David Hargreaves says Fonterra needs to find the right balance in tackling its many problems, while juggling the demands of a difficult global dairy backdrop

By David Hargreaves

Time flies when you are having fun, so the saying goes. But it can also go pretty darn quickly too when you are under the pump and needing to make decisions.

This may be how the high-ups at Fonterra are feeling, with already more than two months having elapsed since the co-operative, along with announcing an awful result, put various things up for review - including the disastrous investment in  China's Beingmate Baby and Child Food Co.

If the corporate-related issues were not bad enough the farming and production side of matters is not playing ball either, which is all piling more pressure on.

Statistics New Zealand reported on Monday that dairy farmers are getting a lower payout for milk but their costs are rising for goods and services like feed, fuel, and freight.

Stats NZ said the prices received by dairy farmers fell 4.8% in the September 2018 quarter, due to a lower farm-gate milk price. In contrast, their costs rose 1.5%, mainly influenced by higher prices for animal feed, fuel, and freight.

Fingers crossed

There would be fingers crossed that the results for this week's GlobalDairyTrade auction, which will be known on Wednesday, are not too bad. Continued falls in prices may put further pressure on for another cut in the forecast farm gate milk price for this season. At the moment, as of October, the forecast has now moved to a range of $6.25 to $6.50 per kilogram of milk solids.

If auction prices stay soggy and production remains strong then there's every possibility that the next review of the milk price - due by mid-December - will again have to trim that price.

In the meantime, farmer shareholders have delivered a sharp, backhanded slap to the Fonterra board by turning their noses up at the three anointed new director appointments (well, one - Peter McBride - made it) and installing independently nominated Leonie Guiney, who served as a director from 2014-17 but was effectively booted off the board and was then extraordinarily gagged by Fonterra from talking to the media - giving Fonterra the sort of self-inflicted, PR disaster that PR professionals have nightmares about.

And then there was the independent report prepared for Fonterra's farmer shareholders, which shows that the co-operative had an "opportunity cost" of $2 billion in foregone earnings in its first 17 years of existence. In many respects the report didn't say anything that hadn't been surmised before but it was nevertheless sobering to see the conclusions in all their non-glory.

Taking a little time

So, it is little wonder I guess that the board and management of Fonterra are giving themselves a little time to sort through the review, including the Beingmate investment.

The one time a business can truly be bold when it comes to taking decisions that cost, or more to the point, lose the company money is when the company's had changes at the top. And Fonterra of course has a new chairman and a new (technically still interim - though I wonder if we'll see the 'interim' quietly dropped) CEO. 

At such times a company can throw the kitchen sink at the previous management decisions made by taking big writedowns and referring broadly to 'legacy issues' as they talk of putting 'past problems' behind them and moving to better times. 

This is Fonterra's chance for such an exercise. But it will need to get it right. Maybe this is its one shot. 

And it will need to strike the balance between taking a prudent amount of time over the review and the decisions to be made - and for demonstrating the stomach for and ability to take, firm action.

Nothing on Beingmate

In that regard I'm personally a little surprised we haven't seen anything so far on the Beingmate investment. It would seem on the face of it a very quick and easy 'win' for the new management to jettison this investment and to move on.

The fact that this hasn't already happened could just be down to a very thorough approach - or it could indicate that getting out of Beingmate might not be simple at all.

The one thing the new top team at Fonterra would not need is a protracted and possibly litigious exit from Beingmate. Given how little is really known about what was involved in the investment in the first place and what promises were made at the time, it's not beyond the bounds of possibility that exiting this investment will be slightly more difficult than just saying: "We're off. Thanks for the memories."

My other thought on the current review process is that while, yes, the company certainly should exit bad investments and strategies, I do hope one thing is borne in mind. And that is this: Just because you've made a mess of doing something, doesn't necessarily mean the original general IDEA was wrong. 

All I'm saying is it would be a shame indeed if the concept of 'value add' was somehow lost completely because it hasn't been done right. It is easy and very human to assume that if something goes wrong it has gone wrong because it was the wrong thing to do. Sometimes it's harder to accept that the basic concept is a valid one - but the way in which it was implemented was all wrong. 

...but some back to basics will be good

Having said that, I wouldn't want people to think either that I'm against a kind of 'back to basics' approach. Personally I would start - if it could be done without being ruinously expensive - by relocating the Fonterra head office from Auckland to Hamilton where it would then sit in a much more natural 'home'. There's such a thing of reminding yourself of your roots. And for Fonterra abandoning the idea of being an Auckland city slicker might not be a bad idea.

There is much to do for Fonterra to garner confidence among farmer shareholders and the wider public (who do, we should never forget, also have a very big vested interest in the fortunes of Fonterra).

What we need to see is a number of constructive announcements over the next 12 months highlighting a new direction for Fonterra and how this is to be achieved.

The problems are so large, I would say, that it would be a big mistake to attempt the 'big bang' approach of saying: 'Here is the new strategy, this is it.' In a sense this is going to need to be show not tell. Show the people the culture and thinking of the organisation really is changing. Actions. Not words.

In the meantime, between the corporate challenges Fonterra faces and the on-the-farm challenges of a global dairy market that's looking pretty iffy, these will be challenging times. 

I hope Fonterra will be up to the challenge. But to be honest I fear not. And I still think the Government needs to be thinking what plan b might be if Fonterra doesn't demonstrate it can get its own house properly in order.