Tuesday, July 31, 2012

The Dairy Industry Restructuring Act

The Dairy Industry Restructuring Act (DIRA) has been getting a lot of attention lately, from the discussion on the price of milk through to Trading Among Farmers. That’s because the diary industry restructuring act is the foundation piece of legislation that allowed Fonterra to be formed.
I have one major issue with it, but first some background.

Prior to Fonterra or before 2001, the dairy industry was made up of a number of dairy Co-operatives spread across the country. These Co-ops supplied both domestic and export dairy products.
But all milk that was exported had to go through the NZ Dairy Board, who controlled all the marketing and distribution of NZ milk into export markets. So an individual NZ company could not negotiate deals directly with customers in a foreign country (Craig Norgate gave it a crack though).

Fonterra was formed when the two largest Co-ops, Kiwi and NZ Dairy Co-op merged with the marketing board and most of NZ other small Co-ops. Fonterra now accounted for over 95% of all milk collected in NZ. The DIRA was passed to allow this merger to take place. It now meant that anybody or company can export milk out of NZ independently.

But the government were concerned that this merger would create a monopoly player in the domestic market, who could exploit that position and NZ consumers could end up being over charged for their dairy products. So provisions were made in DIRA that required Fonterra to supply 600 million litres of milk to competitors. This would allow competitors to buy milk from Fonterra at “the farm gate” price, who could then process the milk and compete in the domestic market. Therefore ensuring there was plenty of competition.

In the 10 years following the formation of Fonterra, we have seen plenty of milk processors in the NZ market, producing all types of dairy products from milk to yogurt etc.

If we look at liquid milk as an example, most of the milk in the brands we see in the super market is purchased from Fonterra under DIRA. Meadow fresh which is based in Christchurch and owned by Goodman Feilder, simply gets the milk delivered to its factory by Fonterra tankers, where it is processed and put into a Meadow Fresh bottle. Fonterra’s Anchor brand competes directly with Meadow Fresh as they are both aimed at the same price point. Both brands contain exactly the same milk. The supermarket home brands price there milk at a cheaper rate. There are also a few smaller processors like Klondyke and Al & Sons. So it is clear that there is competition in the New Zealand market.

Further proof of the existence of competition is there is nothing to stop any dairy farmer in NZ from pasteurising their cow’s milk and selling it to the NZ consumer. Many farmers have done it in the past. Likewise, there is nothing stopping any start-up company from creating any dairy product and selling it. They simply call Fonterra and tell them how much milk they want and where they want it. So there is competition in the domestic market.

We have also seen export based dairy companies come onto the scene in the last 10 years. Synlait, Open Country Cheese are two early examples. These companies are export based businesses and as far as I’m aware they don’t provide any product to the domestic market and if they do it will be a tiny fraction of their total business.

These two companies are entitled to DIRA milk from Fonterra as well, even though they have their own suppliers and in Synlait’s case they process milk from their own 15,000 cows as well as their own suppliers.

Now both these two independent companies have at every opportunity argued for the reduction of the “farm gate” price of milk that they pay Fonterra. There are endless submissions to government and a healthy amount of lobbying of government ministers takes place. These two processors among others jumped into the recent “milk price” debate that raged, as consumers complained about the rising cost of milk.

They claim that Fonterra are artificially raising the “farm gate” milk price because their processing division essentially accepts a lower return on investment than a normal competitor would. The recent claim is that the farm gate milk price is 40-50c/kgms higher than it should be, and that a normal competitor would not or could not pay this price and still make a suitable return.
This is where the “war of words” between these companies and Fonterra is focussed.

I don’t believe the farm gate price is over inflated, in fact I believe that it is actually quite a cheap method of acquiring milk.

I’ll comment on the “farm Gate” milk price at a later date.

