Dairy Group: formula boost to payouts

New Zealand Dairy Group says its capital will grow $330 million in five years through a new peak rights scheme.

New suppliers and existing shareholders who want to boost production would have to pay $30 a litre for any extra milk they produced over the company's 70-day peak.

The peak period is the 30 days before, and the 40 days after the peak day - the group's day of highest supply, usually around mid-October.

Dairy Group corporate finance general manager Janie Elrick said the scheme would also increase payout to farmers, rising to 3.5c a kilogram of milksolids in five years through saved interest costs.

Peak rights - a form of user-pays - would see new suppliers coming into the company, or existing suppliers who increase production, paying a fuller share of the capital cost to set up new factories. The plants would be needed to process the extra milk at the peak of the season.

Dairy Group is now putting the scheme to farmers in a series of 40 meetings.

It marks a swing away from its original concept of introducing a two-tier system of shares, so that every farmer could supply milk for commodity-type products, but the threshold for a farmer to get milk into value-added consumer products - with higher returns and higher risks - would have been greater.

Farmers still have to approve the proposal at a special meeting on December 15. If they give it the go-ahead, the company's moratorium on new supply would be lifted immediately.

The lifting of the moratorium is expected to trigger a huge surge of investment in conversion of drystock farms to dairying, especially in the South Island.

Ms Elrick said the scheme would also free more capital for value-added investments such as a $68.5 million whey protein isolate plant at Lichfield, near Putaruru, to be built by next June.

According to Dairy Group, it costs $50 a litre to build a basic milkpowder plant, and the peak flow rights charged to expanding production would pay $30 a litre of that.

The formula was driven by the fact that 40 per cent of capacity costs related to collection, separation and evaporation of the milk, and the balance related to processing the milksolids into commodities.

The new and expanding suppliers would also have to buy shares in the company at $2 a kg of milksolids - creating a total cost of about $4 a kg of milksolids for the new milk supply rights. Farmers who increase milk production outside the Dairy Group peak would not have to buy extra peak rights.

There will also be "headroom" rights available to suppliers with a flat milk supply curve through the season, and allocation of these will be in proportion to the total milk supplied in the North Island and the South Island. Initially, peak rights will not be transferable between the two islands, to avoid peak supply increasing in the south without the company getting the extra funding to increase processing capacity.

Meanwhile, some farmers say they would be disappointed if it turns out that Dairy Group and the other major company, Kiwi Dairies, adopt different strategies to cope with the soaring milkflows.

Federated Farmers Bay of Plenty dairy spokesman Dennis McFetridge said it would have been "very positive for future sustainability of the industry" if the two companies had been able to come up with a joint initiative.

Until now, the constant and increasing need for more processing plants to handle rapidly rising milkflows has been financed by retentions from the payouts to shareholders.

Kiwi, which has not had a moratorium in the South Island, said it had just completed a round of meetings with its shareholders on its own share standard proposals.

Information would be sent to all shareholders this week on the proposal, which a spokeswoman said was not directly about coping with peak milk. Instead, it was to address issues of fair value for shares and the sending of correct signals on new milk from conversions or from existing suppliers.

- NZPA