Fonterra shocks farmers with milk advance payment clawback

Fonterra's move has caused havoc with farmers' budgets. Photo/File.

Fonterra has thrown many of its farmer-shareholders and their accountants into a spin with a "blindsider" announcement that it's clawing back some of the payment due for their milk, turning their expected cashflows for January upside down.

The big dairy cooperative, which posted its first ever net loss recently and has $6.2 billion of debt, has told its farmers the advance payment rate schedule has been "reset" at $4/kg milksolids, down from the previously announced, and banked on, advance rate of $4.15.

The shock change means farmers will in January, be paid $4/kg for the milk they produced in December instead of the $4.15 they had been told to expect, plus Fonterra is clawing back 15c/kg less for all of the milk a farmer has supplied between June and November.

The $4.15/kg advance rate will be reinstated in February.

Specialist dairy accountant Nigel McWilliam of Diprose Miller said for an average production farmer, the clawback adds up to about $8000, which has vanished with no warning at a difficult financial time of year when farmers have budgeted the money for bills, GST, tax and to buy new shares for next season.

Fonterra's 10,000 farmer-owners produced 1.5 billion kg milksolids in the 2018 financial year. This new season's production is likely to be much stronger.

Fonterra disputes that the advance rate reduction is sizeable, saying it is 3.61 per cent.

McWilliam said he was "livid" at the lack of notice and on behalf of farmer clients had been rushing to arrange bridging finance with banks before business shuts down for the holiday season.

The $4.15 will kick in again in February, with Fonterra telling shareholders they would be paid $4.15/kg for January milk in February, with the February payment retrospectively paying $4.15 for all milk supplied for the season to date.

Farmers are reportedly furious about the surprise announcement, which comes after the Fonterra board shifted 5c/kg - about $70m - of farmers' due milk price for the 2018 financial year into the earnings side of the balance sheet.

Fonterra Shareholders' Council chairman Duncan Coull said farmers' reaction wasn't so much to the amount of money being clipped, but the way the cut was communicated.

The council, which represents the interests of Fonterra's shareholders, is informed about financial matters around the same time as the sharemarket, on which the company has listed dividend-carrying units in farmer-owned shares, he said.

In an off-market notice to farmer-shareholders on the advance rate cut, Fonterra said if it had continued to pay the previously advised $4.15 advance rate, which was based on a milk price forecast of $6.15, it "would go against our financial discipline guidelines and could have had implications for our credit rating".

Fonterra last week cut its milk price forecast for this season to $6-6.30/kg from $6.25-$6.50 to reflect easing international milk prices.

Industry watchers said the advance rate move was to give Fonterra "bridging finance" to improve the look of its books for credit rating agencies at January 31.

In a written response to Herald questions, the company said the advance rate cut "is not a cashflow issue and is unrelated to our current financial performance".

"Our strong relationships with our financial partners, including the rating agencies, are based on being consistent with our financial discipline guidelines wherever possible..

"This includes guidelines as to what percentage the advance rate represents of the total forcast milk price throughout the season. We have been consistent with these guidelines.

"We appreciate the budgeting impact that the updated $4 advance rate will have on farmers in January."

As well as disputing that the advance rate cut is sizeable, a Fonterra spokeswoman disagreed the move was a clawback and that it had blindsided farmers.

Fonterra was not taking any money back from farmers, she said.

As a result of last week's milk price forecast cut, farmers had been paid a higher proportion of their forecast annual price than they normally would be at this stage of the season.

As for farmers being blindsided, when the milk price forecast changed, the advance rate was reviewed as "standard practice".

One Fonterra dairy processing competitor, which declined to be named, said its phones have been red hot with requests from Fonterra shareholders to switch, and from farmers on waiting lists now urgently wanting to leave Fonterra.