FSC chair Ian Brown said the reports will build on the review document the council provides annually which looks at Fonterra’s performance against its own key performance indicator (KPI) targets as set out in its statement of intent (SOI). The more frequent quarterly reports will give a more timely analysis and will collate data made publicly available by management, along with independent analysis of performance to help provide commentary to the metrics.They’ll also include reporting on how the markets as part of TAF are performing.
The FSC’s goal is to improve farmers’ returns through effective monitoring and communication and the quarterly reports will allow it to do this more effectively, Brown said.
In its annual review of last season’s performance the FSC said the co-op had fallen well short of its total payout before retentions and farmgate milk price targets. While this had largely been due to the fall in global commodity milk prices coinciding with Fonterra’s seasonal sales peak and a worldwide lift in production, costs within the co-op had also risen by 6%.
The report said the lift in spending was in direct contrast to the way farmers had to run their businesses “in these tough times” and that continued to be a point of discussion between the council and board.
The FSC is continuing to work with Fonterra to optimise milk price forecast communications with farmers so they can run their own businesses better.
“It was a real shock to many farmers to see the farmgate milk price dropping at a late stage of the season,” the report said.
The council compared Fonterra’s earnings before interest and tax (EBIT) with other cooperatives and found the others generally show a trend of achieving revenue growth but declining earnings whereas Fonterra had flat revenue but compared favourably against them with modest earning growth.
For Fonterra to be an enduring business returns from the marketplace have to show a rate of return higher than the cost to shareholders of belonging to the co-op, the report said.
Fonterra’s gearing ratio has dropped to below the board’s target but still sits slightly above the mean for other international co-ops. Retentions and increased milk supply backed by shares have contributed to the balance sheet strengthening but the council said it wanted to ensure the co-op used the capital in a way that will benefit long-term shareholder wealth.
Fonterra’s return on assets (ROA) and return on equity (ROE) sits within the range of returns achieved by other international co-ops. The FSC has endorsed the company’s strategy refresh and intention to improve ROE by increasing revenue and decreasing costs.
It’s now looking for an extra $400,000 as a contingency in its budget for TAF costs, taking its total budget to just over $4 million for the 2012/13 year. The FSC said that while the additional money may not be required, it will need to ensure farmers are provided with reliable information, and it is able to monitor and communicate the size of the Fonterra Shareholders’ Fund (FSF) and can carry out its part in the fund risk management policy.
FSC chair Ian Brown has strongly urged farmers to vote for resolution eight to ensure the policy that will help manage and monitor the size of the fund is enacted. He’s also spoken out against resolution nine, which calls for a minimum of nine farmer-elected directors on the board and for the chair to be elected by farmer-elected directors only (Dairy Exporter, November, page 11). He defended the council’s stand on advising farmers how to vote on the issue, saying farmers elected councillors to carry out more detailed analysis of such issues on their behalf and many would expect the them to come back with a recommendation.
The resolution pre-empted the work of the governance and representation review in which the council was heavily involved, he said. Farmers should take comfort in the requirement that the review’s recommendations can’t see any changes to director numbers or other constitutionally-controlled governance matters unless 75% of shareholders give their approval. The review aimed to ensure farmers would get the best representation over the coming 10 years.
“We’ll be looking at what went well over the last 10 years and what we could have done better. It’s just good practice to carry out the review. Shareholders would be equally annoyed if our representation and governance models became irrelevant or got out of step with the world we’re operating in,” he said.
In the notice of the annual meeting where the resolution will be voted on, the FSC makes the point that the resolution would change part A of Fonterra’s constitution and so could not take effect without the support of 50% or more of councillors. The board also recommends voting against the proposal and takes the unusual step of criticising those that put the resolution saying it “would like to register its disappointment that the cooperative’s governance structure, philosophy and culture have not been followed in putting these proposals forward”.
It said it would be hard to attract skilled quality professional directors if only farmer-elected directors could vote for the chair.
