Dairy Farm Transactions and Fonterra

It is an opportune time to share with you, potential issues farmers need to consider when buying and selling dairy farms that supply Fonterra.

It is not possible, in this article, to specify all issues that may need to be considered. However, the main issues will be raised.

The overriding goal for a farmer is to determine whether there is any deficiency in a property from Fonterra’s perspective, and if so, who should pay to remedy that deficiency.

The following should be considered when buying and selling dairy farms supplying Fonterra:

Does the vendor supply milk to Fonterra under a Fonterra Supply Contract? If so, and the purchaser supplies another dairy processor, the vendor will be liable to pay Fonterra the higher of:

  1. $1.00 for every kilogram of milk solid supplied to Fonterra in the season prior (not just the contract supply amount); or
  2. $1.00 for every kilogram of milk solid forecast to be supplied to Fonterra.

It is critical for the vendor to require the purchaser to supply Fonterra under very specific contractual terms, to avoid the payment of the liquidated damages referred to in the Fonterra Supply Contract.

Liquidated damages cannot be avoided by simply sharing up 100% before selling a dairy farm, where the purchaser wishes to supply another dairy processor.

The vendor must file a cessation of supply by 28 February. Otherwise, even if fully shared, without a Fonterra Supply Contract, Fonterra may charge a penalty of $1.00 per kilogram of milk solids supplied, if the purchaser does not supply Fonterra.

Fonterra relies on the exit and entry provisions under the Dairy Industry Restructuring Act (“DIRA”) and wants a commitment to supply milk three months prior to the end of any season, for the following season

Is the purchaser going to be fully shared or supply milk under a Fonterra Supply Contract? This requires an application made by 30 April, with approval by Fonterra on 31 May for a Fonterra Supply Contract, but an Application for Supply should be submitted by 28 February.

A Fonterra Supply Contract may be assigned by the vendor to the purchaser where Fonterra has 30 days to provide consent.

Does the vendor hold a winter milk contract? A vendor can cancel a winter milk contract by providing two seasons’ notice, or assigning the contract to a purchaser. Otherwise, liquidated damages may be payable. Notice given to cancel a winter milk contract on 1 November 2018 would create a termination date of 31 May 2020.

What vendor warranties are required by the purchaser, such as:

  1. Fonterra Supply requirements;
  2. Farm Dairy and Environmental Assessment Report (QCONZ Report); and
  3. On-Farm Assets Team Tanker Access Assessment.

Does the farm comply with the milk cooling obligations specified by the Ministry of Primary Industries by 31 May 2018? If not, is the vendor required to rectify by this date?

These are some of the matters that need to be addressed when buying and selling a dairy farm that supplies Fonterra, either before an agreement for sale and purchase is signed, or under a due diligence condition after signing.

There are a number of other issues to address outside of Fonterra matters before purchasing a dairy farm. In particular, any regional council rule, for example, the impact of Waikato Regional Council’s Healthy Rivers.

Get in touch with us if you need advice on any of these matters.

Written by Chris Spargo