Dairy farmers were hanging out for Fonterra's early morning announcement on the size of the advance payment they will receive for milk solids for the first half of the next season.

The Fonterra board discussed the issue at their board meeting in Auckland yesterday. While much of the focus is on the overall payout forecast for the 2015-2016 season - a difficult crystal ball-gazing exercise indeed while the dairy commodity slump continues - for farmers it is getting money into their pockets that counts.

It is also important for the overall economy as Finance Minister Bill English observed last week when he noted that low inflation and the dairy price slump were impacting on Government revenues.

ANZ chief economist Cameron Bagrie also noted the downside risks for the NZ economy from the dairy sector. In an ANZ note, Bagrie's team said Fonterra was expected to announce a 2015/16 opening milk price of between $5 and $5.25/kg milk solids (MZS) for the June 1, 2015, to May 31, 2016, season. "This will reinforce considerable cash-flow pressures in the dairy sector and the economy's ultimate need for a lower New Zealand dollar, which we believe monetary policy easing by the Reserve Bank will help achieve."


The debate around the Fonterra board table will have been intense.

The company's own cash flows have been under pressure. The directors will have had to perform a delicate balancing act to ensure their farmer shareholder supplier interests and the shareholders in the Fonterra Shareholders Fund are treated equitably. Yet also ensure sufficient working capital to ride out the trough.

Given the financial pressure farmers are under, today's announcement will need to be backed up with superb communications.

Reflecting on Fonterra's communication style, it is obvious the company has come a long way since it was dubbed "Fortress Fonterra" and has turned the corner when it comes to more openness.

But it still suffers from a surfeit of corporate speak. For instance the "Velocity, Volumes, Value" mantra which chief executive Theo Speirings deploys when he talks with journalists, analysts, executives and board members alike about Fonterra's strategies and financial results can get in the way of straight communication.

Dairy farmers, they just want the facts.

And that is proving problematic, with the commodity collapse lasting far longer that Fonterra's earlier and more rosy forecasts.

Fonterra sets the price benchmarks for the overall dairy industry.


Competitors such as Westland and Open Country have to stay up to the mark to attract suppliers. While Tatua has done well through its focus on producing premium high-value products, it tries to stay within its comfort levels.

Where the price is also important is for the increasing number of Chinese interests which have set up "stainless steel" operations in New Zealand.

If Fonterra sets its prices too low, it may just drive more of its suppliers into the new competitors' arms.

ANZ noted that low opening advance payments would bring cash-flow stresses to the sector.

That would present challenges for Fonterra and its farmer shareholders alike.