Fonterra offers payout to organic farmers based on market returns, a first for the cooperative

Friday 5th February 2016

Fonterra Cooperative Group is for the first time offering its organic dairy farmers a payout based on market returns in a bid to boost organic supply as competition and consumer demand increase.

It’s the third time in a year the cooperative has reviewed the way it pays organic farmers. It will now offer organic farmers a choice for the 2016/17 season starting, in June, of either a payout based on a share of the market returns for organic products or the existing payment based on a $1.75 premium to the forecast conventional farmgate milk payout, which is currently $4.15 per kilogram of milk solids.

The move comes at the request of organic farmers, many of whom want a greater share of returns from the value add products, although they are also open to greater risk if demand and prices go down.

Craig Deadman, Fonterra’s global business manager organics, said organic milk products are providing high value returns for the cooperative and the new payment model reflects the additional costs and efforts farmers make to produce premium organic milk.

“Linking the organic milk price to organic market returns will help us increase the number of organic farmers,” he said.

That number has dropped to 60 from 73 in the past year, after the establisment of rival Organic Dairy Hub last year, which so far has 15 suppliers, some of whom also supply Fonterra.

Fonterra hasn’t disclosed how much the alternative payment approach is likely to deliver farmers though Janet Fleming, a member of Fonterra’s newly set up Organic Farmers Advisory Group, said modelling the cooperative showed farmers this week indicated they would have made more off the market return model last season, but not the previous two seasons.

Bill Quinn, a spokesman for the Organic Dairy Hub, last month claimed organic farmers had been advised by Fonterra that the potential payout under the market return model could be around $8/kgMS this season.

Deadman said the market return payout will follow the same timelines as the conventional payout with an opening season forecast given in late April/early May.

Market return payouts will be based on the returns from all its organic products, less associated costs of bringing them to market. Some of surplus will then be distributed to the organic farmers while the rest will be paid out in the annual dividend to all cooperative members, he said. That split has not been disclosed.

Fonterra has had a rocky history with organic farmers after blowing hot and cold on its formerly unprofitable organic milk business in the past.

Fleming said it was time for farmers to move on “though it’s taking some people a long time to move on”.

She said farmers in a worse financial position are more likely to want to take on the greater rewards and risks of the new market return payment than those that want more certainty of income.

Fleming, who runs two organic farms in the Taranaki, said there was a lot more interest from conventional farmers in switching to organics, given the downturn in dairy prices and low payout this season.

It takes three years to get certified as organic and Fonterra offers a 45c/kgMS above the standard payout during that period for those wanting to convert.

“Most people are organic farming by default at the moment as they’re not making supplementary feeds and there are no fertiliser tankers out on the road,” she said, which could cut down the conversion time.

Organic milk comprises less than 1 percent of Fonterra’s milk supply. Its organic milk strategy, released last year to show farmers the cooperative was committed to the business, aims to increase supply to 600,000kg/MS by 2020.

BusinessDesk.co.nz

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