That loss included a $232m payment to Danone and a $439m write-down of Beingmate. At the time Fonterra told us its business performance must improve.
This year the loss is $605m from an asset write-down of $819m.
What is more concerning is though milk collection was slightly up sales revenue was down 2% and capital expenditure by 30%.
The ongoing problem for Fonterra is debt. Of a net debt of $6 billion I’d suggest the total debt is nearing $11b. With a billion about to come off it’s still huge.
While I applaud trying to sell the dog that is Beingmate, finding a buyer will be difficult.
Fonterra’s strategy of focusing on world class dairy ingredients is sound.
It should replace the misguided strategy of investing around the world.
The annual report is too much motherhood and apple pie for me. I thought investing in “non-dairy where it made sense” was loopy and $9m for governance is excessive.
The problems Fonterra now suffers are the result of past decisions. The co-op needs to analyse those decisions, who made them and why.
The quote about those not learning from history being doomed to repeat it should provide a salutary lesson for Fonterra.
For example, where were the auditors when all the mistakes of Beingmate, China Farms and South America were being made? I suggest PWC was missing in action.
Fonterra’s approach to farmer shareholders involved the most expensive spin budget in NZ. That has been partly cauterised but needs more.
Its approach to the media was jackbooted. For example, when I wrote questioning the investments in Beingmate and China Farms I was roundly criticised, told due diligence was done at both senior management and board levels and they knew more than me, even though my information came from China.
I believe those directors and senior management need naming and shaming.
The much vaunted Velocity restructuring did, according to the Commerce Commission, put up costs while not achieving savings.
From 2012 when Velocity was launched Fonterra employed 17,000 staff. In 2018 that increased to 22,300 on a declining milk pool. That tells me the board and senior management were asleep at the wheel.
The Shareholders’ Council’s job is to scrutinise all the investments Fonterra makes and obviously it didn’t. It also oversaw Velocity. It just accepted the spin without question.
Critics claim Fonterra’s problems are the result of its co-operative structure.
If a corporate fails the leadership is blamed. If a co-operative fails the problem is the same – bad leadership.
I accept there are problems with co-operatives when it comes to capital structure but Tatua, Farmlands, Ravensdown and Ballance handle those issues.
The core problem goes back to the misguided Trading Among Farmers, which gave birth to the Fonterra Shareholders Fund.
Fonterra shifted the redemption risk from the co-operative to its farmer shareholders. It also enabled Fonterra to leverage its balance sheet, which it did to the tune of more than $2b.
The bulk of that money wasn’t reinvested in the co-op but wasted on Beingmate, China Farms, South America and Australia. There is little to show for that now.
Surprisingly, no-one has been held accountable.
I also believe the board needs reform.
There are 11 members with four appointed and seven elected. They appoint the chairman.
I’d like to see appointed member numbers cut and farmer members increased.
I’ve read Fonterra chairman John Monaghan might stand down next year and that there’s a process in place to appoint a successor.
I humbly suggest the time to step down is now and it isn’t for the departing chairman to appoint a successor.
The good news is with the appalling share price farmers won’t want to realise a substantial loss by selling their shares.
Suppliers won’t be leaving in droves as many would like.
That gives Fonterra a chance to change.
For a start, the culture needs to change with the spin machine stopped.
Dairy farmers are intelligent people who can be spoken to directly.
The board must change to having more farmer directors with a new chairman.
The board needs a lot more transparency and the Shareholders’ Council should be nuked. It has achieved nothing.
If those reforms do occur I can see a bright Fonterra.
The financial news is all bad now but that is because of decisions made in the past. My view is the people involved in those decisions have no place in Fonterra or indeed in any senior industry role.
The simple answer is for farmers to take back control of their co-operative.
