Fonterra suspends 5c milk differential

Fonterra is suspending the 5c differential between its share-backed and non-share-backed farm-gate milk price for six months.

That decision, announced yesterday, meant farmers would not be required to immediately increase their shareholding to cover increased milk production at the end of the season.

Instead, they would do so based on the new rolling three-season average share standard which will come into effect from June 1 next year.

Chairman Henry van der Heyden described it as a ''common-sense solution'' that would simplify farmers' business decisions between now and June. It would ease the transition into the introduction of the three-season rolling average.

Earlier this year, the board decided on a 5c difference in the farm-gate milk price for share-backed and non-share backed production.

Milk production this season had since been higher than originally forecast and some farmer shareholders were considering adding to their shareholding now, to gain the benefit of the full milk price, Sir Henry said.

The board made the decision to suspend the differential because it ''made no sense'' to encourage farmers to acquire additional shares in that period.

''Instead, this decision sends a strong signal to our farmer shareholders that they should not feel any pressure to purchase shares to back all their production this season,'' he said.

Dairy prices took a breather in this week's GlobalDairyTrade auction, falling 2% on a trade-weighted basis.

Whole milk powder led the decrease with a 3.5% fall, while skim milk powder and cheddar also recorded declines, down 1% and 2.4% respectively. Anhydrous milk fat lifted 3.7%.

This week's fall was the first since the October 2 auction and, overall, dairy prices had increased by 27% since May, Westpac economist Nathan Penny said.

Fonterra will be applying for consents to build a new milk powder plant at its Pahiatua site to process an additional 2.5 million litres each day.

The proposal for a third drier would help ease peak processing pressure in the lower North Island, Fonterra director New Zealand operations Brent Taylor said.

The co-operative's two driers at Pahiatua were already running at capacity, processing 1.4 million litres a day, and for the past 12 years, at least 1.6 million litres a day had been sent by rail to the Whareroa site for processing.