Fonterra says the move to slash the number of organic dairy farms which supply it organic milk was a tough decision, but one the company simply had to make.
Fonterra has been calling its organic farmers to meetings this week, telling them about the changes which will see more than 50 organic dairy farmers, not be paid premiums for their organic milk, once their current contracts expire.
Fonterra’s general manager of milk supply, Steve Murphy, says the company’s organic business model couldn’t withstand the heat of the global financial crisis, which has seen the market for premium organic dairy goods dry up.
“We collect milk from the far north of the North Island to the south of the south island. When you add in those costs in terms of transport costs scheduling costs and the amount of milk we don’t actually use as organic despite the fact that we pay for it as organic.
“Coupled with what’s happening in the market place where the growth rates have slowed significantly and on top of that the pricing and the margin we’re able to get out of the market has declined. That means we’re running an unprofitable business, so that means we have to act on that and try and turn it into a profitable business."
To do this Fonterra is reducing the numbers of organic suppliers, by building an organic supply hub around Waikato and the Bay of Plenty, and rationalising the markets and customers it sells to.
The company will process that milk at its Hautapu plant near Cambridge.
Steve Murphy says Fonterra’s the global financial crisis has changed consumer behaviour.
The financial crisis has meant people aren’t really prepared to pay the premium that I guess the business structure we had in place requires to make it profitable.
Steve Murphy says while pockets of the niche organic market are doing OK, the packaged dairy market in which Fonterra trades has been particularly poor.
Mr Murphy says he cannot stress enough what a tough business decision it was for Fonterra to make.
"This is not an easy decision for us – that we’re very mindful that the people that supply us organic milk are very passionate about the farming systems they’ve developed over a number of years, and we really do feel for them.
"But we also recognise that we want to have a sustainable organic business going forward so therefore we need to get in a position where it is stable and not losing money."
He says Fonterra will work with its organic farmers to make the transition back to supplying normal milk and will do everything to ensure they have sustainable businesses.
Further, Mr Murphy says if organic farmers outside of the hub could justify a business model where they continued to farm organic then Fonterra would continue to collect their milk.
Those farmers just wouldn’t be paid the organic premium they have been receiving for it.
Further, Steve says he is flabbergasted by the claims of the Soil and Health Association that the move is to remove potential obstacles to the introduction of Genetically Engineered grass.
He says GE has never come up in any of the discussions he has had on Fonterra’s organic milk business.