But my main concern is, why does DIRA allow an export based company buy DIRA milk from Fonterra. The main concern of regulators back in 2001 was that Fonterra would have a monopoly in the domestic market and stifle domestic competition. So the provisions within DIRA that we discussed above, were designed to allow this domestic competition.
We now have a situation where these two companies are taking “cheap milk” from Fonterra processing it and then essentially competing with Fonterra in international markets. If one wanted to get all sensational about it we could put it like this; the NZ government has legislation that allows 2 foreign owned companies to come in and buy cheap milk from Fonterra and then compete against Fonterra internationally. From a NZ Inc perspective it makes no sense!

There has been a huge public response to Shanghai Pengxin buying the Crafar farms. Shanghai Pengxin have stated that they will build a processing plant to process their milk, but it is entirely possible that they would be eligible to buy DIRA milk as well, which I find to be totally backward thinking, as Fonterra and its farmer shareholders should be making the margin from the final processed milk not a foreign owned company.

I believe that a simple amendment needs to be made to DIRA, that DIRA milk is only available if it is destined for the NZ domestic market. There does not need to be competition for raw milk destined for international markets. The Commerce Commission and the NZ government only need to worry about competition in the NZ domestic market.

The Government of NZ has no greater task than to support our export sector and protect the businesses that earn our foreign money, Open Country and Synlait are included in this group.  I have no problem with companies competing with Fonterra, that’s healthy. But if an independent company wants to export dairy products then they should get their own milk supply.Both Synlait & Open Country have their own suppliers anyway.

I can’t think of an example anywhere, where a company is required by legislation to supply product to competitors.

Monday, July 23, 2012

Water Quality and Dairy Cows

The dairy industry has is coming under increasing pressure around its environmental impact on NZ water ways. I have noticed in the past 2 years the calls to reduce the impact of dairy farming have reached fever pitch.

The term “Dirty Dairying” has been around for a while now and I’ve seen more than a few vehicle’s with the bumper sticker “Fonterra stop shitting in our waterways”. The public perception is that dairy farming is bad for our water ways.

So I thought we would look at the science behind water quality and determine what the facts are. As we all know that facts are often the first casualty in public debate.

This presentation to ministers by the commissioner for the environment Dr Jan Wright is a very good summary of how our water ways are getting contaminated.

I will summarise her presentation, but if you have a spare 20 minutes, give it a quick look.

There are essentially 3 types of pollutants that affect our water ways:
  • Sediment -as a result of erosion and flooding, where large amounts of soil and gravel etc get washed into the water ways.
  • Bacteria- from animal and human waste being discharged into the water ways.
  • Excess Nutrients-when Nitrogen and Phosphorus find their way into the water ways.

Dairy farms main pollutant is Nitrogen from excess nutrients. This graph shows how much nitrogen is leached per ha from the different farming classes. Interestingly Horticulture is the worst offender, but Horticulture makes up a very small area so the overall effect is not as great as the dairy industry. You can see that a dairy farm leachs on average 50kg of N/ha/yr, which is less than horticulture. I have seen data that show vineyards leaching 80kg of N/ha/yr.

Public perception is that cows standing in unfenced water ways and waste from effluent systems is the biggest cause of nitrogen pollution from a dairy farm. But it’s not. It would be great if it was, because those two issues are relatively easy to fix.

This graph shows 85% of dairy Nitrogen pollution is a result of Urine. But this is not urine from cows standing in a stream urinating or urine from dairy effluent.
We hear so much about dairy shed effluent, but dairy shed effluent is collected while the cows are being milked, which accounts for 4-5 hours of the day. The remaining 19-20 hours the cows are in the paddock, urinating.

Research has shown that the cow’s urine from the unrine patch is the main culprit. When a cow urinates the urine lands in an area about the size of a dinner plate. The nitrogen in that urine patch is equivalent to 800kg nitrogen/ha. To put that into perspective a dairy farmer would apply around 200kg of nitrogen fertilizer per ha per year and that would be done over 4-5 applications. Many farmers apply much less.

The grass within that dinner plate sized area is only able to utilise a small fraction of the nitrogen in that urine patch. The nitrogen then converts into nitrate form which is water soluable. The nitrate attaches to the water molecules and leach through the soil profile.
Once the nitrates are below the grasses roots then there is very little that can stop the nitrates filtering through the soil profile and into the water table, which in turn reaches our water ways.

