Mind you, I should be frightened of criticising Fonterra if the reaction to comments by Regional Development Minister Shane Jones is anything to go by.
While Jones is an orator and uses language I wouldn’t, he has a BA and Master of Public Administration from Auckland University and was awarded a Harkness Fellowship to study at Harvard. He has also been associate trade minister.
He is entitled to his view.
That view encouraged some asinine comments from Fonterra suppliers, mainly around the fact the Government and Shane Jones should butt out of farm business and one of the more stupid statements was the Government should get their sticky fingers out of the dairy industry.
There are two issues with those ridiculous statements. The first is that governments put considerable resources into supporting primary industries and that includes dairy.
For example, what would happen if the Government said to the dairy industry “You brought Mycoplasma bovis into NZ – fix it”.
What if the Government got out of biosecurity, roading, infrastructure, trade agreements and research – all vital to the dairy industry?
The second reason is the statements by dairy farmers came across as arrogant, party political and precious to all the non-dairy farmers, the vast majority of New Zealand.
Considering the facts behind Jones’ statements I am aware of a strong anti-Labour push by the dairy industry before the election with suspicion Fonterra was part of that.
I am also aware of frustration in Government circles about Fonterra’s attitude to the new administration.
All of that isn’t very smart considering the Dairy Industry Restructuring Act, DIRA, is up for review.
Another problem I have is that Jones isn’t saying anything new.
In late May Fonterra foundation director Harry Bayliss went public on a letter he sent to all Fonterra directors on March 31.
In it he claimed Fonterra had consistently underperformed over the last 10 years. He believes the real issue is the governance culture set by chairman John Wilson, which manifests itself in a lack of strategic leadership by the board.
He added there is a widespread and growing lack of confidence among shareholders, noteholders and the wider business community in Fonterra’s future.
They are damning statements from a highly respected dairy industry leader.
Fonterra has many other problems but no-one is taking responsibility.
As I’ve written on previous occasions the investments in China are a dog. Some commentators are suggesting the loss there could be a billion dollars. I think they could be even greater than that.
One reason, aside from the Beingmate fiasco, is that milk production in China is expensive.
According to the ANZ bank, Chinese domestic milk price is 10% to 20% higher than international prices and there is no future in that.
In NZ it costs US$30-34 to produce 100kg milk equivalents. In China the cost is $US50-60 – almost double.
In Farmers Weekly at the end of May the highly respected corporate finance and economic advisers TDB Advisory said “It is not clear that Fonterra has created value for its farmer shareholders and the NZ economy”. They went on to suggest Fonterra’s returns to farmers and shareholders are behind those of its competitors.
So don’t tell either Jones or me that we should all leave the dairy industry in the shape of Fonterra alone. It is verging on being a basket case which will have a massive effect not only on our biggest industry but the entire economy.
In fact, in his post-Cabinet media conference just last week Deputy Prime Minister Winston Peters told us Fonterra’s shortcomings are costing the economy $2 billion and that is everyone’s business.
The greatest iniquity, I believe, is next year’s projected price of $7/kg and while I’d be happy for dairy farmers to receive $8 the price needs to be sustainable.
Analysts I spoke to had the projected price at between $6.40 and $6.68. The milk price futures market is below the Fonterra projection, which I find telling.
ANZ’s medium term view is $5.75 to $6.75.
The Commerce Commission has said the $7 price is too high and Fonterra is underestimating risk.
So, why would it do that, other than to give shareholders a warm feeling about the co-op and its board. Farmers should make the most of it as my view is that warm feeling won’t last.
The additional issue is that with a high milk payout the share dividend is reduced.
Fonterra shares trading on the stock exchange have dropped from $5.75 to $5.04 in a month with First NZ Capital changing its category from neutral to underperform.
That is not good news for Fonterra.
