No future in loss-making businesses

He says shareholders feel for people affected by closure of assets but he says the writing had been on the wall for its struggling Australian business.

“Thankfully we have a board that can make those tough decisions otherwise it will be difficult for all farmer shareholders to come out of the hole we are in right now,” he told Dairy News.

Fonterra last week announced it was closing its Dennington milk plant in Australia, leaving 98 people without jobs.

The co-op is commencing a strategic review of two wholly owned farm hubs in China and reviewing its joint venture partnership with Nestle in Brazil -- Dairy Partners Americas (DPA) Brazil.

Fonterra chief excutive Miles Hurrell says China remains a key market for Fonterra.

“We have contributed to China’s dairy industry by developing high quality model farms and showing there is a valuable opportunity for fresh milk in China’s consumer market, and this continues to be an attractive prospect. 

“However, this does not necessarily mean that we need to continue to have large amounts of capital tied up in farming hubs.”

The two hubs milk 31,000 cows. Fonterra has spent about $1 billion setting up the farms but very little profit has flowed back to farmer shareholders.

Langford says the farms were set up to get market access into China and not just to make a profit.

“While it hasn’t been overly profitable it has allowed us market access,” he says. 

“Having said that we cannot keep a loss making asset. The bottom line is that Fonterra cannot keep running unprofitable businesses.”

Should Fonterra decide to sell the China Farms, it would still have a milk hub it jointly owns with listed company Abbot Laboratories. Hurrell says this will allow Fonterra to participate in the lucrative fresh milk market in China.

On Fonterra’s DPA business in Brazil, Hurrell says a decision will be made by the end of this year. The joint venture distributes chilled dairy products throughout Brazil.

The Dennington plant in Victoria is at least 100 years old and considered unviable. Fonterra has been in talks with staff at the plant.

“The Australian ingredients business continues to feel the impact of the drought and other significant changes that mean there is excess manufacturing capacity in the Australian dairy industry,” says Hurrell. 

“This is not a one-off for this season, it’s the new norm for the Australian dairy industry and we need to adapt. 

“We need to get the most value from every drop of our farmers’ milk and, with the reduced milk pool in Australia, we must put it into our highest returning products and most efficient assets. Dennington is over 100 years old and not viable in a low-milk pool environment.”