Clearly, given the gap in performance over the past four to five years something had to change but it will be a sad day for farmers on the West Coast if their only choice is for the co-op’s ownership to move into someone else’s hands.
If this occurs then responsibility for the fortunes of these farmers clearly transfers to the 10,000 farming families who own Fonterra because, for the next 10 years, the milk price Westland farmers will receive will be pegged to Fonterra’s farmgate milk price.
This further amplifies the reality that Fonterra farmers are not only guardians for their own co-op but are also guardians for the entire New Zealand dairy industry.
As the largest co-op and through its transparent milk price regime Fonterra sets the base milk price for the entire industry.
Failure as farmers to recognise this will result in ultimate failure for this industry over the longer term if we continue to allow industry fragmentation.
This isn’t on my part being anti competition or xenophobic to overseas investment.
It is merely recognising the reality of the situation we will ultimately find ourselves in if we choose this path.
There are many case studies in history that show this around the world in many sectors outside dairy.
Competition leads firstly to overcapacity and in the short term over-paying for milk.
This leads to poor return on investment for the processor, which translates to lack of investment for the future, which leads to players dropping out which corrects the overcapacity and results in the appearance of a key player that determines the milk price paid.
It’s imperative that key player is a co-operative processor owned by its supplying farmers if that price is going to reflect the full value of our milk.
Co-operatives are price makers not price takers – they maximise the price paid to their farmer suppliers for their milk.
Corporate processors on the other hand will always seek to maximise their return on investment in processing.
The easiest way to do that is to pay the least amount possible for milk.
We, as farmers, often talk with pride about our role as guardians of the land and that we are merely caretakers for the next generation. As guardians of the land we take care of the land so it takes care of us.
This must extend beyond the land to caretakers of the industry that supports the land because failure to look after the industry that supports the land gives no stable future for the next generation to continue.
Our forefathers have provided us this opportunity for close to 150 years so it’s imperative we do the same.
The Westland situation also highlights that the co-op structure alone doesn’t protect its shareholders.
As co-ops we operate in the commercial world and the expectations of shareholders of a co-op are the same as shareholders of any other company. Clarity around strategy, an appropriate capital structure, strong governance and management capably executing strategy to deliver sustainable returns are all as important as having the right culture to continually challenge the status quo and having the courage and agility to change tack when needed.
Fonterra, as a co-op, is at that point in time where we need to take a close look at ourselves, take stock of where we are at and continue to evolve because, clearly, the status quo won’t suffice.
The milk price model delivers us an internationally competitive and transparent milk price but the strategy needs to evolve and performance must lift to ensure sustainable returns on our invested capital over time.
There has been a shift in culture to create the environment to challenge the status quo to ensure we get this right moving forward.
But, in my view, there is more we as farmers can do.
The landscape we operate in is changing rapidly, compliance and standards are lifting because of societal and consumer demands and to keep ahead of this the imperative to create maximum value from what we do has never been greater.
The most undervalued component of what we do comes naturally to us every day.
As I scan the world we are the only country producing milk naturally off the grass curve at scale, with the lowest footprint.
But we have yet to realise the real value of this.
This is the primary attraction for investment in dairy in this country yet we, by selling ourselves down the road to corporate processors, are gifting this provenance to them for no reward beyond the commodity price for milk.
This, in my view, is a travesty and lost opportunity as an industry.
We must do more in this space and it starts on farms.
We will only be as good as and attract the value of the lowest performing farmer – and frankly that is not good enough.
If we are serious about our role as guardians of our land and our industry then some need to lift their game. Failure to do so is detraction in value creation for us all.
It’s time we all reflected on what we want for ourselves, our children and grandchildren.
It’s time to save us from ourselves and start to value what we have.
It’s time to recognise the responsibility we have to ensure the continuation of a strong co-op model in New Zealand as it is the only model that will look after the long-term interests of our families and communities and allow us to be true to who we are as guardians of the land.
The future’s in our hands, let’s take this responsibility seriously.
