Friday, March 29, 2024

Agility to drive value

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Fonterra chairman John Wilson has hit back at repeated criticism the huge co-operative has lost its way or not delivered on the promise it once held.
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“I do sense the frustration of farmers with critics who come out of their holes when global milk prices are low,” he said ahead of the annual results release on September 24.

Wilson is one of three farmer-directors who retire by rotation this year to face the farmers’ vote in October.

He would be seeking his fifth three-year term, having been a director since 2003 and chairman of the Shareholders’ Council before that.

Speaking from Hong Kong on his way to the United States then a Fonterra plant opening in Indonesia, Wilson said Fonterra’s progress over the past 14 years had been extraordinary.

At formation, Fonterra farmers received 30-40% less for milk than their peers around the world and had done so for decades.

Now that gap had closed and one of the biggest reasons was Fonterra’s scale and improved efficiency, being able to collect and process milk effectively and get the products to markets a long way away around the world.

When Fonterra was formed many critics thought it was inefficient and competitors would quickly eat its lunch.

“Competition is good and I want to see the three strong but different NZ co-operatives continue.

“But foreign capital coming into NZ appears to be looking for a product rather than getting the sort of returns on capital farmers would expect from our co-operative.”

In the annual result Fonterra would explain with more transparency where profits were coming from, the divisions doing well and those that were not while reporting on the results from the transformation strategy.

When looking back over Fonterra’s progress the first thing to note was the annual milk collection – 1.1 billion kg milksolids in 2002 versus 1.6b now.

Wilson argued considerable wealth had been created because more milk produced per farm was now receiving, on average, significantly higher prices.

“Fonterra’s improvements in efficiency tend to get lost within the milk price.

“If Fonterra wasn’t a success story you wouldn’t have had the 24% increase in milk production over the past five years.

“I know farmers are anxious and under pressure from the current low prices but they are looking through the cycles and continuing to invest in their industry.”

Farmers knew that extreme volatility made it very difficult for Fonterra to forecast the milk price consistently.

“They value the co-operative and are asking all the right questions about whether our strategy is correct and where the returns will come from our global businesses.

“They know some parts of the company will go well some years and other parts won’t.

“Of course there is concern about world prices but they accept we have to spend money to cope with the processing demands of more milk.”

Asked for his thoughts on Fonterra’s transformation over the next 15 years, in contrast to the past decade or more, Wilson said the rate of driving volume into value would increase.

Milk production growth in NZ would slow because of convertible land constraints, demand from emerging markets would continue and so would payout volatility.

Therefore Fonterra would be more agile; something that was not easy in such a large organisation.

The co-operative had to evolve and it would tackle its governance and representation model next year, he said.

He acknowledged that transformation was destabilising for staff and therefore affected morale.

“But this is about future agility and responding to the challenges of world markets.

“I talk to people all around the company who know this is necessary and will make Fonterra a better company to work for in future.

“The review is not a criticism of the past but a response to dramatic world changes – most of our peer companies are going through similar transformations.” 

“Competition is good and I want to see the three strong but different NZ co-operatives continue.”

 

John Wilson

Fonterra

Wilson said staff surveys showed “engagement scores” were improving, not falling.

The company had “pockets of excellence” and the transformation process would improve those areas that needed to be better.

Transformation was also driving working capital out of the business that became available for the 50c/kg milksolids voluntary loan scheme.

Farmers had been very appreciative of Fonterra’s ability and willingness to advance the loan, he said.

It would be a help to farmers through a very difficult six months for cashflow rather than return that $400 million or more to the balance sheet.

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