KEY POINTS:
Farmer concern about Fonterra's new tactical pricing plan has surfaced in the dairy heartland of Taranaki.
Co-op chairman Henry van der Heyden and fellow director Greg Gent attended a Federated Farmers-organised meeting in Stratford last week to front up on a range of issues.
Peter Adamski of Taranaki Dairy Farmers of New Zealand said the concern over tactical pricing - mostly aimed at heading off competitors in Canterbury and Waikato - had been such that some Taranaki farmers were rumoured to be considering pulling out of Fonterra and setting up a rival dairy plant.
At the moment, all Fonterra suppliers must hold co-op shares in proportion to the milk they supply, with all shareholders paid for their milk at the same rate.
Under the tactical pricing plan - due to be introduced next season - if a farmer can show he has a genuine offer from a competitor, Fonterra will come up with a "one-time" counter-offer. That means different Fonterra suppliers could be offered different prices.
But a farmer taking up a tactical pricing offer will have to sell all his shares and supply milk to Fonterra under a special contract, thus avoiding the possibility of different shareholders being paid different rates - a move that would be against the co-op ethos.
Previously, the national Dairy Farmers of New Zealand chairman Frank Brenmuhl has said farmers are likely to have fewer problems with this scheme than one in which different prices were paid simply on the basis of where shareholders lived.
But he believed there would be disappointment that the scheme did not address issues raised when Fonterra was first formed.
It had been suggested then that Fonterra be allowed to pay different prices in areas where farmers could supply competitors.
But the view among the Fonterra farmer shareholders at that stage was that the new co-op should focus instead on doing such a good job that no one would want to leave. "And that's the view that most of us still hold," Brenmuhl said.
Adamski voiced similar sentiments.
He said there was concern among Taranaki farmers at funds being available to pay more to some suppliers than others under tactical pricing.
"Because we have a very efficient plant here, they feel 'Why should we be forking out to keep those guys happy [elsewhere]?' ... Fonterra should be able to do such a good job, and stand alone and operate, without worrying about the competition. There shouldn't be any need for them to change."
Brenmuhl and several Fonterra rivals have also raised the possibility of tactical pricing potentially attracting attention from the Commerce Commission if were seen as Fonterra using its size and subsidisation from other co-op suppliers to block rivals from expanding.
Van der Heyden has dismissed suggestions there would be any cross-subsidisation and insists the co-op would not pay so much for milk that it became unprofitable.
But, while Fonterra has said it has no plans for different shareholder payouts in different regions, van der Heyden has been less than black-and-white on the subject. He said last month that the co-op would use all tools available to defend milk supply but that it was too early to say exactly what that might entail.
And, ahead of last week's Taranaki meeting, he told the Business Herald: "We're in a competitive environment and we've got to behave [as if we are] in a competitive environment. So everything that Fonterra is suggesting ... is just normal commercial behaviour.
"We'll do what's in the interests of the co-operative. We will protect our milk supply and we will only pay a price for milk under contract ... if we can make money out of it."
As it turned out, the meeting reportedly turned down a resolution seeking the abolition of tactical pricing, and van der Heyden predicted a big step-up in payout next season on the back of world prices staying strong.
So whether any Taranaki "mutiny" continues to gather steam remains to be seen.
Fresh For China
Van der Heyden said that sourcing more milk from overseas suppliers - a trend experiencing rapid growth - was in the interests of all shareholders.
He said Fonterra used to supply 30 per cent of one big customer's needs, all from New Zealand.
Now it supplied 75 per cent - with 60 per cent coming from New Zealand and the rest from overseas suppliers. "We've got our global supply chain. We're leveraging off that to the benefit of our farmers here."
On moves to set up a big dairy farm in China, he said that traditionally dairy consumers moved over time from processed to fresh products - but Chinese consumers were moving very quickly into fresh milk products.
"That's a key [reason] why Fonterra is getting involved with farming in China. If Fonterra doesn't do it someone else will ... so we're the ones that actually should be making money out of it."
Hot Seat
Blue Read is to be the new Fonterra Shareholders Council chairman, taking over from the retiring John Monaghan next month.
Read, a Taranaki farmer, has been on the council since 2001 and was deputy chairman for four years.
He takes over as Fonterra faces a plethora of significant issues, such as a possible listing of co-op shares and the introduction of tactical pricing.
Read said 2007 would be an "unprecedented year" for the co-op.
"While the capital structure review is the most visible item on the co-operative's agenda, performance monitoring, shareholder representation and governance development remain equal priorities for the council," he said.
One of Read's challenges will be helping to manage any conflict between farmers and management over capital structure.
Lic Keeps Moving
After announcing plans to merge a genetics subsidiary with an artificial insemination company in Ireland, LIC has completed the purchase of Northern Feed Systems for what is believed to be more than A$1 million ($1.14 million).
The Australian company designs and makes stock-feed handling systems. It also owns the intellectual property associated with the cow-drafting gates used in LIC's Protrack farm automation product.
LIC's chief executive, Mark Dewdney, said his company planned to grow Northern Feed Systems to take advantage of farm automation demand across the Tasman.
