Fonterra’s collective strength is just as important today as it was at its formation in 2001, former and founding directors agree.
That’s not say it’s getting everything right and that the dairy giant gets straight A’s but former directors Earl Rattray, Mark Townshend, Jim van der Poel and Greg Gent (see p12) are all in agreement the co-op needs and should get all the farmer support it can.
“Anxiety and even unrest routinely come with low milk prices; it’s easy to want to find someone to blame but we need to stand back and look at reality,” Rattray said.
Farmers have flooded the world market with milk at the same time as two of the world’s largest importing countries – China and Russia – have contracted from the market, he said.
In liquid milk equivalent (LME) terms the world traded market is about 65 billion litres and in the space of just 12 months an additional 6b litres LME poured onto the market.
“So that’s 10% more and a good part of that – about a third of that increase – came from New Zealand,” he said.
While it might not seem like it right now, with plunging farmgate milk prices, the good news is that traditional buyers from countries such as Venezuela and regions such as South East Asia, the Middle East and North Africa have come back into the market and Fonterra with its global reach has managed to find a home for the milk.
“They’ve pulled off a minor miracle. Our biggest market halved its import volumes yet they are managing to sell it all, and turning it into cash, not Lada’s and trinkets. I’d be worried if it was sitting in stores.”
Rattray, who spends a portion of his time working for a Geneva-based strategic food consultancy, said there’s no evidence of inventories from NZ.
“It really does show the strength of Fonterra’s networks and GDT (GlobalDairyTrade),” he said.
For the first four months of the year milk production was similar to the same period the previous year and whole milk powder (WMP) exports for the six months until June this year were also similar to last year, although their destinations had changed.
“Farmers need to stand back and look at the cause of this rather than react to the short-term price falls. It’s going to be Fonterra that pulls us out of this with its ability to place product in optimal markets,” he said.
Townshend said while farmers might be unhappy with the current Fonterra milk price they should at least take some comfort from the fact Fonterra was trying to maximise milk price.
“Conversely the non co-ops will be rejoicing in the current milk price environment where their carrying costs will be much lower and their businesses less at risk than when milk price is
high.
“To anyone who thinks the owners of these companies are really worried about the plight of NZ dairy farmers then think again. While we would all like Fonterra to be performing better, at least we know that maximising milk price is a key objective,” Townshend said.
Jim van der Poel agreed that Fonterra’s role in maximising milk price to NZ dairy farmers, no matter who they supplied, was a major factor in the industry’s success in this country.
Others benchmarked off that price, lifting farmgate milk prices to all.
That value was accrued back in the value of land and any weakening of Fonterra’s strength through wholesale movement of farmers to competitors risked huge value destruction, he said.
He warned that Fonterra’s board, shareholders’ council and management needed to stay connected with farmers to ensure they understood the underlying value of the co-op.
But they also needed to ensure
they delivered on the benefits of the model.
Townshend said farmers needed to accept some of the blame for the current Fonterra predicament.
“In my view, person for person, the board is not stronger than 10 years ago. A public beauty competition-popularity contest is not delivering the best governance outcomes for Fonterra,” he said.
At the formation of Fonterra, the shareholder-directors were appointed from their legacy boards.
The two legacy processing company boards each appointed five directors to Fonterra so the two legacy boards, which could gauge capabilities around their own board tables by the contributions individuals made, promoted those they thought would contribute the most, he said.
“Maybe the time has come for some of the shareholder-directors to be appointed rather than elected through shareholder ballot,” Townshend said.
He suggested three of nine could be appointed that way with the other six elected.
Appointments would be made after assessing board capabilities in totality.
“Does the board at a point in time need more future leadership options, more strategic thinkers or more difficult-to-elect, cold, flint-hard practitioners who really hold management to account?”
Townshend questioned the effectiveness of the board election candidate assessment process.
In the last six years one new director was elected at each election. Only one of six has had a strong Candidate Assessment Panel (CAP) scorecard.
“This means shareholders do not value CAP assessments and recommendations. We hear stories that the CAP process is ineffective and accusations of bias.
“The blunt reality for those who do not score well, and their own avid supporters, will be that they will generally find it easier to criticise the system than accept their own limitations or lack of experience. This, presumably, is at the core of the accusations of ineffectiveness and bias against the Candidates Assessment Process.”
In the year Townshend retired from the board he sat on the panel, which at that time was chaired by independent appointee John Palmer who ran the process professionally and with neutrality.
Townshend said he found it was an excellent process in terms of providing shareholders guidance on who may
be effective as governors of their cooperative.
