Had this step not been introduced there would have been a large number of suppliers who would have received no cash in June and the negative impacts that would have had on cash flows. The payout steps from July, August and September remain small, representing a 2 or 3 per cent increase in total payout received. The 10c and 15c steps are barely enough cash to meet interest costs most suppliers, let alone operational farming costs like wages, power, rates and other farming inputs. This is in stark contrast to the 8-10 per cent increments that the industry used to make at this time in a normal season. Farmers in tune with their budgets will have already spotted this and would have established lines of credit to meet their seasonal requirements. If suppliers have not seen this cash flow deficit they should speak to their bankers. Fonterra suggests that it has over paid suppliers $700m during the early part of the season and farmers have to bare the consequence of that. Farmers have done that already through the reduction of the advance rate from $4.30 to $4.05 in September 2008 and the reduced receipts since then. Today the total payout paid to farmers is on par with a normal season. Fonterra has traditionally paid 70% of the total payout by April and we are at that point today. The balance used to be distributed by August reflecting a 7 per cent increase in cash paid out each month. With the change in balance date those funds are now being distributed over 6 months which should have averaged out at about 5% each month. Instead Fonterra has chosen to pay 2-3% for 5 months and then 14% in October and claiming a significant portion of that as the "Value Add" contribution, a dividend rather than milk value.. There may be a mitigating issue that justifies the delay in paying suppliers. Fonterra has a significant inventory over hang. The half yearly financial statements showed an inventory value of $5.095b which translates to over 1000k tons of product, roughly half of Fonterra's total annual production. This as nearly twice the normal 500-600k tons of inventory held in January. Export sales, as reported for the total industry by Statistics NZ, shows below average disposals. Fonterra is likely to be holding 350k tonnes more of inventory at balance date, worth roughly $1.4b. To shift 80-100k tonnes of product more each month will be a big ask of Fonterra if it wants the cash up this inventory before balance date. If the product is not sold Fonterra will need to finance that value either from more borrowings or withholding payout, roughly $1.20 per kg MS. Recently Fonterra announced a trade agreement with China worth 160k tons of product. It is likely that this will be sold throughout the course of the season. Less than half will be dispatched and paid for by balance date. The adage, "That co-operative shareholders are the lenders of last resort", is as pertinent as ever. Outside equity does not solve this problem, just shifts the debt burden from the existing shareholders . It would be appropriate for the Fonterra Board to inform suppliers honestly about what is happening and not hiding behind "commercial confidentially". The chairman of Fonterra, all too frequently, cites that a 10c shift in the exchange rate is worth $1 in payout. But it changes the value of debt, denominated in $US by 12-20% and the interest cost to service by the same. The decline of the $NZ from 80c to 55c increased debt value by 45% and the corresponding interest cost. The halt in decline of Whole Milk Powder prices, as identified by Global Dairy Trade, may be promising, but without sales to back it up it is of no economic value. The quantity of product being offered by Global Dairy Trade is only a fraction of all the product that Fonterra must sell. The Skim Milk Powder and Butter product mix is realising less than Whole Milk Powder and so while WMP prices might be holding , other product mixes are still in decline. Fonterra has increased the June payment by 10c. It should not have increased the total payout yet because there is significant downside pressure on total payout. A better solution would have been to deduct 10c from the October payment. And if Fonterra is so confident that it could better the current $5.10 payout it could surely transfer more of the October payment into advance rates steps in July, August and September.

GF van Beek,

Whakatane