Fonterra denies asking small businesses to cut costs

Lukas Paravicini (Paul Henry)
Lukas Paravicini (Paul Henry)

Fonterra has responded to criticism regarding its treatment of its suppliers, saying that it is a good corporate citizen.

The cooperative's Chief Financial Officer Lukas Paravicini appeared on the Paul Henry programme and was asked about criticism from suppliers, who say they have been told their payment times are being extended from 30 days to 90 days.

Mr Paravicini told Paul Henry "This is not true."

He says 75 percent of its 8200 suppliers are being paid within 30 days and 10 percent more were placed on a sixty day payment arrangement in 2011.

There are around 1000 larger suppliers who were asked, last year, to accept longer payment times of up to 60 days.

Mr Paravicini says "We produce a product, we store it, we ship it to the world, we sell it to customers who pay us in sixty days. That whole process can take easily up to six months. That is why in 2011 we took the decision to align our payment terms to 60 days."

Paul Henry read him part of an email from a supplier who said "Fonterra wrote to us months ago telling us (not asking) we were being moved to 90 day payment terms -- including invoices already waiting to be paid. We are a small local kiwi company working for Fonterra, and this, coupled with the oil price fallout, could kill us!"

Mr Paravicini responded "It is not true."

"I don't know what this person's experience was with Fonterra specifically, I will not comment on that person. What I can tell you is that there is no such thing as 90 days. The maximum that we have changed is as people go from 30 days to 60 days. That's the maximum extension."

He was asked about suppliers' claims that they have been asked to reduce their charges by 10 percent. He responded that the cooperative had asked around 500 suppliers to cut their charges.

Paul Henry also asked him about emails from suppliers who said that they were too scared to go public because they were fearful of reprisals they might receive from Fonterra.

Is Fonterra acting responsibly?

Mr Paravicini said that Fonterra was acting responsibly.

"What I do accept and I do apologise for is the pace we set for those 1000 suppliers. But we did the right thing."

"We did not do this because we are in trouble. We did this in 2011 and we asked less than 15 percent of our existing supplier base to look at their payment terms."

He said "No small company in New Zealand has been approached. We have approached 10 percent of our larger suppliers to do that."

Mr Paravicini also addressed the possibility that some of its employees might be misreading the policy?

"I cannot tell you I saw 1000 or 1000 responses, but I would be very unfair to say my people would not execute this with the best interests. All our people have the best interests at heart."

Criticism from farmers

Mr Paravicini's appearance came a day after Federated Farmers said that Fonterra needed to do a much better job of talking to the public.

Federated Farmers' dairy industry group chairman Andrew Hoggard told the Paul Henry "communication has been a really weak point for Fonterra for quite a while now."

Mr Paravicini told Paul Henry that "there are a lot of interfaces with our farmers."

"But I accept we can always do better."

He also defended the cooperative's decision to move into new headquarters in Auckland, saying they are saving money by moving people from five locations into one building.

Plunging prices

The cooperative last week cut its forecast payout to farmers to $3.90. That means its farmers are facing a second year in which most will not break even.

As many as 80 percent of farmers are currently operating at a loss, with officials expecting the number of farming loan defaults to rise in the year ahead.

Rising debt

Total dairy debt stands at around $38 billion in New Zealand, but 10 percent of the farmers hold about 30 percent of the debt. That is around $10 million for each of those farmers.

The Reserve Bank (RBNZ) has run stress tests on the five biggest lenders in the diary sector: ANZ, ASB, BNZ, Westpac and Rabobank.

The RBNZ says the commercial banks are "robust" enough to cope with a sustained fall in dairy prices. It modelled two scenarios.

The first scenario projected dairy prices remaining below $5.25kg of milk solids until 2019 and projected a 20 percent drop in land value. The stress tests found that would see a $5 billion loan write-off, resulting in a loss of about $1 billion.

The second scenario projected the dairy payout remaining below $5 and land values dropping by 40 percent. That would result in write-offs averaging $10billion, with a projected loss of $3 billion.

On average the banks reported losses under the two scenarios of between 3 to 8 percent of their total dairy lending.

Dairy debt is about 10 percent of the banks' total lending in New Zealand.

The RBNZ says the banks would be able to manage those losses.

Factory closure

Yesterday Fonterra confirmed it was closing its Kaikoura cheese factory, which will see around 30 full-time jobs lost.

The cooperative had been considering the closure for months.

The factory's been operating in the small South Island seaside town for more than a century, but Fonterra says it's operating costs are too high, averaging around 16 percent more than similar plants.