Five things you need to know about Fonterra

05/08/2015

On Friday Fonterra’s Director’s will announce what the milk pay-out for the current season will be.

Dairy auction prices have been very low and Farmers are braced for a poor pay day. Many farms will be unprofitable this year.

After a big round of staff redundancies there is considerable interest in whether the Directors will signal changes to the way Fonterra operates.

Leading up to this, here are five things you need to know about Fonterra put together by RadioLIVE producer Mitch Harris:

1. Fonterra was formed in 2001 from the merger of the two largest co-operatives, NZ Dairy Group and Kiwi Co-operative Dairies. It also had the old Dairy Board folded into it which had been the marketing and export agent for all the Co-ops. The merger was originally turned down by the Commerce Commission and it took special government legislation to allow for the merger and the deregulation of the Dairy Board. The Tatua and Westland Co-ops chose to remain independent. Fonterra’s core business consists of exporting dairy products under the NZMP brand. It has a number of value added dairy products under the banner of Fonterra brands. It also has several subsidies and joint-venture companies operating around the world. The aim was to build a dairy company with the size and muscle to compete with the likes of Nestle and Danone.

2. In September 2009 the Board announced a process to revamp Fonterra’s capital structure. Called “Trading Among Farmers” only Farmers could now own shares and meant the Co-operative would no longer have to issue or redeem shares at a price determined by an independent valuation process. Instead, farmers would buy or sell shares amongst themselves at market-prices through a farmer-only share trading market. This had the effect of making Fonterra shares permanent capital, providing the co-operative with more confidence to invest in long-term projects without the worry that some of its share capital might be needed to fund redemptions in future years.

3. In 2008 one of the biggest dairy companies in China, the Sanlu Group, 43% owned by Fonterra, recalled more than ten thousand tonnes of infant formula after a food safety scandal involving the criminal contamination of its raw milk supply with melamine. An estimated 300,000 Chinese babies were affected and six died after developing kidney problems. Chief executive Andrew Ferrier was criticised for sitting on the information too long, taking a month to inform the government. In September 2012 traces of DCD, a fertiliser, was found in some milk samples. Fonterra, Federated Farmers and the Government moved quickly to reassure the public and overseas buyers there was no risk to health.

4. Dairy prices started to fall sharply last year and analysts believe it reflects a structural change in the world’s dairy markets rather than just a cyclical downturn. China has changed its focus on production for domestic consumption, the European Union has removed production quotas and farmers in the US are chasing a bigger share of the export market. There is much more competition, particularly in the premium end of the market where Fonterra competes. The challenge is whether the over-capacity in NZ dairy processing can be converted to value added products.

5. In the 2013/14 season the farmgate milk price hit a record of $8.40. This season it looks as if the payout will be in the low $4 range. Farmers and investors are disappointed that the dividend has not partially offset the low milk price as it was expected to do. Questions are being asked about Fonterra’s structure and strategy. There is a tsunami of milk at the moment and by law Fonterra has to take all the milk shareholder farmers can supply. It has spent 100’s of millions of dollars on stainless steel to handle the supply and some wonder if this is sustainable. Others question whether Fonterra’s world domination strategy where it gets involved in overseas “milk pools” is the way to go, claiming Fonterra should be concentrating on the superior quality of NZ product. There are also questions about Fonterra’s structure. Should the company be split in two? One business to concentrate on bulk milk collection and processing and the other on added-value products. It is hoped that this approach will see a greater proportion of value-added, branded products less dependent on the commodity price.

source: data archive