Fonterra settles farmer class action for $25m over milk price clawback

The dairy giant has settled with about 1000 farmers who alleged the company’s attempt to clawback $60m in ‘overpayments’ was deceptive and unlawful.

Fonterra has settled a class action brought on by about 1000 dairy farmers over its decision to claw back about $60m in milk payments. Picture: Nicole Cleary

Fonterra has settled a class action with about 1000 farmers for $25m over its decision to “clawback” milk payments six years ago, avoiding a trial that was set to begin this month in Victoria’s Supreme Court.

The New Zealand dairy co-operative slashed the price it paid farmers for their milk in April 2016, known in the industry as a step down. This resulted in about $60m in “overpayments” to Australian farmers, which the processor attempted to clawback.

The farmers - represented by Adley Burstyner - alleged the decision was unlawful and was misleading, deceptive and unconscionable conduct, causing financial and mental distress.

On Friday, Fonterra Australia managing director René Dedoncker announced the co-operative had settled the lawsuit - without an admission of liability.

“We believe it is in the best interests of farmers, the dairy industry and our business so we can all move forward,” Mr Dedoncker said.

“Over the last six years we have invested a significant amount of time and effort to overhaul our relationship with farmers to rebuild trust and strengthen the dairy industry.

“We are proud of the good relationships we have today with our farmers and the wider industry and are committed to investing in the future of Australian dairy for years to come.”

Fonterra Australia managing director René Dedoncker said settling the class action was in the best interests of farmers and the dairy industry. Picture: Adam Taylor

It comes six weeks after Fonterra abandoned a potential $1.2bn float of its Australian business.

Despite farmers receiving record farm gate prices in the past year, many have left the industry. In the past 20 years, Australia’s milk pool has fallen 20 per cent to 8.8 billion litres.

Fonterra announced in September it had maintained its milk collections at 1.4 billion litres, giving it 15.9 per cent market share. This compares with 21.6 per cent market share in 2018.

Mr Dedoncker said the $25m settlement was inclusive of interest and all costs and “has already been provided for in the prior year’s financial statements and will not have a material impact on Fonterra Co-operative Group Limited’s financial position”.

It remains subject to court approval.

Fonterra’s step down in 2016, followed a similar move from then rival processor Murray Goluburn, which ran into financial difficulties after an ill-fated partial listing on the ASX.

Under a 2012 milk supply contract — known as the Bonlac supply-agency agreement — Fonterra was legally obliged to match or better the farm milk price paid by Australia’s biggest dairy group and price setter, then Murray Goulburn, at all times.

The farm gate price forms a key part of Murray Goulburn‘s non-voting unit trust – which floated in July 2015– because it is tied to its dividend. If the farm gate price fell to 2012-13 levels, the yield would fall from 7.4 per cent to as low as 3.5 per cent, according to its prospectus, prompting Murray Goulburn to keep its farm gate price high.

It was a decision that New Zealand dairy farmers criticised. In August 2015, Fonterra’s former chief executive Theo Spierings said the price Australian farmers were being paid was too high and did not reflect a then fall in global prices for key dairy commodities.

“What you cannot do is pay money that you have not earned,” Mr Spierings said at the time.

“We need to have an honest debate about what is being earned in the market. There will be different views but at a certain point in time people will land at a certain number … because (the farm gate price) is not so difficult to calculate”.

Murray Goulburn - which later collapsed with Canadian company Saputo buying most of its assets for $1.31bn - later reversed its “step down” and attempted clawback of $183m in milk price “overpayments”.

It is not the first time farm gate prices have been tinkered with to suit company objectives.

A disastrous joint cheese venture between Warrnambool Cheese and Butter and National Foods (now called Lion) weakened the company and led to an exodus of farmers to rival processors. WCB could not afford the $50 million for its 50 per cent stake in the venture, and cut the price of milk it was buying from farmers.

Five years later, Saputo took over WCB.