Difficulties made clear

Richard Woodd charts the problems at Okato's cheese factory.

The New Zealand Organic Dairy Farmers' Co-operative in Okato is on the financial brink.

The Taranaki Daily News has obtained board reports to suppliers and shareholders signed by co-op chairman Malcolm Campbell, of Whakatane, that detail the decline.

On December 24, he advised that the forecast payout would be $5.70 per kilogram of milk solids for organic milk and $5.25 for non-organic milk.

As a new business, it could not be competitive with Fonterra, he said.

"For instance, we had to sell 3 million litres at a loss of about $500,000, which equates to about 38 cents in payout. The lost opportunity of not converting this to cheese was an additional 21 cents."

The cause of that loss, he said, was lack of capital to complete the factory and catch the milking season start.

Manufacturing quality issues had affected the organic cheese premium and the total effect on payout was about $1.

Between 10 and 20 new suppliers were expected for the 2010-2011 season, who would represent $3.2 to $6.4 million in investment.

After planning plant capacity for 96,000 litres per day, what was left over would be put towards repaying farmer loans, repaying convertible note holders wishing to exit and maximising payout, which was estimated at $6.50-$7.50kg/MS.

A month later, Mr Campbell reported "a significant deterioration in the financial position of the company" based on actuals against budget and forward forecasts.

The chief financial officer was made aware that a failure to deliver was a serious breach of his employment arrangements. What was promised was not delivered and Mr Campbell visited the Auckland office and told both the chief financial officer and chief executive this was an unacceptable failure by them.

"It is now clear that the budget approved by both boards is significantly at variance to the actual trading position of the company," he said.

He listed the causes as:

Late commissioning, loss of revenue and milk sold at below cost.

Cost overruns.

Over-optimistic cheese prices.

Negative exchange rate movements.

A co-op shareholder battle that led to loss of interest of vital new supplier capital.

Overestimates of milk available.

The late start meant Fonterra milk was not purchased at the default price.

Cash flow problems likely to breach the BNZ's covenants.

While the directors met to consider whether the business was fundamentally viable, the chief executive had gone to the United States [on a holiday and sales promotion trip]. He was asked to return immediately.

On January 26, Mr Campbell advised suppliers and shareholders: "The directors have come to the conclusion that the business is unsustainable as it is operating at present and too high risk for all concerned. There may be other options with bank support, e.g. the sale of a portion of the business. But the payout would not be competitive in the current environment. This would also mean many suppliers would not have a viable business going forward."

In February, Mr Campbell reported the bank had reduced its overdraft limit from $3.6 million to $2.1 million.

Options suggested were: ask farmers for additional security for further credit advances and thus give them the opportunity to retain the business, look for additional investors, sell the plant.

Payment to all "critical suppliers" due February 7 would now be paid in full by February 14. To match the overdraft, milk payments (65 per cent of $4.70 and $4.25kg/MS) would be paid in instalments. Suppliers were asked to consider providing security for second mortgages of $100,000 each.

"Farmers need to consider the risk of adding more capital debt against what they would lose if the business ceased to operate," he said.

On February 19, he reported: "We will be unable to make the forecast payment on Monday, as the result of a [cheese] sale being pushed back. We have $2.6 million of cheese in stock. We are looking at all avenues to get through this difficult period."

On February 23, the chairman told milk suppliers: "If you decide to supply elsewhere, you need to know the consequences, because without milk, the company has no future."

Last week, he advised that suppliers "will receive their next payment in the week ending March 14 and March 21. These payments are subject to us receiving payment for sales.

"I am under considerable pressure from outside quarters to make a hasty decision on the bringing in of outside investors."

He ended by advising that the board would be hosting Seoul Dairy Ltd senior executives at the factory in mid-March.

- © Fairfax NZ News