Dairy suppliers leaving Fonterra for new pastures

Farmers considering leaving Fonterra lodged their "cease" notices in February. Photo / iStock

Fonterra has continued to lose farmers to its competitors, based on latest production data.

The co-operative's market share last year ran at about 85 per cent, down from 96 per cent at the time of its inception in 2001.

Chairman John Wilson said last month there had been anecdotal evidence of loss of market share.

Farmers considering leaving Fonterra lodged their "cease" notices in February, but the co-op will not know until July whether they have followed through.

AgriHQ expects New Zealand's total dairy production to be down by 2.5 per cent this season, which ends on May 31.

"Fonterra's will be a bit lower than that because they are losing market share," AgriHQ dairy analyst Susan Kilsby said.

Fonterra estimates its production will be down 4 per cent this season.

Rakaia-based specialist dairy manufacturer Synlait Milk said last month that it had picked up 28 new Canterbury milk suppliers - bringing its total to 201 for 2016/17.

Synlait said increased demand for nutritional products and increased production capacity had created a chance for more Canterbury dairy farmers to sign up.

Open Country Dairy - the country's second biggest dairy manufacturer - is also understood to have added new suppliers.

"They are picking up as many as they need, based on their capacity and what they want," Kilsby said.

Fonterra's farmers are required to own shares in the co-op to supply it with milk, and some have been selling shares to supply competitors who do not require share ownership and who are offering similar farmgate milk prices.

"The value of the Fonterra shares, relative to the return on those shares, is an incentive for farmers to look elsewhere," Kilsby said. "Until the dividend justifies the investment in the shares, I think it will be a problem for [Fonterra]."

Fonterra's farmer-only shares - which mirror the price of its NZX-listed units - last traded at $5.74, from $6.10 at the start of the year.

At March's interim result, Fonterra reiterated its forecast 2015-16 milk price of $3.90 a kilogram of milk solids. To help farmer cashflows, Fonterra said it will pay its final dividend earlier - 20c paid in two 10c increments in May and August. With dividends for the full-year forecast at 40c a share, the cash payout will be $4.30/kg.

Wednesday's GlobalDairyTrade auction is not expected to show product prices running away in any direction. Nigel Brunel, director of financial markets at OMF, expected prices to be generally flat, with perhaps a mildly firmer tone.