Friday, 25 September 2009


We gave a column from Brent Wheeler an airing the other day and it has been fisked by No Minister..

The comments are worth a look. Heres the best.

Dumb analysis. Try reading it again. Brent is saying that the incentives on farmer suppliers are to maximise the return on supply - which is what they are good at.

They face very poor, in fact perverse incentives, to maximise the return from value add, because value add requires capital, and capital requires Fonterra to hold-back dividend returns.

You can't have both. Its logically inconsistent, and a cash starved, dumb, politically driven beast is the result.

Fonterra can't even get their PR straight, are they managing the redemption risk, or are they trying to capitalise the value-add business? Can anyone tell?

Nope. The model is doomed, if Fonterra can scrape together a couple of hundies from this they put off the day of reckoning another year or two. So keep kicking the can down the road there Sagenz!

The fact your rellies were dumb enough to invest in the financial services industry is a non-sequitor. Whats that got to do with whether a regulated monopoly is a doomed whale thrashing around? I should also remind you that Dairy Farmers of Britain is in receivership. A classic example of what happens when a Co-op over leverages itself - it hands itself to its creditors.

There is your future under the co-op model. Fonterra is a price taker, not a price-maker.

Look at saturday's Herald. Fonterra is down to 21% assets to debt, this is dangerous territory for a Co-op with a redemption clause and just while I am piling on, Fonterra is NOT a price maker. That is just dairy propaganda.

If they were price makers, why was everyone surprised when the price went down. D'oh! Was it some cunning plan to disguise Fonterra's market power? Or was it that they take the world price?

Nor is Fonterra the largest dairy trader in the world. It is the largest player in the freely traded global commodity market. These are not the same things.

Most milk is traded under regulated protections (the EU and US in particular).

Fonterra is probably the best producer of basic dairy ingredients in the world. Thats fine, but it means NZ dairy farmers are in the commodity supply business. That is a business with low returns, and all the value is captured at the other end of the food chain. NZ dairy farmers are already at the mercy of those evil commodity traders, and no amount of propagandising can hide the fact that Fonterra is over leveraged and in trouble.

Hence the need to manage the redemption risk, by encouraging farmers to invest even more of their equity in the business.

So which bit of Brent's analysis were you disagreeing with again?

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