There is a lot of research going on by scientists to better understand nitrate leaching and ways of combating it. Nitrogen inhibitors are a recent development. The inhibitor is sprayed onto the land. Trials show that considerable leaching reductions can be achieved, but on farm results are reported to be less effective. 

The reason the councils are concerned about the increase of dairy farming is that the nutrient leaching will increase. If a sheep farm is converted to dairy the average nitrogen leaching will increase by 30kg/ha.
If the current level of growth in the dairy industry continues at 3-4% per year, then cow numbers could quite possibly be double their current levels in 15-20 years. I don’t think the wider community will allow there to be 12,000,000 dairy cows without major restrictions.

At this point in time the industry does not have a commercially viable answer to the nutrient leaching issue. There are certain farming practises that are worse than others, that can be minimised. But as a whole there is no silver bullet.

Friday, July 20, 2012


The north island has begun calving and the south island will begin in August. Not only is calving the busiest time of year for farmers, but it is also the time when that thorny subject of inductions rolls around.

So what are inductions?

To fully understand it we need to understand how the dairy farming year operates. The dairy farming year is based on grass growth rates. The cows are dried off over the winter as this is the time when grass growth is at its lowest. Cows feed requirements drop dramatically when they are not lactating. Farmers plan to have the cows calve when the grass starts growing again, which in the South Island is about mid-August.

Ideally farmers want the cows to all calve over a short space of time as this means the cows have a longer lactation. You would prefer a cow calved in 10th August rather than 10th September as you will get an extra months milk.

Obviously, the date a cow calves is dependent on the day she conceives. A cow’s gestation period is about 283 days long. So to calve on 10th August she needs to conceive on approximately the 10th November.

A cow starts her oestrus cycle again, about 40 days after she calves, but this can be longer if she is under weight or stressed or has a complication like a retained placenta. So a cow that calves in October won’t be able to get into calf until at least mid-December (if everything goes well).

Cows that calve into October are considered to be late. So farmers look through their mating records and identify the late calving cows and call the vet in, who injects the cows with a hormone injection which causes them to calve early. Obviously the calf is pre term or premature and they do not survive.

The end result is that the cow has calved early and she has time to start cycling again and get in calf in or around that mid-November mark, which means she will calve within the desired period next season.

Inductions are not pleasant and the practise is often highlighted by the media and critics of the dairy industry to beat dairy farmers up with. It’s also used by our trading partners as a reason to inhibit our exports or at least the they threaten to.

I remember 20 years ago standing at the calf shed with my Mum. She was saying that dairy farmers would not be able to induce cows soon, which pleased us both as neither of us like it. But here we are 20 years later and we are still doing it.

So what percentage of cows are induced in New Zealand?

the New Zealand Veterinarian Association has stated that only 3% of the national herd was induced in the season just finished, with 98% of farms being under 15%(Benny 2011).

So the New Zealand Veterinarian Association say 3% of the national herd was induced.

New standards were introduced in the 2010-11 season by the NZ Veterinarians Association (NZVA), Dairy NZ, Dairy Companies Association of NZ (DCANZ) and Federated Farmers. In the 2011-12 season the level of inductions within an individual herd will not exceed 8% reducing to 4% in 2012-13.

The industry has introduced its own guidelines to reduce the number of inductions in any one herd.

Inductions can be a way of covering up poor animal husbandry practises. If a farmer has a poor conception rate which leads to a lot of late calvers, they can cover up the mistake by inducing all the late calvers. You will find that cows that are stressed, under fed and underweight, who also have to walk long distances are less likely to conceive. So the moves by the industry to reduce inductions to 4% on any individual herd should begin to eliminate this.

I'm not comfortable with inductions; I can understand why it is done though. The paper by Pangborn and Co outlines the additional financial costs farmers face by not inducing. It’s interesting reading.

Which brings me to the point of this post.

