Farmer payouts or dividends

Mick CalderWhy is Mick Calder not surprised that the surge in Fonterra’s earnings has resulted in an increase in the milk price and no adjustment to the expected full year dividend to external investors?

There was always going to be this conflict of interests for the company between maintaining optimal payments to their farmer suppliers and providing what is considered to be a reasonable return to investors, he writes in his latest blog.

Given the history and culture of the dairy industry, based as it is on the co-operative model, the company’s interests will generally be directed first towards ensuring the supplier shareholders receive optimal returns which reflect the state of the market, but also to ensure continuity of supply.

Directors are required to act in the best interests of the company, so supplier based enterprises such as Fonterra, or meat companies, have to balance the needs of their investors (and bankers) against those of their shareholder suppliers.

This dichotomy continually arose when Freesia Investments held shares in meat companies, but it was more pronounced with the shareholding in co-operative companies. If the market was down, farmer directors argued for all available funds to be put into product payments, while any surplus generated by improvements in market returns were needed to boost the year-end payouts, to engender as much farmer supplier loyalty as possible.

The Fonterra external investors should consider themselves lucky; they can at least expect to receive a dividend. Freesia came behind the farmer shareholders and the banks, and the cupboard was bare.

Mick Calder says he’s a ‘generalist’ having started in agricultural science then marketing economics and trade policy, and finished in business management and administration, with elements of bookkeeping and legal drafting thrown in. His professional roles include former board secretary for the New Zealand Meat Board and later the NZ Lamb Company. He was co-author, with Janet Tyson, of Meat Acts, a history of the New Zealand meat industry from 1972 to 1997, which makes fascinating reading (Published 1999: ISBN: 0-9582052-2-1). He has written countless other reports, newsletters and articles for magazines and newspapers. He also maintains his own blog, Agriphile.


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