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.
The first insight is our global operating context, which continues to change.
And the second is risk - how we manage risk on your behalf and the way we treat your capital.
We are and always will be a New Zealand farmer-owned co-op, but we are also a global export business.
When considering our strategy, we need to challenge ourselves to look beyond the back fence, and past the here and now.
The world is changing. We are moving out of an era of trade liberalisation and co-operation and into a world that is more expensive, competitive and volatile. Expectations are evolving and New Zealand milk is becoming scarce.
Customers are increasingly calling on us to partner with them to improve their sustainability and innovation capabilities. And there's even more focus on sustainability from banks, regulators, and from a market access perspective.
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The cost of capital has increased, and many industries - including agriculture and our bankers - face higher capital requirements.
In this new global context, Fonterra also faces increasing competition for both milk and capital here at home.
That all sounds inherently negative, and it's certainly not without risk, but the opportunity for us still absolutely exists. Demand for dairy continues to grow and, in a rapidly changing world, we are uniquely positioned to capitalise on any shifts. We have high quality New Zealand milk which is becoming more scarce.
And most critically, we have scale. That gives us great confidence in the future of our co-op. Success will come by focusing on our comparative advantages, simplifying the business to meet that and then aligning our peope to achieve that singular vision.
The second insight we consider is risk. Fonterra is an extension of your farming businesses. It exists to provide certainty and manage risk on your behalf, while also maximising returns via a competitive and sustainable milk price, and a respectable return on the capital you invest in the co-op.
We govern Fonterra through a set of financial settings and a risk appetite that is now more appropriately aligned to that of our farmers owners. As you've seen from our recent financial performance, this approach has served us well in recent years and has set a strong platform for this next phase in Fonterra's evolution. Fonterra adds value for all dairy farmers by creating stability for the industry and de-risking the on-farm investment.
You and your bank manager know that your milk will be collected and you'll be paid on time each month - not every industry can say that.
We add value through the milk price, delivering a return on the $50 billion invested in on-farm capital. And by generating a return on the $12 billion worth of capital you have invested in the co-op.