I saw a reference to the latest abortion figures in NZ, the other day and it turns out that the induction rate of human foetuses is at 19%. So 19% of all human pregnancies are induced (aborted) as compared to 3% in the dairy industry.

Now this is not a post on the morality of abortion, you can all make you minds up on that issue.

People need to be consistent in their attitude though. If you are against inductions in cows then I can understand you being against inductions in humans. Likewise if you frown on the dairy industry for inductions then be consistent and frown on the abortions of humans.

I was listing to Sue Kedgley on Newstalk ZB a year or so ago. She was speaking on behalf of the Greens and laying into the dairy industry about this video. The interesting thing was that at the same time, the Greens were promoting a bill that would allow abortions to be conducted up to 20 weeks gestation. I couldn’t believe the hypocrisy of it.

I can’t think of two more comparable situations. The dairy industry terminates the life of a calf that is inconvenient and unwanted to the farmer. That calf would either be slaughtered at 4 days old or slaughtered later in life as a beef animal. Abortion is the termination of a human life that is considered inconvenient and unwanted, except at some point between foetus and birth it becomes illegal to terminate a baby. It's certainly illegal to terminate a baby after its birth as is confirmed by this case in Australia recently. 
Surly a human life is worth more than a calf? I find in inexcusable for someone to be against inductions but be in favour of abortion.

Anyone who holds this view and publicly criticises a dairy farmer for inducing 3% of their herd, but defends abortion should be called up on their hypocrisy.

Just for the record; at Milking on the moove, we will not be inducing any cows. Our plan for a dairy industry that is attractive to young people does not include inductions. Mrs Herud and I adopted our first son and I encourage the adoption of all unwanted babies in NZ.

Wednesday, July 11, 2012

Time To Ditch The Roster

I've talked about hours worked in my last post and how I feel that the long hours are the main cause for the dairy industry’s inability to retain good people.

But the total hours worked is a little bit simplistic. It’s more than that. The hours worked on a dairy farm are also “unsociable”, which means that when you work on a dairy farm it is difficult to be social and socialise.

Apart from the long hours worked, the main culprit is the “staff roster”. Look at any advertisement for a dairy position and the roster is quoted, 6 on 2 off, or 11 on 3 off etc. Rosters work well for employers because it’s easy to work out and manage.

But the roster doesn’t suit the 20 year old who wants to go out on the town and chase the ladies on his days off, because no one is in town on a Wednesday and Thursday night. And it sucks to be stuck on the farm on Saturday night getting txts and pxt from your mates telling you how club xyz is filled with hot backpackers from Germany, Sweden and Brazil, or that your mates new Skyline is proving to have remarkable acceleration but rather poor traction characteristics.

Nor does the roster suit the family who want to go to church on Sunday, because only once in a blue moon does their rostered days off fall on a Sunday.

It doesn’t suit the young school leaver who excels at netball. Because netball is every Saturday morning and even if she could make it every Saturday she’s far too knackered to want to run around for 60 minutes.

To a young employee and even the not so young, the ability to have a life outside of work is important.

The whole western world has revolved around the weekend, that’s when everything happens. The kids sport, the rugby’s on, the home show, the craft show, the boat show, wild food festival, Warbirds over Wanaka etc. The weekend is when your friends are off shooting or fishing or helping each other install blow off valves onto their “sick rides”.

Unfortunately the weekend is often treated just like any other day on the dairy farm.

After 10 years of no physical activity, I have taken up social soccer. The team is made up of a mixed group of people, some work for the Waimakariri District Council (I know, shudder ), others are electricians, a painter, a builder, 3 or 4 university students, a draughtsman and me, a house husband masquerading as a farmer. All these guys work during the week and have the weekends off. One of the electricians is on call one weekend a month, but only if needed.

It’s a fact that none of these guys could play sport at 2:00pm every Saturday afternoon, if they were employed on a dairy farm.

I believe weekends should be reserved as special days so staff can have time out with family and friends. If farmers can do this, then I’m convinced a majority of staffing issues will disappear.
How can this be achieved?

Every farm is different; the staffing on a 200 cow owner operator farm is quite different from that of an 800 corporate farm. The solutions will be different.

