Fonterra's plan to sell its consumer and associated businesses including brands such as Anchor and Mainland could reap the giant co-operative $3 billion and might lead to farmer shareholders getting a bumper payout of maybe $2 a share. Analysts like it. The sharemarket loves it.
So, why do I feel so disappointed?
The word that keeps coming to mind is 'ambition'. Or more to the point a lack of it.
I don't want to appear churlish. And this whole subject is one with many points and counter points. There's plenty of room for debate on this one.
Nobody would seriously argue with the view that Fonterra has never got the bang for the buck that certainly I think it should have been able to get from running longstanding brands such as Anchor and Mainland.
But what irks me is the implicit thread running through this that says to me, 'oh, we can't do this - so let's get out now and stick to our comfort zone'.
After the woes of around 2019 the management of Fonterra have done a very good job of cleaning up the mess and getting the co-op back on track.
But without wanting to minimise that achievement, it's always seemed to me that the courses of action in cleaning up Fonterra were 'obvious' enough. Debt was too high. It needed bringing down. Sell things. Restructure. Nobody says that's easy, but it's straight forward enough.
The trick for Fonterra was always going to be what came next. Having got things back on an even keel, what was the strategy that would take it forward? Well, the answer seems to be to take more steps back. To move Fonterra more to being simply a commodity supplier.
After the blood noses Fonterra has received over the years, I understand the thinking. And no business is going to fail short term by taking the 'safe' option. But longer term?
Here is a genuine question that I think has a very open answer: If a strategy fails, has it done so because the strategy was wrong, or because you fudged it up? As I indicate in the asking of that, I think that is a question that's actually hard to answer. History is littered with folk who kept doing the same things and expecting different results only to mess up time and again. So the strategy was wrong.
But an opposing point of view is that it can be very difficult - particularly when big business egos are involved - to survey the ruins of a strategy and to pinpoint that 'well, yes, that was actually the right strategy, but we made a mess of it'. Far easier to blame the strategy and turn around and do something else. That's very human.
I don't think that wanting Fonterra to be able to take its product and make it into internationally saleable brands was the wrong idea. Isn't that what the NZ public actually hoped for in 2001 when Fonterra was able to skip through the normal competition rules and be created?
At the heart of Fonterra's travails has always been its capital structure and the inability to easily access new capital.
The big hole Fonterra found itself in during 2019 was due to trying to fund a massive global expansion with a massive amount of debt. That's the proverbial recipe for disaster. Unless you execute such a strategy perfectly and can quickly start generating returns from your investments then struggle city is always going to be the destination. And that strategy was not executed well. A flawed strategy executed badly.
So what about that whole capital thing at Fonterra and the farmer-shareholder desire to maintain control - without the ability to pour in big quantities of money?
Well, was there even now, at this stage, some sort of compromise that could still have been reached between the farmer shareholders' desire to maintain that control and the ability to access greater amounts of fresh money?
In terms of the consumer business, surely it might have been worth at least attempting a plan whereby the consumer brands were put into a new separate business with a majority shareholding held by the Fonterra co-operative, but with access for outside investors. That's right, a new business separate from the co-op, but with access to fresh money.
So, you would have the co-operative exactly as of now running the collection and processing of milk and the ingredients and food service business, while the brands business would be run separately. And with different, brand specialist, management. The farmer shareholders would maintain control of the co-op as now and everything would remain the same. The only difference might be that if the consumer business goes well the dividends the co-op could pick up from investment in the brands company may be more attractive than the dividends that have been seen to this point. Maybe. Yes, maybe the farmers would have been able to have their cream and eat it as well.
I think such a plan would have been worth trying.
I don't ultimately see a great future in just being a supplier of commodities. Look around. It's the end providers of brands that make the money in this world.
By ceding control of the value-added part of your product chain you leave yourself hostage to the global commodity cycles. And to changes in supply, consumption and usage.
Wasn't this the great argument in New Zealand going way back? That we used to simply supply the world with undeveloped commodities and then buy back the developed, finished products from the rest of the world at inflated prices?
