New Zealand dairy giant Fonterra has been criticised by a group that looks after the interests of farmers in the co-operative, with some dairy producers threatening to take their business elsewhere.
Chairman of the Fonterra Shareholders' Council John Monaghan said that if poor payouts to farmers continue, some farmers may look for alternative co-ops, a move that may threaten Fonterra's existence.
"The impact of poor payouts will extend well past farm profitability and may challenge the very existence of the co-operative," Monaghan said in the council's annual report. "A lean payout could encourage suppliers to look for alternatives and may not encourage farmers to increase production."
He said that as a result the co-operative could struggle to reach its target of 3% annual milk growth.
During 2005/06, the council told Fonterra that an anticipated payout of $3.85 per kilogram of milksolids was unacceptable and the payout was increased to $4.10, after a $130m cost efficiency program.
However, the payout still compared unfavourably with those for smaller co-ops in New Zealand, Monaghan said.
"While a record number of new suppliers has joined the co-operative for the 2006/07 season, others have left with some suppliers taking all or part of their production to competitors," he added.
The annual report said Fonterra's growth in Australia might be more difficult, after it lost a takeover battle for domestic dairy producer National Foods last year.
Fonterra has consolidated its Australian assets, bringing the Peters & Brownes Foods and Bonland Dairies businesses under the Fonterra brand and acquired the Nestle site at Dennington near Warrnambool in Victoria.
But Monaghan said the profitability of Fonterra's Australian operations had been adversely affected by competition for milk supply.
"It is imperative that the Australian operations deliver an improved return to Fonterra shareholders in the coming season," Monaghan said.
He said strong earnings from Australia were necessary to achieve future growth initiatives.
Fonterra chairman Henry van der Heyden said today in a statement that the council had listed many of the issues that confronted Fonterra during 2005/06.
"But the board is confident that management has appropriate strategies and action plans in place to counter these issues," Van der Heyden said.
He said those strategies, which include a significant step up in the returns from Fonterra's value-add businesses, are being implemented by management.
"Farmers are making it very clear that they expect Fonterra to pick up the pace on performance and lift its returns to farmers year-on-year," Van der Heyden said.
