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Family first for finalists Vol 16 No 17, May 1, 2017
farmersweekly.co.nz
Turf war for milk F
nigel.g.stirling@gmail.com
ONTERRA is circling its wagons as it faces a new, competitive threat in its Waikato heartland. After several years deliberating, Open Country Dairy has finally pushed the button on plans for a new milk powder plant capable of processing 250 million litres of milk a year at Horotiu north of Hamilton. In a letter to its suppliers OCD said the new factory would be built to pump out 40,000 tonnes of milk powder a year, taking total production from the Talley’scontrolled company’s four sites in the North and South Islands above 300,000 tonnes for the first time. “The plant will be built using the latest evaporation and spraydrying technology and provide Open Country with an additional, flexible dryer capable of meeting tight microbial specifications and producing a diverse set of ingredients with specific functional properties.” It was expected to be running in time for the start of the 2018-19 season. Just six minutes up the road from Fonterra’s massive Te Rapa factory – annual milk powder production 325,000 tonnes – OCD was setting up shop in the shadow of one of the dairy giant’s biggest plants. In a letter to Waikato suppliers Fonterra’s Paul Grave urged those thinking of supplying OCD to reconsider.
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Optional stop Waikato farmers will be able to choose to send milk to Fonterra’s Te Rapa factory or to Open Country Dairy’s new plant six minutes up the road.
The banks may perceive they have got better security if they are fully shared up but if their debt to assets is too high they may suggest they sell the shares and get debt down a bit. Don Fraser Fraser Farm Finance
Sticking with Fonterra gave shared-up farmers a stake in processing and marketing assets “all the way to the international marketplace and ensures the price paid in the marketplace is returned to you”. “Fonterra will always pay you the highest possible payout – other processors may not always have this objective,” he said. Discounts through its FarmSource retail network and a currently healthy 6.6% dividend yield on Fonterra shares were further reasons for staying as were differing payment structures Grave maintained were not easy to compare on an “apples for apples” basis. “Your supply curve could potentially mean that the actual
milk price you receive differs to the headline milk price.” However, experts believed OCD would easily lure the 130 or so suppliers needed for its Horotiu factory. Fraser Farm Finance principal Don Fraser said a significant part of the appeal came from not having to own shares to supply the privately-owned company. “Some of those people are leasing farms and it is a big cost for them. Having to buy the shares blows their budget out.” Fraser said it was likely some farmers considering switching were doing so under pressure from lenders. “The banks may perceive they have got better security if they are fully shared up but if their debt to
assets is too high they may suggest they sell the shares and get debt down a bit.” Unlike Fonterra, which operated a deferred milk payment system, OCD divided its season into three parts and paid its farmers in full based on sales made during those periods. Dairy analyst Geoff Taylor agreed where a farm’s milk production was weighted towards the first third of the season a farmer supplying OCD could be disadvantaged relative to Fonterra peers if prices rose in the subsequent two thirds of the year. However, he believed it was an unfair comparison because price rises in the final two thirds of any year were just as likely as falls while earlier payment on average
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was worth an extra 5-10c/kg MS to OCD farmers. “The reason we put such a large range on how much it is worth is because that depends significantly on the cost of money and this is one of the reasons that OCD does it … on average their suppliers have greater debt, particularly in spring, and their cost of funds can be varied.” So long as it continued to pay a competitive farmgate price and run its business prudently Taylor believed OCD would attract more milk. “Compared to when they were knocking on farmers doors previously they have demonstrated they are much lower risk with lower debt levels and shown they can get on and produce a commodity and get paid earlier in the cycle and distribute a higher value than others in the industry.”
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Nigel Stirling