Fonterra will split payout into two parts

Fonterra has confirmed it is to split the dairy farmer payout into clearly identified portions from this season, providing separate returns for milk and value-added activities.

The co-op's annual report released today said the value-added portion of payout would be paid twice a year in February and August.

Fonterra's shareholders council yesterday put the co-op on notice that it had to improve its value-added performance.

Co-op chairman Henry van der Heyden said in Fonterra's annual report that splitting the components would help farmers distinguish value-added returns more easily.

"It will provide the clear signals about milk value that are needed by farmers to make informed production decisions."

Fonterra confirmed last week that an announcement was pending on a significant change to the way it reports value-added.

The annual report gives a value-added figure of 48c/kg of milk solids which is total payout minus the Fonterra commodity milk price (FCMP), one measure of the price the co-op can pay for milk and still make a good return.

However, the shareholders' council reports value-added as 25c/kg under a method using the historical commodity milk price (HCMP), the price a theoretical efficient competitor - performing better than Fonterra - could pay.

A senior industry source has said Fonterra was looking at a shift towards reporting value-added using a measure closer to HCMP.

That had potential implications for the Dairy Equity scheme, under which farmers would sell investors a beneficial interest in Fonterra shares, including the value-added portion of payout. Dairy Equity is planning to use FCMP in its calculation of value-added but it has said it would want to align its measure with Fonterra's if it changed.

That raised questions about how a shift by Fonterra might affect participants in the Dairy Equity scheme.

The annual report effectively confirms Fonterra is to shift towards a measure more akin to the one using HCMP, although it is not known exactly when a formal announcement on this will be made.

However, it is also understood Fonterra is still likely to calculate and report FCMP anyway, so Dairy Equity may simply have the option of sticking with its original plan.

Meanwhile, the National Bank's general manager of rural banking, Charlie Graham, has confirmed ANZ-National is looking at introducing a Dairy Equity-style product.

Graham is - with Dairy Equity's Geoff Taylor and others - a shareholder in the Dairy Investment Fund.

One issue raised over the attractiveness to farmers of selling to Dairy Equity is whether it might be better to borrow from a bank instead.

Graham said National's general policy was to only lend up to 65 per cent of the value of shares, if they were the sole security for a loan.