A few simple practical ideas of mine are:

Have a core team of staff, who only work Monday to Friday. (Obviously calving time will have to be different)

The only tasks to be done on the weekends are milking, that means no feeding out, no messing around moving calves or moving the effluent spreader, just milking.

All feed and supplements should be set up or fed out in advance on the Friday and clearly marked on the white board/map. The effluent spreader should be shifted etc. This means that the only jobs to do on the weekend are getting in the cows and milking them.

Employ relief milkers for the weekend’s and have one of the permanent staff “on call “as backup
Milk once a day on the weekends.  I know I know that might hurt production, but we should keep an open mind. Has anyone tried it? Will dropping 2 milking’s out of 14 really make a difference?

If we farmed with that sort of mind set that weekends are important and implemented a few simple practises like I mentioned above, then there is no reason why relief milkers could not do the weekends.

I can just hear farmers reading this will be saying to them selves “this guy has got his head in the clouds”, “we’re not made of money". But I would point out that the "town" business that I am involved in, spends 25% of it turnover on wages. CafĂ©'s generally spend 30% of turnover on wages, construction spends 30% and dairy farms spend approximately 10% of turnover on wages, which is on par with supermarkets.

At the end of the day what I am really saying is dairy farmers need to spend more money on staffing to make the conditions similar to what people in town work. It really comes down to more money being spent on extra staff and a change in the way the working week is structured.

The dairy industry is asking people to make a big sacrifice by not having regular weekends off. The simple fact is employees have a choice where they work and the long list of “Dairy farmer worker wanted” ads in the newspaper tells me that people are voting with their feet.

Dairy farming has so much to offer it can be such a great career. If the industry could just make a few changes it could be a profession people want to work in.

Wednesday, July 4, 2012

The Elephant In The Room

I do not like to talk about how people hated their time on a dairy farm. But after 15 years involved in the dairy industry I think I have a pretty good understanding about happens on many farms.

I represent the people who have been dairy farming and have left the industry, because that is what I did. I looked at my options and decided that there were better opportunities out there, than dairy farming.

I’ve seen and read a lot of stuff over the years on dairy staffing issues, most written by dairy farmers or those closely associated to the dairy industry. Much of it is not objective because of the simple fact that they are current dairy farmers. They are still dairy farmers because they obviously don’t have a problem with the way things are currently. Therefore most of the conclusions that are made are overly positive and miss the mark, in my opinion.
If you want to know why people leave the dairy industry, it makes sense to ask the people who have left.

For the last 10 years I have read reports about employment relations on dairy farms, I’ve heard experts at discussion groups and field days talk about the issue, I’ve read the dairy exporter for years and I’ve poured over the Dairy NZ web site. There is a lot being written and said about time management, communication skills, goal setting, HR compliance, performance management, how to communicate with your foreign employees etc  but in all this time I have only heard or read of three people who actually mention the great elephant in the room.


The terms “work life balance” and “time off farm” get mentioned all the time in reports, articles and at field days. But no one actually gives it any real priority.

I thought I would outline all the dairy jobs I have had in the past and explain my experience so you can see where I am coming from.

My first real job that was not on my parent’s farm was when I was 17 years old in 1997. It was for a sharemilker who lived next door. During the summer, I would have to be on farm at 5:00am and I would get an hour for breakfast and an hour for lunch. If all went well I would be finished afternoon milking at 5:30. So that was a 10.5 hour day. I would get every 2nd weekend off.
I worked for the same employer (who is a good bugger) in between university study and after uni for a number of years and the hours stayed much the same.

After university in 1999 I went to work on a dairy farm in Dunsandal where the hours were around the 60 hours per week.

In 2009 I took a manager’s position on an 800 cow dairy farm owned by a large corporate. I got 1 day off every week, but as manager you were still responsible for the farm on your day off. I ended up working 80 hours per week.