I don't think it was wrong of Fonterra to want to run international brands. I think that was a good strategy.
Has Fonterra done it well?
No.
What was really needed was a proper way of working out how to do it well.
What seems to have happened is an acceptance of 'we can't do this'. A lack of ambition.
In the short term, providing a sale of the consumer business does go ahead, then things should be looking pretty solid for Fonterra and its shareholders. No doubt.
But longer term I fear that Fonterra may find itself falling behind overseas competitors that do have ambition and do back themselves.
'Safety first' is a good short term strategy. But long term, being unadventurous can leave you as a sitting duck. What's worse? Failing? Or simply fading into insignificance?
So, yes, I'm disappointed.
18 Comments
the problem with an overall strategy of 'Volume' is that you need a market that can absorb it, otherwise in Fonterra's case, you're just creating fertiliser.
What is difficult is getting markets across the world to want the product at good prices. If you can't do that then you need to develop products they will buy. Clearly as this article indicates, all too hard!
We're in the middle of an economic winter created by central bank policy. This is what silly businesses do. They sell the family jewels to richer companies, owned by rich people. The rich get richer. Remind me who our central bank is working for again?
Fonterra would do well to hold fire for Spring and then see whether this plan is in fact still the best one.
Meanwhile, government can utilize their balance sheet to shift famer debt away from foreign owned banks onto their own balance sheet while giving farmers some reduction in cashflow stress.
Golly! Did I just suggest a NZ development Bank specially for farmers? Just like many other countries around the world then? Must be a dumb idea, ay? Neo-liberalism says leave such things to the market.
Wholeheartedly agree, David.
As the song goes, "I get knocked down. But I get up again." We need to get back to trying. Giving up is for the "also rans". (A nice cut in the OCR with a slight drop in the NZD might be just what our farmers need to stiffen their backbones.)
And there is your ill informed problem. You do not understand the dairy industry dynamics in NZ and voice a perspective that the dairy industry dynamic here is the same as othe countries. And don't get started on producer subsidy equivalents - NZ has the lowest in the OECD.
NZ is close to unique because it is export, not domestic market focused production. Pretty much all other countries that export dairy product, export their domestic market surplus. In NZ, domestic market product is essentially export market surplus. That is a fundamental and critical industry dynamic difference. So comparing Fonterra to other international entities is fundamentally fraught.
Think exports of fresh fruit, meat, dairy, fish and NZ exports close to or more than 90% of production. What other OECD country can you name that operates a dairy sector with that same dynamic?
'Pretty much all other countries that export dairy product, export their domestic market surplus. In NZ, domestic market product is essentially export market surplus'. And if I tell you that those overseas coop's export their market surplus as added value brand products why can't NZ do this?
See what the results are: https://data.oecd.org/trade/trade-in-goods-and-services.htm
Denmark (Arla foods) exports as % of GDP = 70%; Netherlands (Friesland-Campina) exports as % of GDP = 93.8%. Compare that with New Zealand as % of GDP = 24%. In those countries there is a mindset to export value added products. They both have a very small landmass leading to a very high GDP/km2 and have very limited input resources ea less milk. So to remain in business and survive they have to make and sell high added value products
New Zealand's performance is pretty poor and certainly room for improvement but not if we only export products at the lowest margin within their supply chain. If more other countries like China are improving their own dairy, there will be less market for low margin bulk product as Fonterra is trying to migrate to. I wouldn't be surprised if the Gulf States and Saudi Arabia will set up their own dairy herds in airconditioned sheds. They have plenty of money for it.
The big question is obviously what will they do with the proceeds?
The share market is assuming they'll disburse the proceeds but maybe they have another strategy. Would need to be good to trump the returns they were getting.
Edit. Actually , returns would need to trump the returns they would have expected going forward from those companies.
A fair question. I half wonder if the plan is to ditch the consumer brands to clear the air for a full A2 conversion - at the moment they can't really put their weight behind A2 without potentially harming their A1-containing branded products.
