Friday, March 29, 2024

ALTERNATIVE VIEW: Fonterra reset must have honesty

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I’ve been following the excellent articles on Fonterra in Farmers Weekly.
Farmers will get a measurement statement in June and then will have until December 1 to comply with the new standard for the 2023-24 season.
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It would be safe to assume the future of our largest company and the cornerstone of our dairy industry is somewhat precarious if the share price is anything to go by.

It launched on the NZX at $5.50 and went to $8. At the time of writing it was $3.76 down from $5.15 a year ago.

In a period when the NZX had considerable growth Fonterra shares dropped more than 25% and that reflects the capital value of the company.

It isn’t a good signal, especially as the malaise is occurring at a time when it is unlikely to be farmers selling their shares, more corporate NZ.

That tells me the corporate sector isn’t convinced about the direction of Fonterra, can’t see a future for the dairy industry or a combination of the two.

Forsyth Barr analysis says it is difficult to gain confidence in the near-term outlook for Fonterra.

Fonterra earnings have been downgraded, again, from $20,109 million to $18,761m. Next year the earnings downgrade goes from $20,508m to $19,969m.

The reality for Fonterra’s farmer shareholders is they are an average of $300,000 worse off because of the share price decline over the last two years.

In addition, when Fonterra was launched it had 95% of the milk supply.

It is now just 81% and falling.

There has been considerable commentary on the state of Fonterra including from economist Peter Fraser that Westland Milk sale overseas is a dress rehearsal for the main act of selling Fonterra to foreigners.

I sincerely hope not.

We’ve heard Fonterra needs to chop the milk price to provide the co-operative with capital. I think that’s sensible.

That has been totally rejected by the co-op, which I found slightly bizarre.

For the record I’m not wildly pessimistic about Fonterra’s future though I am concerned.

Yes, it needs to reduce debt and considerably so and the international dairy market is a volatile, highly competitive place.

My view of Fonterra and its problems sits firmly with previous board and management decisions.

It has been all the bad decisions made in the past along with a cavalier approach by the board.

The issue is with the co-op’s super massive, gold-plated spin machine that lets it gild the lily while hiding the truth.

I’d accuse it of being dishonest to its farmer shareholders and why it was supported at management and board level is surprising.

So that’s in the past. My belief is anyone who made decisions to invest in Venezuela, establish China Farms and the ridiculously stupid investment in Beingmate has absolutely no place in the organisation.

Considering the board there are directors, appointed and elected, who were part of the organisation back then.

There are quite a few of the Shareholders Council who were presumably overseeing the Fonterra board when the decisions on China Farms and Beingmate were being made.

Fonterra threw $750m at Beingmate in one of the biggest, most lavish and dishonest public relations campaigns seen outside of politics.

Farmers were told Beingmate had 80,000 flagship stores, which didn’t exist.

Then after the Sanlu debacle Fonterra spent $1 billion on China Farms, which aren’t worth anything like that now.

So Fonterra needs to change.

It was with some disappointment that I read a letter to shareholders dated July 8 talking about forthcoming Fonterra board elections.

It was not completed by an independent organisation but the board and the Shareholders Council, both interested parties.

I’d further argue the descriptions Independently Assessed Candidates and Non-assessed Candidates are aimed at stacking the deck.

It obviously hasn’t got through the heads of those at Fonterra Towers; including the Shareholders Council, that two of the three who were elected last election did not play the silly game of the selection process.

I’d further suggest that if Peter McBride didn’t go through the process he would still have been elected onto the board.

So my thoughts on Fonterra’s future.

Get out of all offshore investments and partnerships, except possibly Australia. Why is Fonterra in South America?

Close all offices around the world.

Employ locals in Asia.

Get rid of the army of consultants and analysts. 

Lower the milk price and hold capital.

Focus on manufacturing.

Leave it to farmer shareholders to make the decision regarding the suitability of board candidates.

Get rid of the millstone that is the Fonterra Shareholders Council.

I’d like to see a cost-benefit analysis of that organisation and can’t see how it has added a cent to farmer returns.

Finally, be honest with farmer shareholders and tell it like it is without all the expensive and over the top bluff, bluster and spin.

Dairy farmers are intelligent people. If they’re given solid, factual information they are more than capable of making their own decisions.

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