Fonterra’s competitors challenge its capital restructuring plan – but the co-op has the backing of our Agriculture Minister

New Zealand’s   big  dairy  company, Fonterra,  has  come  under  pressure   from  two  directions  this  week.  First,  its  fortnightly GDT auction registered  another   fall  in  prices. Second,  it  faced  fire   from   four  of  its  competitors which  lobbied  the  government against  its  capital  restructuring  plan.

On  the  first issue, the latest  sale  has  taken  the GDT index  to  the  lowest level  since  January  last  year, although  what  may  soften that particular  blow  is  the  devaluation  of  the  local  currency. The  NZ dollar is  now  trading well  down against  the  greenback at US56c ,  from where  it  was  then,  around US70c.

The average price at the  auction fell 4.6% to US$3723 a tonne, after falling 3.5% in the previous auction.

Prices have generally been falling since hitting a record high in March.

The price of whole milk powder, which strongly influences the payout for local farmers, fell 4.4% to US$3421 a tonne.

Among other categories, skim milk powder fell sharply, 6.9% to US$3250 a tonne, cheddar  3.9% to US$4769 and butter 2.6% to US$4851.

NZX dairy insights manager Stuart Davison told  RNZ  weak demand was the key driver in the fall.

“The demand at this auction was so weak that only whole milk powder and butter managed to register a 2.0 demand-to-supply ratio at the outset of the auction, with every other product on offer starting out with only a 1.5 demand-to-supply ratio”.

By the end of the auction demand for whole milk powder was lower. The sharp fall in skim milk powder was expected, h  added.

“Skim milk powder was always going fall off the edge when buyers were in the right position to be able to step away.

“Supply has rapidly caught up in the interim, with all major producing regions now flush with skim milk powder, and buyers can be picky on their skim milk powder purchases.”

Meanwhile  Andrea   Fox  reported  in  the  NZ  Herald  that four companies  have  teamed up for a last-ditch fight against elements of Fonterra’s capital restructure they consider anti-competitive.

The Government is serving the commercial priorities of Fonterra over other New Zealand dairy processors, enabling an already dominant force to strengthen its market hold, say

In a submission to Parliament’s primary production select committee hearing the case for the country’s biggest business to get a law change to enable its capital restructure, the Open Country Dairy, Miraka, Synlait Milk and Westland Milk Products companies said they  had combined to express a common concern the Government is not being neutral.

Fonterra, created from an industry mega-merger under special legislation 21 years ago, needs Parliament to pass amendments to the Dairy Industry Restructuring Act (DIRA) to action its proposed capital structure rejig.

Promoted in 2001 to be “a national champion”, Fonterra is seeking to keep its factories full by making it easier for farmers to buy its shares and supply milk, as competition for milk tightens in a declining production market.

DIRA sets the ground rules for competition in the dairy processing sector, a cornerstone of the economy.

The joint submission said DIRA impacts not just Fonterra but other processors which handle 21%NZ of milk and employ thousands of workers in provincial NZ.

“Despite this, Fonterra’s commercial priorities are the focus of the (DIRA) Amendment Bill,” the submission said.

Point  of  Order  thinks  Fonterra  won’t   be  too  worried by  this  criticism, because  Agriculture  Minister  Damien  O’Connor   has  already  indicated  he  is  backing  Fonterra’s  capital  restructuring  plan.

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