Should we be worrying about Fonterra?

The Sunday Star Times is concerned about Fonterra’s plans to stockpile milk powder.

Fonterra’s managing director of global trade, Kelvin Wickham, last week pointed the finger at the US Department of Agriculture for buying up more than 100,000 tonnes of surplus milk powder from US producers and stockpiling it in limestone caves near Kansas City.

What Wickham did not mention was that Fonterra was already well advanced in its plans to begin doing the same thing here, but not in limestone caves. Instead Fonterra will be stockpiling excess milk powder in modern, high stud warehouses up and down the country.

Maybe he didn’t, but there is a difference between a government stockpile and a supplier owned co-operative one. The former is a taxpayer subsidy which might encourage more production, any costs for the latter will be carried by farmers.

 Frenemy  is also concerned and if I’m reading the post correctly seems to think Fonterra was trying to hide something.

I don’t think that’s the case. The ODT reported last November on the company’s plans to use the former Fisher & Paykel site at Mosgiel for storage and I’ve read other references in shareholder communications and/or the media.

And what’s the alternative? You can’t turn the milk supply off overnight if  it starts outstripping demand and, when cow numbers are dropping in Europe and the USA, the medium to long term outlook is still pretty positive.

Farmers cranked up production in response to last season’s record payout but supply usually peaks in November, it’s been dropping since then and tanker pick ups are down to alternate days on many farms.

Some farmers are planning to dry cows off early rather than milking to the end of the season to conserve feed in response to the high cost of winter grazing and because they’d have to pay $5.50 for extra shares for any increased production.

But in spite of that, and the gloomy headlines, this is market reality and we are all going to have to focus on our cost structures.

Meanwhile on the positive side while the payout is down from the record high, $5.10 isn’t too bad when the three biggest costs – fuel, fertiliser and interest are dropping. 

If Fonterra was actively encouraging farmers to produce more milk than the company can sell I’d be worried, but stockpiling the surplus from what they’re already getting in response to falling international demand looks like a sensible response to market signals.

4 Responses to Should we be worrying about Fonterra?

  1. Pique Oil says:

    HP. I am unsure whether they were trying to hide anything. I have a well earned scepticism of the Empty Suit brigade and thus anything they say I look for underlying reasons. Wickham was economical with the truth and following the Sanlu issue I am concerned for the Dairy industry as it affects the whole country. Fonterra have just raised a substantial amount of money for “general purposes” whatever that means. What I am seeing is a pattern emerging and from where I am sitting it doesn’t smell of roses.

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  2. Stevie J says:

    The NBR ran this story back back in November/Dec. The SST may want to get their act together. We should be worried about fonterra because if they were stockpiling back in November it means that the situation is infintely worse now. prepare for inventory writedowns!

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  3. Pique Oil says:

    Stevie, the NBR article in November was about the new site at Mosgeil.
    The SST is all about another issue entirely. Colliers have negotiated leases on 43,000 square metres in Auckland Hamilton PN and Christchurch.
    The area here in the Manawatu is 8,000 square metres and knowing the buildings I can assure you that it takes a lot of pallets to fill it.

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  4. Stevie J says:

    No sorry pique oil, wrong story. Go and read the paper. Just went and found my copy – NBR December 12 – looking for 70,000m2 of storage, plus emergency storage in shipping containers in or around Auckland’s Mt Wellington. It was on the front page. Now that i look at it again, SST ripped it off far worse than i thought! hahaha. guess thats modern journalism huh?

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