Fonterra’s plan to restructure business receives support from New Zealand Government

NEW ZEALAND  – New Zealand’s Cabinet has agreed to support the restructuring of Fonterra company which brings in export revenue of about US$19.1 billion a year and accounts for about 3.1% of GDP, to make it easier for farmers to join the country’s dominant dairy company in an environment of declining milk supply.

The restructuring will enable Fonterra to remain a large-scale, farmer-owned co-operative which can invest in innovation and sustainability while also freeing up cash for farmers to repay debt or invest.

Fonterra was concerned it would have become a smaller, less efficient business that would continue to lose milk supply hence be forced to close factories and end up paying farmers less for their milk if the changes were not made.

The co-operative anticipates that the changes will make it more competitive with rival processors who don’t require farmers to outlay cash for shares to supply milk, and who have been gaining market share.

The restructuring by the cabinet could lessen competition, lower the price of Fonterra’s shares and units, and push up local milk prices for consumers.

The proposed changes also aim to increase the independence of Fonterra’s process in setting the milk price it pays farmers, support liquidity in the farmers-only market for Fonterra’s shares, and require Fonterra to maintain and publish a dividend and retentions policy.  

The New Zealand Government also requires Fonterra to select one more minister on the Milk Price Panel for more transparency and contract a financial institution for the farmer-only share trading market to do an independent analysis of the share price performance for farmer-owners.

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Meanwhile, Fonterra has increased wholesale milk prices as a result of the record high prices of commodities globally.

ANZ agricultural economist Susan Kilsby said prices had been strong across milk powder, butter, and cheese, and it was not surprising Fonterra had lifted its wholesale rates.

Since March 2020 a 1-kilogram block of cheddar cheese has increased from US$10.14 to US$12.24 while the cost of a two-liter bottle of milk has increased from US$3.63 to US$3.88.

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Other inflationary pressure such as labour and material costs for packaging would have also added to input costs, she said.

Speights Ale house owner and Hospitality NZ branch president Mark Scully said it came as no surprise that Fonterra was increasing its prices.

Because of how cost structures worked in hospitality businesses, any increase in wholesale price got multiplied when it was passed on to customers, he said.

“A dollar increase in your price of goods translates to probably close to $3 dollars on your plate,” Scully explained.

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