Tuesday, September 22, 2009

Dairy farmers and not supporting a quick buck.

Brent Wheeler seems like a normally rational person from what I recall of occasional MSM pieces. I just read his piece on Fonterra via Roarprawn and have to take issue.

Suppliers maximise returns by obtaining the highest possible prices for their product - not by leaving plenty on the table for dividends to the owners. High cost of supply to the company sits well with the supplier and poorly with the investor.
When the supplier is the investor this is argument is a circular nonsense and ignores two obvious points. The farmer is quite entitled to stop supplying one dairy company and offer supply to another. Additionally the farmer is an investor and will benefit from the company which is able to offer the most added value. Evidence the high premium on Tatua supply farms. Tatua is a small dairy company with a consistently high payout relative to competitors including Fonterrra.

It is well worth the farmers while to accept short term growth in order to maintain control over their buyer and eventual market price. What they lose on the swings of supply price they make up for on the roundabouts of Fonterra dividend. Better the tightly controlled Directors who know full well they had better pay attention to their farmer shareholders than being subject to the complete lack of control evident through highly distributed shareholdings amongst many disinterested pension funds interested in only their quarterly returns and not the long term health of the company.

The Silver Ferns meat reference is just laughable. "Silver Fern Meats whose latest capital raising efforts imposed restrictions to limit non farmer investment to 20% ended up with a shortfall in capital raised. " I have previously posted on the meat industry. There is a huge difference between the asset rich low return meat industry and the dairy industry. Market ideology and evidently Wheeler says farmers should follow the highest short term price. Yet farmers are capable of seeing the returns that the likes if Dairy Farmers of Britain are able to return for their famers, despite the supposed protection of the EU. UK farmers are getting lower than economic returns and steadily going out of business as the likes of Tesco & Asda chip away at their milk supply margin with no correspondent rise in dividend to compensate.

To me Fonterra is like democracy. The worst solutions apart from all the other possible solutions. Fonterra is the worlds largest trader of dairy products. It needs to grow rather than stagnate but putting itself in the hands of wide boy NZX share dealers is not the long term answer to growth and preserving independence. The dairy cockies have shown far more sense than meat industry traders who shove their product and margin straight into the hands of foriegn owned traders and lose all ability to influence the final market price to consumers. NZ meat producers are price takers, NZ dairy are price makers.

I write as someone whose family arrived in NZ generations ago and built wealth from dairy farming only to see it pissed away once the farm land was sold and funds invested in NZ financial instruments.

The model that Fonterra should follow will be arrived at over a long period by necessity and should ensure that a transition to exchange tradeable shares does not result in a long term loss of producer control. Whatever the ideology says.


thedeityformerlyknownasnigel6888 said...

Nope, dumb analysis. Try reading it again. Brent is saying that the incentives on farmer suppliers are to maximise the return on supply - which is what they are good at.

They face very poor, in fact perverse incentives, to maximise the return from value add, because value add requires capital, and capital requires Fonterra to hold-back dividend returns.

You can't have both. Its logically inconsistent, and a cash starved, dumb, politically driven beast is the result.

Fonterra can't even get their PR straight, are they managing the redemption risk, or are they trying to capitalise the value-add business? Can anyone tell?

Nope. The model is doomed, if Fonterra can scrape together a couple of hundies from this they put off the day of reckoning another year or two. So keep kicking the can down the road there Sagenz!

The fact your rellies were dumb enough to invest in the financial services industry is a non-sequitor. Whats that got to do with whether a regulated monopoly is a doomed whale thrashing around?

thedeityformerlyknownas nigel6888 said...

I should also remind you that Dairy Farmers of Britain is in receivership. A classic example of what happens when a Co-op over leverages itself - it hands itself to its creditors.

wake up Sagenz, there is your future under the co-op model. Fonterra is a price taker, not a price-maker.

Look at saturday's Herald. Fonterra is down to 21% assets to debt, this is dangerous territory for a Co-op with a redemption clause.

thedeityformerlyknownasnigel6888 said...

and just while I am piling on, Fonterra is NOT a price maker. That is just dairy propaganda.

If they were price makers, why was everyone surprised when the price went down. D'oh! Was it some cunning plan to disguise Fonterra's market power? Or was it that they take the world price?

Nor is Fonterra the largest dairy trader in the world. It is the largest player in the freely traded global commodity market. These are not the same things.

Most milk is traded under regulated protections (the EU and US in particular).

Fonterra is probably the best producer of basic dairy ingredients in the world. Thats fine, but it means NZ dairy farmers are in the commodity supply business. That is a business with low returns, and all the value is captured at the other end of the food chain. NZ dairy farmers are already at the mercy of those evil commodity traders, and no amount of propagandising can hide the fact that Fonterra is over leveraged and in trouble.

Hence the need to manage the redemption risk, by encouraging farmers to invest even more of their equity in the business.

So which bit of Brent's analysis were you disagreeing with again?

Anonymous said...

Every dairy farmer in NZ should read this exchange of views.

Congratulations to thedeityformerly..etc. for putting it so well.

This latest is just staving off the inevitable. Fonterra is undercapitalized and politically run, and it will remain so until the light dawns.

No chance of getting on the board, unless you toe the party line. So farmers never hear the real debate.

Anonymous said...

4 excellent posts on this

Ed Snack said...

Yep, Nigel is quite right, when you own 21% of the company and the bank(s) own the rest, the banks have more say than the shareholders on direction and control, because they're far more at risk. Wake up farmers !