8 Mar 2016

Questions over Fonterra's viability

3:30 pm on 8 March 2016

An agricultural consultant and dairy farm owner says Fonterra's change to the way it pays contractors raises questions over its commercial viability.


Fonterra Photo: RNZ / Andrew McRae

Fonterra has extended by two months the time it takes to pay suppliers, from 30 to 90 days, and has asked them to cut their charges by at least 10 percent.

The co operative said it was standardising payments to match what it does in other countries.

But Will Wilson said it meant the contractors were carrying the credit and they should look at ways of being less reliant on Fonterra as a customer.

"If you are dealing with a company that is stretched with its working capital which is one of the implications you could take from this behaviour, then maybe you look at not being so reliant on Fonterra as a customer. I mean you have to start asking the questions, how commercially sound is the business."

Lawyer Stephen Franks said Fonterra's actions were not unique but were typical of companies that were stretched financially.

"It's a pretty significant step for a major New Zealand company and it's a bad precedent. It's usually regarded as 'not cricket' that stretching your suppliers like that and forcing them effectively to become lenders to you does effect your reputation long-term."

Fonterra suppliers will be more wary in the future and could raise their prices to reflect the risk, he said.

One Fonterra supplier who spoke to RNZ News said he had to raise charges to other customers after the cooperative told him to cut prices by 10 percent or lose business worth hundreds of thousands of dollars.

The company director, who did not want to be named, said he was reluctant to fight the changes because he could not afford to lose Fonterra.

If he lost the business he would have to cut one of his six workers. He said Fonterra refused to negotiate on the changes.

"I've been working in businesses for the last 20 years. I've never ever come across tactics like that from a New Zealand company. I was absolutely gobsmacked."

Chief financial officer Lucas Paravacini told RNZ News it understood the impact of the payment change and it affected only 2000 of its 20,000 suppliers.

Earlier today, Fonterra also cut its dairy payout forecast and extended by two months the time it takes to pay suppliers.

The milk price dropped today from $4.15 to $3.90 per kilo of solids.