Saturday, 23 April 2011

Cheese producer blames milk price for factory closure

This claim is being reported by RadioNZ
An award-winning cheese producer has closed one of its factories, blaming the rising price of milk and the system for charging for it.

Kaimai Cheese Company has closed its Te Mata factory and cafe in Havelock North.

Executive director Wyatt Creech says the state of the market makes it impossible for a company to be in anything except a very small artisan cheese business.

Mr Creech says the Fonterra dairy co-operative is able to back-charge if milk goes up during a season, which means the company has to sell a product without knowing what the final price of milk will be.
The first thing I find myself asking is why agree to a contract with a "back-charge" condition in it? And how long has this type of contract been used? If it is common type of contract which has been used for sometime then I can't see how the contract with Fonterra is the issue here. It seems more likely that the real issue is that world milk prices are high and cheese companies have to pay the market price for their inputs. Second if supply from Fonterra is the problem why not get milk from another source? Some entrepreneur could take advantage of the situation and offer an alternative supply of milk to firms like these cheese manufacturers. Third if companies are worried about supply then why not vertically integrate? Control over input supply is a common reason given for vertical integration.


Miguel Sanchez said...

In a way they've already dealt with the second and third issues. Kaimai can get up to 50 million litres a year of raw milk from Fonterra at "cost", then sends it to Open Country (another Creech-directed firm) for processing. Kaimai's 50m litre quota is on top of Open Country's own 50m quota (they recently had this affirmed in court) so supply restrictions aren't a problem. And while the two firms are "independent" (again according to the courts) I'm sure they're on friendly terms with each other.

As for the point that "the company has to sell a product without knowing what the final price of milk will be" - this is precisely what the futures market was established for.

wfs said...

Maybe they just right. fighting what is right is the most weapon for them. people may suffer with this if they won't find any solution for that.