29 Calf selection made easy Vol 17 No 35, September 17, 2018
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Fonterra farmers overpaid? Stephen Bell stephen.bell@globalhq.co.nz
M
ISGUIDED analysis has greeted Fonterra’s $196 million loss caused solely by the co-op ignoring market signals to continue high paying high farmgate milk prices to farmers, Massey University academics Professor Hamish Gow and Dr James Lockhart say. And it is indulging in the sort of behaviour that led to the downfall and eventual sale of Australian co-op Murray Goulburn they said. The first loss in Fonterra’s 17year history was confirmed after months of rumours and anguish and the reaction was predictably one of concern, the said. However, the analysis is mostly misguided. “Why did the loss emerge? “One simple reason, Fonterra paid its suppliers, importantly our dairy farmers, too much for their milk solids. Period. “For too long Fonterra has chosen to ignore the structural changes associated with supply in global dairy markets begun in
2014-15 with the removal of quotas in Europe,” Gow, Massey’s director of business innovation and strategy, and Lockhart, a business and management lecturer with expertise in strategic performance, corporate failures and governance, said. That coincided with increasingly cheaper feedstuffs and policy changes in the United States while a number of markets, and particularly China, opened themselves to greater competition. “European and US farmers behaved entirely predictably and increased production.” The world is now awash with milk and much of it can be sold only on export markets Fonterra traditionally dominated as the sole provider. However, that no longer holds. “Fonterra has become primarily a provider of advanced commodities while others have increasingly captured the topend, speciality ingredients and branded product markets. “The result is a stubborn market, reflected in near static or declining Global Dairy Trade auction results with a global market price that now translates
In the red Volume
22.2b LME
Revenue
$20,4b
Normalised EBIT
$902m
Return on Capital1
8.3%
Net profit after tax
-$196m
Earnings per share
24¢
Annual dividend Yield
10¢/share 1.7%
1
Return on Capital (ROC) excludes goodwill, brands and equity accounted investments. Excluding goodwill, brands and equity accounted investments ROC was 8.2%in ingredients and 35.1% in consumer and food service.
into a $5.50 to $6 payout, not $6.70.” So having frozen in the face of market adversity from January Fonterra stripped dividends from its shareholders and did its best to protect retro payments, especially for the benefit of sharemilkers this season. The directors focused on protecting domestic suppliers, both farmers and sharemilkers, while penalising the dividends to shareholders and adversely affected the company’s balance sheet and external investability. “This same behaviour emerged
two years ago in Australia when Murray Goulburn and Fonterra played a game of chicken, in which MG yielded first, only then resulting in a decrease of the Australian milksolids price to a sustainable level. “Had Fonterra adjusted last season’s milksolids’ price in January or earlier when market indicators again began signalling excess supply their balance sheet would be stronger now. “As for this season’s price, quite where $6.75 comes from requires an explanation – something more sophisticated than the exchange
rate being less than US60c or butter prices being too high. “The rest of the problems, such as Danone, Beingmate, a grossly overpaid chief executive (departing chief executive Theo Spierings earned $8m this year) and continued investment in first stage processing capacity onshore, while important, are essentially red hearings, diverting attention from the underlying root cause – building a robust, conservative, and resilient milk pricing model that farmers and bankers can trust and against which can make long term investments. “Hopefully, last week’s results were a reflection of the past. “Over the past month Fonterra has gained a new board and, while acting, a new chief executive. “They now need to rebuild and ensure Fonterra is a robust and prudently managed and governed NZ co-operative capable of acting as the industry-competitive yardstick in setting fair onfarm milk prices and corporate performance against which all other dairy companies must compete and be compared,” they said. The pair are thus expecting a significant reduction in this season’s farmgate milk price.
Fonterra promises to nail its forecasting Hugh Stringleman hugh.stringleman@globalhq.co.nz FONTERRA’S new leadership has issued a more detailed earnings guidance for this financial year, underpinned by divisional forecasts. It has raised the stakes
by also promising the giant dairy processor will meet the expectations of farmershareholders, unit investors, employees and New Zealand. Interim chief executive Miles Hurrell said the co-operative must issue more accurate forecasts, including the potential
opportunities as well as the risks. “We will also be clear on our assumptions so farmers and unit holders know exactly where they stand and can make decisions that are right for them and their businesses.” The forecast earnings guidance
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is 25-35c a share and unit and the milk price prediction has been left unchanged at $6.75/ kg, following the 25c reduction announced two weeks ago. The big ingredients division is forecast to make earnings before interest and tax of $850-$950 million. The value-add consumer
and food service division forecast is $540-$590m. Neither forecast is ambitious but more a restatement of the earnings results of the previous two financial years. That underscores how difficult Continued page 4
“The unit has performed well above our expectations and we’re really happy with the excellent service” ProCool Water customer Mike Smith, Brentworth Dairy Farms
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