“They have done a very good job in terms of being efficient commodity producers but with value-add they are struggling to decide who they are and what they are doing.”
He advocated a two-company model for Fonterra: a co-operative processor and commodity producer owned by farmers and a separate company to produce and promote value-added products.
The brands company could be owned by farmers, the processor, the public, a foreign company or a mixture of those.
Woodford said a lack of capital and culture had prevented Fonterra from establishing branded products in markets such as China.
Sales in some southeast Asian markets were growing but at a slower rate than market growth, meaning overall Fonterra was losing market share.
“Give credit to Fonterra for being efficient as a producer of commodities and recognise value-add is a very hard game,” he said.
The co-operative’s fundamental problem was a lack of capital, an issue which had plagued other dairy processors such as Synlait and meat processing co-operative Silver Fern Farms.
Majority-owned by foreign companies, the Canterbury dairy processor Synlait had to look offshore for capital when NZ investors failed to front. It was now majority-owned by offshore investors.
Woodford said growing value-added products was costly and while Fonterra could not raise sufficient fresh capital to fund that push, its balance sheet meant it could not borrow it either.
Regardless, Woodford said Fonterra’s structure would preclude it from shifting to be a producer of value-added products.
He described Fonterra’s performance for the last 10 to 12 years as mediocre, saying its growth had been driven by increased milk production.
To try to fill the void left by a lack of capital, Fonterra had embarked on a hybrid structure, Trading Among Farmers, which he said created competing motivation and tension between supplier shareholders and investors.
“A company like Tatua (Co-operative Dairy Company), everybody’s interest is aligned. The problem with the Fonterra model is that they no longer have an alignment of interests.”
In changes to ENZA’s ownership structure in the 1990s two aligned companies were able to lock up 40% of shares.
Woodford said that block created tension between determining what ENZA paid for fruit and what it paid as a dividend, which ultimately aided the co-operative’s implosion.
“When you get a situation in a co-operative where not everybody’s interests are aligned, then in the long run eventually those tensions bubble over.
“Within Fonterra we clearly have some people who are clearly traditional co-operative people and others who really believe the future is as a corporate.”
In addition to being unable to attract outside capital, Fonterra lacked the entrepreneurial culture to grasp opportunities.
Its culture was consistent with being an efficient commodity producer, he said.
Woodford was part of a delegation to China in 2007 where he observed the potential of UHT milk and urged Fonterra to grasp the opportunity.
It didn’t do that because the board was unhappy with financial projections, he said.
But, precise forecasts were never precise, he added.
“Entrepreneurial opportunities never stack up in advance. They are based on vision and opportunities.”
The UHT market has grown to be very significant but is dominated by other dairy producers.
Equally, Fonterra and many other NZ food producing companies had failed to predict the rapid rise in China of online buying.
Woodford said milk powder delivered to a home in China sold for 99 Renminbi (RMB) compared to the same product in a store which sold for 300 RMB.
He also believed Fonterra’s focus on its Chicago special ingredients laboratory had diverted its focus off countering the massive expansion of the US dairy industry, with that extra milk now flowing around the world depressing prices.
“They got that wrong as well.
“Entrepreneurial opportunities never stack up in advance. They are based on vision and opportunities.”
“It wasn’t that there weren’t people in Fonterra doing analysis but the overall culture of an organisation such as this is those ideas never come through.”
Under Craig Norgate’s leadership Fonterra lacked discipline but he believed it would have had the perception to grasp opportunities.
Andrew Ferrier installed more discipline and structure but it stifled out the flow of initiatives.
“When people came up with a position or ideas for the future, it never got through the system.”
He said moving to value-added production was expensive and required capital but it also required a culture which Fonterra did not have. That was why he advocates a separate entity solely charged with targeting that market.
Whether his two-company model or another structure was the answer should be the subject of a debate by Fonterra shareholders, the Government and the wider farming sector.
But it needed an intelligent debate based on facts such as the cost of added-value production and the reality that New Zealanders had previously been reluctant to bankroll such investments.
“At Government level and within bureaucracy in Wellington there is great concern as to how we are going to move up to a higher level of value-add and increase export earnings.”
NZ’s dairy processing sector was unbalanced, dominated by Fonterra then a myriad of companies too small to tackle a market like China.
His proposal had failed to gain traction so far but issues facing Fonterra’s structure needed to be addressed both for shareholders and the country which aimed to double exports by 2025.
“The idea of business as usual doubling exports by 2025? It’s not going to occur.”
