Dairy farmers face a strange mix of uncertainties when contemplating with satisfaction the likelihood of a fourth consecutive season of $6-plus milk prices.
While extreme volatility in dairy product prices has calmed down and New Zealand farmers now receive as good as others in Europe and the United States, their institutions have developed cracks.
There might be no better time to rebuild the foundation, beginning with the Dairy Industry Restructuring Act, part 2019.
Last week Fonterra’s leaders promised for the third or fourth time since the embarrassment of their first financial loss in 2018 a fundamental strategy review.
Co-operative principles will remain inviolate but outside of that there will be no sacred cows, chairman John Monaghan quixotically claimed.
The giant co-operative will fundamentally change in its quest to find balance sheet stability and sustainable profits, he said.
The extent of the new strategy and structure would not be fully revealed until September though sales of non-core assets will be announced as they happen.
But the bombshell of the unsettling week was Westland Milk’s proposal to sell the country’s second-largest dairy co-operative to Inner Mongolia Yili, China’s largest dairy company.
It came after a string of poor payouts that resulted from restricted product options and unsuccessful plant expansions during an 18-year fight to remain independent of Fonterra.
Initial reactions from some of its farmer-shareholders were mixed – for, against and wait-and-see.
Monaghan incurred the disapproval of Westland by prematurely regretting the demise of the co-operative and welcoming farmers who might switch supply.
Aside from the breach of convention, Westland’s directors will be concerned about the ease with which its 25 Canterbury suppliers with 30 farms could switch to Fonterra or Synlait.
Westland has 423 farms owned by 342 shareholders and 75% of those voting must approve the proposal in early July.
Fonterra was consulted about retaining Westland as a co-operative but those talks came to nothing, Monaghan said.
He and chief executive Miles Hurrell stoutly defended Fonterra’s milk prices, now widely criticised as being routinely too high for its competitors to match and for the co-operative to pay an adequate return on shareholder capital.
Those high milk prices holed Westland as a co-operative below the waterline.
Yili has promised to match Fonterra for at least 10 years, an unusually generous time.
Coupled with the $3.41/share offer, it seems likely the required majority of Westland suppliers will agree to sell.
Canterbury farmers who do want to switch supply have a choice of no share capital requirement for Synlait or $4.25 a share Fonterra re-entry, not much more than Yili’s offer.
As a multinational, Fonterra could express only mild concern about the prospect of NZ’s third-largest dairy company passing into foreign ownership.
Its seemingly constant battle for viability in Australia was highlighted again in the interim results.
Newcomer Saputo from Canada, which took over Murray Goulburn, formerly Australia’s largest co-operative, is making life very difficult for Fonterra Australia.
Now down to 1100 supply farms and 20% of the milk, Fonterra is battling to fill its new $200m Stanhope cheese plant in northern Victoria.
Synlait didn’t have a good week either.
Its shares dropped 17% on earnings weakness that sharemarket investors hadn’t expected.
At the same time A2 Milk came off its all-time share price high, its fortunes being strongly linked to Synlait as a manufacturer.
Share price volatility might have replaced milk price volatility in the new landscape of the NZ dairy industry.