Why Fonterra accepted defeat in the dairy aisle
OPINION: Fonterra's sale of its consumer dairy business to Lactalis is a clear sign of the co-operative’s failure to compete in the branded consumer market.
Townshend, who has farming interests in New Zealand, Chile, and the US, says NZ is “very lucky to have Fonterra”.
“Most milk producers around the world would dream of having a Fonterra in their country,” he told Dairy News.
“John Monaghan (new chairman) is a good bloke, as is Miles Hurrell (interim chief executive). With the headwinds Fonterra is dealing with, they need shareholder support.
“One thing is for certain: if Fonterra shareholders do not support and value their company no one else will.”
Townshend notes that while Fonterra does some things very well, it could do many other things better.
But Fonterra’s main task is to provide its NZ supplying shareholders with a world class milk price. With a price in the $6.50 - $7.00/kgMS range, all NZ farmers should be profitable and contented, Townshend says.
“The milk price European farmers are currently receiving is about the long term average; US dairy farmers are receiving milk prices below long term average.
“Fonterra farmers, with milk prices at $6.70 last season and forecast at $7.00 for the current season, are receiving a milk price higher than long term average; Fonterra is delivering what it set out to do.”
Fonterra farmers receiving a base farm gate milk price equal to, or better than other farmers around the globe is an amazing success when considering we produce our milk off a strong seasonal curve, and NZ farmers pocket the $1.00 /kg MS lower cost of production advantage.
Townshend says at one of the farming companies he’s involved in, the first 20 minutes of each board meeting are spent discussing what is happening globally and in NZ in terms of geo-politics, finance and markets supply and demand.
“With a well-informed Irish director connected in by phone, and the company’s US-based chief executive, we have good tentacles and conclude that both, NZ and NZ farmers are well served by Fonterra,” he says.
This company has in the last 15 months bought four NZ farms; all had been supplying Open Country Dairy (OCD) but now supply Fonterra.
“It is a very interesting statistic that over the last two seasons in NZ, 50% of dairy farms sold were supplying OCD, yet only 10% of [all NZ] farms supply OCD.
“The conclusions to be drawn here are that those who go to OCD are perhaps under more financial pressure, or the year-round farming method encouraged by OCD burns out farmers; fighting nature has always been hard.”
Townshend says without Fonterra setting a milk price, there is no way non-cooperative milk processors would be paying what they do.
“They have to pay a milk price to attract milk or face stranded assets,” he says.
“And they will pay no more than they need to pay.
“To expect them to do so has as much logic as farmers willingly paying more for fertiliser or stockfeed than they need to.”
Weathering the storm
Mark Townshend notes that New Zealand companies, including Fonterra, did well in weathering the global financial crisis ten years ago. The dairy industry was invaluable to the NZ economy through that period.
The real test for NZ dairy farmers came in the 2014-15 and 2015-16 seasons when the milk price dropped well below $5/kgMS.
“Farms generally were operating at a $1/kgMS deficit through this two year period.
“Fonterra advanced significant interest free loans to supplying shareholders through that period; I am trying to recall any Fonterra farmer publicly acknowledging their appreciation of support from our co-op.
“It would be reasonable to assume that it saved some farmers from economic ruin. And it probably meant less in unpaid bills to ensure rural servicing industries survived.”
Townshend says Fonterra drives processing efficiency, being world class in this area.
