Fonterra co-op structure all good to old hands

Photo: Grahame Cox

Good as gold: Lachlan McKenzie on his Rotorua farm.

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ALTHOUGH THE need for capital in the dairy sector may be taxing financial minds in town, it is something farmers themselves will take in their stride.

Because while some farmers are undoubtedly coming under financial pressure, there are many more who are well placed to prosper.

Lachlan McKenzie milks 600 cows at his farm near Rotorua. He has played an active role with Federated Farmers for many years and was elected chairman of its dairy section 18 months ago.

McKenzie has seen booms and busts come and go and, throughout them all, the dairy industry has always come through and flourished, something he thinks it will continue to do.

"When a lot of farmers bought their farms, they lived off the smell of an oily rag and ran around in an old Holden for 15 years until it couldn't get a warrant of fitness any more. And they reinvested their profits back into their business and that included their dairy company," he said.

"And now many of those dairy farmers, particularly the older generation, are fairly wealthy and that's come about through reinvestment.

"But there's a percentage of dairy farmers who will have to restructure because they have too much debt, there's no doubt about that." McKenzie said they ranged from people who paid too high a price and borrowed too much to get onto their first farm, to established farmers who took on more debt to buy additional properties at high prices.

"The dairy industry is a good industry but occasionally the expectations people get from the market, and it doesn't matter if it's farming or the housing market or any other market, occasionally the market has an expectation that is not fulfilled.

"So when the price of milk [sold to Fonterra] went up to over $7, some people got a bit over-enthusiastic and thought that would go on for a long time.

"Some will sell and others will bring in equity partners. A lot of them own multiple farms and may sell one farm.

"Inside the farm gate, there's still confidence there, but it appears to have come back and banks are now applying the fundamentals [for providing finance] that should have been applied all the time, like having positive cash flows and the right amount of equity and looking at the capability of management. So they are assessing the risk of the whole package."

Something that particularly rankled McKenzie were comments by politicians and financiers that the dairy industry needed to change its co-operative structure. Like most dairy farmers, he is strongly in favour of keeping Fonterra in the hands of its farmer suppliers.

He believes Fonterra will be able to meet its future capital requirements through retained profits, and from its suppliers buying more shares in the company as they grow their own businesses.

He believes calls to list Fonterra on the NZX are motivated by people outside the dairy industry wanting to clip its ticket.

"There is nothing a corporate structure can do that a co-op can't. The difference between a co-op and a corporate is that a co-op wants to maximise returns back to its shareholders," he said.

- © Fairfax NZ News