And it is indulging in the sort of behaviour that led to the downfall and eventual sale of Australian co-op Murray Goulburn.
The first loss in Fonterra’s 17-year history was confirmed after months of rumours and anguish and the reaction was predictably one of concern, the said.
However, the analysis is mostly misguided.
“Why did the loss emerge?
“One simple reason, Fonterra paid its suppliers, importantly our dairy farmers, too much for their milk solids. Period.
“For too long Fonterra has chosen to ignore the structural changes associated with supply in global dairy markets begun in 2014-15 with the removal of quotas in Europe,” Gow, Massey’s director of business innovation and strategy, and Lockhart, a business and management lecturer with expertise in strategic performance, corporate failures and governance, said.
That coincided with increasingly cheaper feedstuffs and policy changes in the United States while a number of markets, and particularly China, opened themselves to greater competition.
“European and US farmers behaved entirely predictably and increased production.”
The world is now awash with milk and much of it can be sold only on export markets Fonterra traditionally dominated as the sole provider.
However, that no longer holds.
“Fonterra has become primarily a provider of advanced commodities while others have increasingly captured the top-end, speciality ingredients and branded product markets.
“The result is a stubborn market, reflected in near static or declining Global Dairy Trade auction results with a global market price that now translates into a $5.50 to $6 payout, not $6.70.”
So having frozen in the face of market adversity from January Fonterra stripped dividends from its shareholders and did its best to protect retro payments, especially for the benefit of sharemilkers this season.
The directors focused on protecting domestic suppliers, both farmers and sharemilkers, while penalising the dividends to shareholders and adversely affected the company’s balance sheet and external investability.
“This same behaviour emerged two years ago in Australia when Murray Goulburn and Fonterra played a game of chicken, in which MG yielded first, only then resulting in a decrease of the Australian milksolids price to a sustainable level.
“Had Fonterra adjusted last season’s milksolids’ price in January or earlier when market indicators again began signalling excess supply their balance sheet would be stronger now.
“As for this season’s price, quite where $6.75 comes from requires an explanation – something more sophisticated than the exchange rate being less than US60c or butter prices being too high.
“The rest of the problems, such as Danone, Beingmate, a grossly overpaid chief executive (departing chief executive Theo Spierings earned $8m this year) and continued investment in first stage processing capacity onshore, while important, are essentially red hearings, diverting attention from the underlying root cause – building a robust, conservative, and resilient milk pricing model that farmers and bankers can trust and against which can make long term investments.
“Hopefully, last week’s results were a reflection of the past.
“Over the past month Fonterra has gained a new board and, while acting, a new chief executive.
“They now need to rebuild and ensure Fonterra is a robust and prudently managed and governed NZ co-operative capable of acting as the industry-competitive yardstick in setting fair on-farm milk prices and corporate performance against which all other dairy companies must compete and be compared,” they said.
The pair are thus expecting a significant reduction in this season’s farmgate milk price.
