Friday, April 19, 2024

To co-op or not to co-op

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George Moss is a strong believer in farmers owning and controlling their own destiny.
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By George Moss, former Dairybase director and NZDG and Fonterra councillor

Back in the late 1970s my late father said to my brother and I that if we wanted to own our own farms the only way to do that was through dairy. Dairy, he said has a co-op structure that is designed to support the farmer, work for the farmer owners, and as a collective invest and add value to the product. 

Meat and wool, he said, were driven by short-term imperatives of securing supply.

“Flirting for supply,” he would say. “No future.”

Consequently, we did one of the very first dairy conversions, in 1981. We are forever grateful to the Dairy Board consulting officers, the LIC, NZDG – they created wealth for us beyond our imagination at the time. We had been trying to survive but with dairy we thrived.

So, I was fascinated when the Open Country flyer turned up in the mailbox headed “Cash flow is king”, offering “payment methods that pay faster and can pay more than Fonterra”.  (I note “can”, not “will”.)

Undoubtedly cashflow is king, but I would argue that total cash trumps it.

I looked at Dairybase data as of February 10 this year. I used operating profit per hectare as my basis for comparison as it considers costs associated with producing the milk. Milk price alone is a poor measure of on-farm profitability. 

The data shows that over the past nine years, Fonterra farmers enjoyed a cumulative total of an extra $2426 /hectare of operating profit. 

It is worth noting that it is in seven of the past nine years that Fonterra farmers enjoyed a higher operating profit per hectare and for two years Fonterra was behind, presumably through the impacts of the restructure. True that Open Country’s milk price was higher on average by 7c a kg over the period, but that didn’t seem to follow through to profit lines. 

I avoided using individual years in isolation as timing of payments relative to the accounting year does impact the numbers.  However, for the record the biggest advantage that Fonterra had in a season was $1066/ha and biggest advantage Open Country farmers had was $618/ha, but that can be distorted by the timing of payments hence the use of the nine-year average. 

Average milksolids per hectare was similar with 1198 kg/ha for Fonterra and 1249kg for open country farmers.

Fonterra farmers do have capital tied up in the processing side of the business and we have seen a depreciation in share value resulting from both changes in methodology of valuation – and with dairying no longer being in growth mode. 

It’s noteworthy that the units are trading about 50% higher than the shares. I see the value in shares, not so much in what they trade for but for the fact that they provide us an enduring and intergenerational right to supply. 

This is taken for granted in New Zealand, but there are overseas examples where dairy processors have not renewed contracts as they expire, creating a real risk to businesses.

With Fonterra now focused on adding value to New Zealand milk, I foresee a time when any new supplier wishing to join the co-op will have their supply put through a model to see whether it adds value to the existing shareholders’ milk – Fonterra will no longer be the fallback option if the others disappoint, as it has been in the past.  

We make extensive use of the six months’ free credit on supplies and milk powder, which enables us to sell surplus calves before paying rearing costs.

The Farm Source points have enabled us to install solar on the house and all but eliminate the house power bill.

Every 10 cents Fonterra pays in dividend will add about $120/ha to our operating performance, only needing a 20 cent dividend to cover our cost of capital (plus some) on shares at 8% interest cost. Within that there is a natural hedge against lower milk prices.

The LIC shares have yielded us well into double digits.

Silver Fern Farms have provided us with a no-wait collection of cull stock plus bonuses and dividends. 

Farmers Mutual Group has given us 40 years of competitive insurances and no-hassle claims.

We will continue to be co-op members because they continue to add real value to our business.

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