KEY POINTS:
Fonterra must act quickly to secure future earnings for its shareholders as unprecedented milk powder prices force some international customers to ditch milk products, says the dairy giant's founding chief executive, Craig Norgate.
Norgate, who is soon to assume the role of chairman of listed rural services provider PGG Wrightson, said record dairy prices were already burning off demand from some of Fonterra's customers.
"Already [Fonterra's] ingredients customers are reformulating away from dairy and you'll find food service customers putting less cheese on their pizzas to try and cut costs."
In a speech to the Federated Farmers' annual conference in Auckland yesterday, Norgate said that since it was uncertain how long record prices would last, the $13 billion co-operative needed to think ahead and negotiate long-term contracts at below current spot prices to protect its market.
"I'd be starting to do long-term deals with those customers at below the current spot market to ensure that the demand is there for the long term."
Norgate's warning constrasted with statements made last month by Fonterra chief executive Andrew Ferrier that prices near US$5000 a tonne would not reduce demand for dairy.
Norgate said the boom benefiting the nation's dairy farmers was based on a repricing of food as a commodity as a result of water issues in Australia and China and the increasing use of agricultural land to produce ethanol for fuel in US and Brazil.
Although this dynamic would "feed into excellent returns for milk and meat over the medium term" he expected dairy commodity prices to settle below current levels.
And dairy farmers needed to make sure on-farm costs - which he said were already rising - did not eat up their improved returns.
"It really is important that farmers don't take their eye of cost structures in the next little while despite the fact that revenues will be pretty good," he said. "Markets can turn fairly quickly even though it's looking pretty positive - you just can't afford to take your eye off the ball."
