6 Nov 2008

Contract milk volume to be reduced by Fonterra

3:22 pm on 6 November 2008

Fonterra will put curbs on the supply of contract milk next season to protect its balance sheet, due to instability in financial markets.

Most farmers supplying Fonterra hold shares linked to the amount of milk they supply.

However, the cooperative also takes a limited volume of contract milk that is not backed by shares.

Fonterra has given notice that it will tighten that arrangement in the 2009-10 season. It will limit contracts to any increase from existing suppliers or new milk from conversions.

Shareholders will not be able to surrender or cash up shares to supply on contract.

Fonterra will also set the price for contract milk at 10 cents below the milk price for the next season, and will require all the milk supplied to it to be fully share-backed within three seasons.

The contract price for the current season is 2 cents below the milk price.

Chairman Henry van der Heyden says the move is intended to protect the interests of shareholders from the risk of a significant expansion of contract supply and the resulting surrender of shares.

He says too much milk not backed by share capital would weaken the balance sheet in a tightening credit market, and place pressure on its capital structure.