I relief milked on a property near Invercargill at Christmas 2008 on an 800 cow farm. The sharemilker employed two staff and was waiting for a Pilipino. The person who got the cows in was getting on farm at 3:00 am in order to have cups on at 4:30. They would finish milking and have 30 a minute breakfast and 30 min to an hour for lunch before heading out to get the cows in at 1:00pm. Milking finished at 6:00pm. This worked out to be a 13 hour day if they got an hour for breakfast and an hour for lunch (which they didn’t). The two staff would alternate getting the cows in so every day was not a 13 hour day. If you didn’t get the cows in you got an extra 1 ½ hours’ sleep and did an 11.5 hour day (Yeah). I later learned the sharemilkers wife left him and went back to Holland.

Gillian Searle did a study called “The reality of a career in the dairy industry” for her Kellogg Rural Leadership Course in 2002. She conducted a survey of dairy farm employees.
The survey found:
60% of respondents had been in their current position for less than 6 months.
45% of respondents received 2 days off a fortnight.
58% expected to work more than 60 hours per week in the spring.
63% expected to work more than 50 hours per week in the summer.
55% expected to work more than 50 hours per week in the autumn.
Over 90% of people said they enjoyed their job or nearly always enjoyed their job.

One of Gillian’s conclusions were:
The primary weakness of dairy farm jobs for employees under the age of thirty are the
long hours of work.

My old lecturer at Lincoln Rupert Tipples has done a lot of work in this area and has published quite a few papers. Here are a few excerpts:
Dairy farming is often seen by young people as hard, dirty work with long, unsociable hours. Wilson & Tipples found the dairy farmers/dairy farm worker population worked longer hours than the New Zealand working population; 40 percent of employees, 45 percent of employers and 49 percent of those self-employed without employees worked over 60 hours per week compared to 10 percent of the total New Zealand working population working more than 60 hours per week. (Wilson & Tipples, 2008). Certainly, long working hours are an issue.
In addition to the long working days, rosters are typically long. They are routinely 11 days on and 3 days off or 12 on and four off (Pangborn, 2010). These factors led a Caring Dairying project brief (2010) to suggest that many large dairy farms are not farming in a socially responsible way.

These two reports back up what my experience has been. That dairy farmer’s work long hours compared to the rest of the country.

I was staggered, but not really surprised to read the figure reported in Gillian’s report that 60% of staff had only been in their current job for less than 6 months! That shows a huge turnover rate of staff. I believe this figure because; again my experience has been the same.

After running my own business for 5 years I stepped back from the day to day running of the business and took a manager’s position on an 800 cow corporate dairy farm in 2009. I moved my family to this remote part of Canterbury and looked forward to experiencing and learning from a well-resourced and professional company.

When I got there in September, all but 1 of the original staff (who started in June) was still there. The manager had gone and a steady stream of farm hands had come and gone before I got there. On my first day at work, one worker announced after morning milking that was not coming back after breakfast. The farm was constantly under staffed, as soon as we recruited a new staff member another one left, leaving us under staffed, which again increased the hours worked for every one else.

I left after 3 months. It was no surprise to learn later that all the remaining staff had left by the end of the season.

The Dairy NZ “Go Dairy” website has a “day in the life of adairy farmer” page. The example day starts at 5:00am and finishes at 5:00pm, with an hour for breakfast and an hour for lunch.
Let’s assume we use an 11 days on 3 days off roster as mentioned above by Ruppert. So in the first 7 days of the roster they will work a 70 hour week (Mon-Sun@10hr/day) then the remaining week they will work 40 hours (Mon-Thur@10hr/day) before having three days off. So they work 110 hours before a break.

Even the web site designed to promote dairying (and you would think they would give a best case example) has a worker working a 10 hour day.

In 2004 I started my business in Invercargill and I employed a delivery driver. I would often get a call at about 4:30 in the afternoon from a customer wanting an item delivered. I would say to the driver “on your way home at 5:00, can you just do this delivery quickly?” After a few weeks our driver said to me “every time I do a delivery on my way home, I end up working an extra 30min that I don’t get paid for”. Now I was a bit taken back, on the farm I had always worked until the job was done. But I was concerned that the level of customer service would suffer if my driver was reluctant to do late deliveries. So I agreed that I would pay him for 40 hours per week and if he did any hours over that I would pay him time and half. A normal week for my employees is 8:00am to 5:00pm Mon-Fri with 30 min for lunch and morning and afternoon tea breaks. That works out to be 42.5 hour per week.

