Milking cash crops

By Linda Sanders In Money

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All good things must come to an end. It was a truly magnificent summer, unless you were farmer. For some, the April rain meant relief from the worst drought in more than half a century. It ended spectacularly in many regions, with flooding in a couple of places.

A breed apart: the drought made a big difference. Photo/Ryan Beyer

Although mostly welcome, the big wet was too late for some areas that were already starting to feel signs of winter.

Many dairy farmers will be grateful to Fonterra for speeding up its payments to them, and lifting the forecast milk price to boost their cash flow.

As the longer-term effects of the drought start to bite, any cash in the door will be critical, though surging world dairy prices will help in the short term, with total returns expected to be higher this year than last.

One of this column’s readers – the wife of a dairy farmer – took me to task for describing farmers as doing well. She said that doesn’t paint the full picture and rightly pointed out those with significant debt are struggling, despite good prices and strong markets. She says these farmers are not choosing to pay back debt – they are being strong-armed, as banks seek to reduce their exposure to higher-risk customers.

“Farmers have no choice about where to spend that little bit of extra money they might get because the banks are desperately trying to claw back what they were so desperately trying to hand out in the first half of the decade.”

Her comments are a pertinent reminder; although bankers promote themselves as business experts, they are in the business of lending money, based on what they think you can pay in interest. Trouble is, whereas they’re your best friend in good times, they can adopt a different attitude when times get tough. Now this family, under intense financial pressure, are desperately trying to hang on to their farm.

Meanwhile, reader David Musker, a former Taranaki farmer, remains cynical about the benefits of the Fonterra share issue. He wonders whether the co-operative will favour non-farmer investors over those on the land under pressure to produce attractive returns. This was a question much debated during last year’s issue.

Fonterra’s latest first-half profit result was strong, helped by pre-drought conditions. The results underline its size and how far-reaching its operations are – from China to South America and Europe.

But all businesses need capital for existing and new operations. The rationale for opening up Fonterra to outside investors was so it did not have to put aside reserves to buy back shares from farmers. Now that money can be used to develop the company instead – and to pay cash-strapped farmers early.

The issue was structured so non-farmers don’t have a say in how the company is run. Cynics will say, though, that – just like bankers – investors will demand a good return on their money, even in tough times. Musker quotes a young farmer friend who thinks Fonterra should have been more conservative and put more money in reserves – avoiding the need for outside investment.

I don’t. Fonterra is one of only a handful of international-scale companies in New Zealand and it runs our most important industry. Until the share issue last year, only 10,500 farmers could participate in its ownership.

Over the years I’ve been involved in building relationships with all sorts of groups – from communities and special interest organisations to government, investors and media. I’ve found the key to building an organisation’s reputation is for people to have a stake – financial or otherwise – in its future. You do that by telling people what you’re up to, listening to what they have to say and ensuring their input into your plans counts.

I’m not saying Fonterra’s share issue was a public relations effort. But a side benefit of increasing the number of people who have a stake in its success – shareholders, KiwiSavers and fund investors – is they are more likely to support its objectives.

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