KEY POINTS:
Farmers are demanding more clarity from Fonterra about how much money it makes from its value add business - which makes branded products such as cheese and yoghurt and was one of the key reasons for establishing the dairy giant.
Fonterra Shareholders' Council chairman Blue Read said the
performance of value add businesses was being masked by the inclusion of increased commodity returns.
Last season's final payout of $4.46 per kilogram of milk solids included a value add component of 59c.
However, roughly 11c of last year's 59c value add return came as a result of increased commodity returns, he said. "It's not wrong," Read said. "It is the model we work under but we just want to see it defined very, very clearly."
The company needed to distinguish between profit generated from commodities and that earned from speciality and consumer products.
"The integrity of value add returns is critical," Read said. "There's so much driven off that value add return - the fair value share, the judging of how Fonterra's performance is going with their added value strategy, offshore market effects ... it's absolutely sacrosanct."
An annual valuation process influenced the setting of the fair value share - bought by the 99 per cent of farmers that supply Fonterra under the co-operative relationship on the basis of one share for each kilogram of milk solids.
A large component of the fair value share came from value added returns and it could be contended that people made investments based on the returns from the fair value share, Read said.
"So it's really important that everybody gets a very clear picture of what is your real value add returns and what's not just a peculiarity of the model such as has occurred this year."
One of the key reasons for the formation of Fonterra in 2001 was to boost the returns from the value added part of the business. Fonterra's proponents expected long-term dairy commodity prices to drop and argued the way to continued profitability lay in the value added business.
However, the value added business has struggled because commodity prices have been so high - meaning the business has had to pay more for the raw milk it uses to produce its products.
This season's record forecast payout of $6.40 included a 20c value-add component. The year ahead would be defining for Fonterra with a review of the capital structure providing an opportunity to consider the future direction of co-operative, Read said.
ADDED VALUE
* 59c value add component last season.
* Roughly 11c came from increased commodity returns.
* Shareholders' Council wants more clarity on performance.