I let my staff manage their own workload, so as long as customer demand is being met promptly and they are achieving the various KPI’s that I measure. Then I don’t really care when they do it. When we are really busy in the winter months, I am always encouraging my team to conduct deliveries on Saturday mornings or do a few late nights if you need to in order to fit all the deliveries in. Sometimes they do.

The interesting point is over the last 8 years I have employed 5 or 6 delivery drivers and I can count on one hand the amount of times any one of them has worked more than a 47 hours in a single week. It’s not like they don’t have lots of work to do, because they do. They are free to work whatever hours they like as long as it is at least 42.5 hours per week. While not scientific, this example says to me that there is a point, where given a choice an employee will decide that the extra money is not worth the sacrifice of their free time.

The hours required by employers on New Zealand dairy farms is in my opinion the single biggest deterrent to attracting and retaining people in the industry. I believe until this issue is taken seriously by dairy farmers, they will continue to struggle to attract and retain good staff.

We need to be honest about these issues and talk about them. So feel free to let me know if you think I'm wrong? 

Monday, July 2, 2012

TAF Revisited

Obviously we all know that TAF was passed a few days ago. It's been interesting watching the debate from both sides.
I hope it works well, we won't know if it’s worked for another 5-10 years though.
The reaction from the fund managers is mixed. Some saying it’s a great opportunity; others like Brian Gaynor are a little hesitant. But what they all have in common is they are all going to wait and watch how the market is working. Which is prudent I suppose.

The other thing everyone is in agreement on is that no one knows what the shares will be valued at. This is what concerns me, will it be higher or lower than the current $4.52 per kgms. Who knows?

I’m in favour of a low share price. I think a high share price creates a large barrier of entry for up and coming farmers and it encourages farmers to supply rival corporate milk processors, that don’t require farmers to buy shares. Which is a bad thing as the strength of the NZ dairy industry is that the farmers are united. I would hate to see the dairy industry end up like the meat industry!

Redemption Risk
TAF has not got rid of redemption risk it has simply shifted that risk from the co-op (the collective) on to the individual farmers. Which isn't necessarily a bad thing because now Fonterra can supposedly do what it wants to do to implement its plan which will hopefully increase growth and profitability.

But if you are an individual farmer and you are decreasing production due to a bad season or you want to quit Fonterra, you have to go to the market and sell your shares to either another Fonterra supplier who is increasing production or to the fund that is made up of the outside investors.

If demand for shares is high then there is no problem, the farmer should have no trouble finding a buyer for their shares. The problem arises when demand is low for Fonterra share. What if there is not the demand from outside investors or if lots of other Fonterra shareholders are selling shares at the same time due to a major drought or something similar. Then the share price will be low. Which is what a market is, supply and demand etc.

That risk is now on the individual farmers balance sheets. If the price of the shares drops to be lower than the current $4.52, then hundreds of thousands of dollars will be wiped off individual farmer’s balance sheets and this will have implications on a farmer’s debt level and borrowing capacity.

If the industry continues to grow at 3-4% then there should be good demand for shares from existing farmers as well as from outside investors. The true test will be what happens when things are not all rosy. What’s going to happen in an environment of a falling payout. I would expect dividends to fall, therefore a falling share price which in turn means the value of a farmer’s assets are lower and one could expect a call from the bank wanting to discuss a revision of your loan to value ratios.

Maybe I’m being a little pessimistic, but what TAF has done is remove redemption risk from the Co-Op to the individual farmer. Farmer’s need to be aware of this additional risk and ensure their financial position is secure enough to withstand a reduction in the share price.

I’ll be interested to see what the banks are doing and saying about this issue, and whether they are adjusting their lending accordingly.