pay back any overpayment.

A statement attributed to Neil Beaumont, chief financial officer, said the advance rate was the percentage of the forecast farmgate milk price paid on actual milk volumes collected each month. It was based on the current forecast for the full year and adjusted whenever the forecast was changed to ensure that by the end of the season the company had paid out the equivalent of the final price.

“By only paying a percentage....we reduce the risk that future advance payments will need to be decreased, or in extreme cases, returned to Fonterra if they were overpaid,” the statement said.

“As part of the recent reduction in the forecast....the advance payment per kg of milk solid was reduced from $6 to $5.10.”

Fonterra would continue making adjustments to the advance rate throughout the season as necessary.

Last week New Zealand’s biggest business, and dominant player in the $26 billion dairy export industry, told its 8000 farmer-owners it was aiming for around $1b in cost savings out to 2030 as the dairy price slump and inflation threatened its short and long-term targets.

Some shareholders claimed to the Herald that if Fonterra could find $1b of cost cuts, it showed how much fat there must be in the company.

Asked to respond, Stevenson noted the planned cost-cutting drive would be over the next seven years.

“It’s not immediate.... but certainly we heard from our farmers loud and clear as we look to cut our cloth to a bare minimum, that we look to Fonterra to do the same.”

He agreed $1b was a “significant” amount of money to save.

“When we look at Fonterra as a company it is a recognition that the size and structure of the business has changed. If you look at some of the (business) divestments in the last couple of years and in terms of milk collection, we are not where we were when Fonterra was formed (in 2001).

“We will have to wait for details (this month) to make an informed judgment on whether this should have been done earlier or not.”

Fonterra will reveal its FY23 financial results on September 21.

Milk price forecast cuts are estimated to carve $5b-plus out of the economy and make a big hole in the tax take.

Fonterra did not respond to a request for comment on the shareholders’ claims of fat in the system.

Asked where cost savings should be made, Stevenson said the council had been asking for greater transparency in Fonterra’s reporting and improvements year-on-year in various categories of operating expenses and cost of goods sold.

“They are a couple of really big lines in the financial accounts in terms of the details underneath. They have been areas we want to look into deeper. We are really encouraged to see they are not going to be reported at a headline level as they’ve always been, but at a per kilogram of milk solids level.

“Farmers are always interested in the efficiency of Fonterra and naturally sceptical....we’ll be looking to have a more informed opinion on that. Operating expenditure and cost of goods sold have been key areas of interest to the council and in discussions with the board.

”They are often raised by co-op members and in discussions we have so it will be encouraging to see that reporting on a proportional milk solids basis.”

Stevenson said the council expected to see this improved transparency in this month’s FY23 results.

Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the dairy industry, agribusiness, exporting and the logistics sector and supply chains.