Illustration / Rod Emmerson
Fonterra has scored an own goal in extending payment terms for suppliers because some frustrated companies are compensating themselves by secretly hiking their prices, say business owners.
One supplier of engineering services, who requested anonymity, said the changes to payment terms introduced late last year put pressure on cash-flow and had exhausted the last of his goodwill towards the co-operative.
In addition to reportedly extending terms for invoice payments from 30 to about 90 days, Fonterra has also requested price reductions from suppliers of more than 10 per cent.
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But the supplier said he'd put his prices up since the changes were introduced.
"When you're not doing work that is easily comparable, they don't know, so we just put a bit more margin on here and there to compensate for the fact we have to wait longer for our money," he said, adding that he knew of other firms in his region that were doing the same thing.
The supplier said Fonterra's farmer shareholders were "gobsmacked" that a business they owned was treating local businesspeople in such a way.
"Imagine if your boss said, 'You're going to get a 10 per cent wage reduction and, by the way, I'm not going to be paying you for three months'."
A supplier of electrical services, who also didn't want to be named, said he hadn't put his prices up but was aware of other companies that had.
"I've heard people talking about it," he said. "There are a lot of people who are pretty annoyed with the situation."
We all understand the dairy sector is undergoing a very tough period, but this should not be used as an excuse not to pay contractors in a timely manner.
Fonterra did not respond to the Weekend Herald's specific questions about supplier price hikes, but chief financial officer Lukas Paravicini said this week that, given the dairy price slump, the co-op had a responsibility to its farmers to ensure it was operating as efficiently as possible.
"As part of this, we are working to move all of our largest suppliers of goods and services to payment terms that match our global standard, which already exists," Paravicini said.
Fonterra this week cut its forecast farmgate milk price to $3.90 per kg of milk solids, well below the estimated $5.25 break-even level for most farmers.
Paravicini said the changes to payment terms affected about 20 per cent of Fonterra's 18,000 to 20,000 suppliers worldwide.
"This work has been underway for six months and is part of our wider business transformation, which we announced nearly a year ago."
One supplier, however, has managed to put pressure on the dairy giant and secure a 31-day payment term - only one day longer than the original deal.
As part of this, we are working to move all of our largest suppliers of goods and services to payment terms that match our global standard, which already exists.
Dave Strong, the managing director of Morrinsville Plumbing & Gas, which provides services for the dairy co-operative's Morrinsville and Hautapu plants, offered the company a 10 per cent discount on maintenance work but threatened to withdraw his firm's services if payments were extended to 90 days.
His company employs 16 staff and Fonterra accounts for 15 to 20 per cent of its business.
The fact the firm had worked at the Fonterra sites for 35 years probably worked in its favour when re-negotiating the agreement, Strong said.
"There's a lot of knowledge there."
Strong said the extended payment terms put a lot of pressure on firms.
"Everything else doesn't change," Strong said. "All your other suppliers and staff still have to be paid."
Steve Levet, president of industry group Rural Contractors New Zealand, said Fonterra's changes sent the wrong message to farmers, that it was okay to delay payments to suppliers.
"We all understand the dairy sector is undergoing a very tough period, but this should not be used as an excuse not to pay contractors in a timely manner," Levet said.
Nigel McWilliam, chairman of Morrinsville Chamber of Commerce, said the changes were putting cashflow pressure on businesses.
McWilliam said: "They are looking to Fonterra to resume normal payment terms, because it is an unnecessary pressure on our town and it is affecting some of our guys."