Not sure whether they would work with A2 Milk or just use their own weight to study and publicize the benefits of A2 (or rather, the risks of A1). That could be a genuine point of difference for NZ milk and steal a march on the competition.
Sell those brands to A2 for cash and a 50% shareholding. The fact that Fonterra doesnt have an A2 strategy reflects to me an organisation with a lack of strategic thinking - (to hard for people innoculated in an organisation with industrial disease and addicted to stainless steel)
The risk that I see for Fonterra is that future protein supply disruption is more likely to be in the B2B space than in the retail space as it will be easier to replace milk ingredients with lab made alternatives in highly processed food products without the consumer knowing (or even caring for many of them)
Look around. It's the end providers of brands that make the money in this world.
And in my opinion that is the nub of the friction between the farmer cooperative model and the open shareholding corporate model.
I haven't looked into dairy supply chain impacts on farmers, arising when farmer owned cooperatives (single desk sellers) have been dismantled but I have examined those impacts in fruit sectors. And at the farm gate, the farmer, through the loss of scale and market power in the international market (domestic market is fringe), the farmer rapidly transitions from a price maker to a price taker.
Kiwifruit is a great illustrator of farm gate impact of farmer owned cooperative on farm gate income. in the 1980s, Te Puke purportedly had the highest density of millionaires in the world. NZ was selling a sought after, high value product into a grossly undersupplied global market. Then came the planting boom coupled with the unregulated (or little regulated) boom in the number of exporters (ticket clippers). Then in the 1992/93 season international prices for Kiwifruit collapsed. All market risk sheeted back to the grower and at that grower level, the industry was technically bankrupt. The exporters still collected their commissions.
Next came export regulations and ultimately the legislated establishment of Zespri as we know it today. And in November 2022, one orchard sale was recorded at $2,000,000 per canopy hectare. That is the benefit to NZ from the farmer owned cooperative structure for perishable agricultural product from sectors where 90+% of production is destined for export into the highly competitive global marketplace.
To my way of thinking, the farmer owned cooperative model makes it inherently difficult to achieve the high profit margins from consumer products alluded to in that opening quote. Because that division within the cooperative business (Fonterra) cannot source raw ingredients at least cost to secure sustainable supply. The whole purpose of the cooperative is to maximise farm gate value back to the farmer owners of Fonterra. And NZ Inc, particularly the regional economies of NZ need those export generated revenue inflows to sustain them.
So congratulations Fonterra. You have struggled to extract adequate profit from your consumer brands division for a long time now, indeed pre-dating the transition from dairy board days to Fonterra. Keep that focus on maximising return to your farmer shareholder owners. I know that makes it hard for the independent milk processors to maximise profit, because you benchmark farm gate price and they will quickly lose suppliers if their farm gate price is not competitive with yours. All the brouhaha about loss of iconic brands is just noise from an ill informed commentariate who do not grasp that your competition exists way beyond the NZ economic zone, and activity within that zone has essentially been a public service to keep dairy products affordable for Kiwi consumers.
The gist of what Keith Woodford is advocating as long as there is majority Fonterra ownership may have merit. It's complex.
I agree with his conclusions over first Dairy Board, then Fonterra handling the FMCG side of the business. It has never blossomed.
One concern I have is that the priority to maximise farmgate milk price to supplier shareholders is essentially contradictory to how a stand alone FMCG entity would hope to source the ingredients, i.e. at least cost to secure sustainable supply.
I think for the viability of NZ dairy farmers, the farmer supplier shareholder structure needs to be maintained. A separate FMCG entity could threaten that.
Perhaps the kiwi interests that shout loudest about opening Fonterra to non-supplier investment, could form a consortium to buy those brands, keeping the profits in NZ and putting their money where their mouths are.
Tatua is often lauded (irrationally in my opinion) as a great success that Fonterra should emulate. But it only has 101 farmer shareholder suppliers, all located within a 12km radius of the factory. And no plans I know of for a change away from that.
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