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 co-op last month announced a 50c increase in its 2016-17 farmgate milk price, lifting it to $5.25/kgMS. Normally farmers get an advance payment – about 70% of the forecast price – then a final payment after the end of the season.
But Fonterra chairman John Wilson says all of the 50c increase has been passed to farmers as an advance.
“This has been done for the first time; it reflects our co-op’s strong balance sheet and acknowledgment of the tough times our farmers are facing out there,” he told Rural News.
Last week, Fonterra directors, including Wilson, held about 45 shareholder meetings to discuss the annual results.
He says farmers appreciate Fonterra’s net profit jumping 65% to $834 million, “but we realise things are difficult on farms right now…. Fonterra has responded by building a stronger balance sheet and getting cash to farmers quicker than we normally do.”
Earlier this year, Fonterra lifted the advance rate and brought forward its dividend payment. Wilson says it’s pleasing to hear farmers appreciate the work the co-op is doing; more needs to be done, he adds.
He says Fonterra’s rural service subsidiary Farm Source is also helping farmers, using scale to buy goods cheaper and passing those savings to farmers. Under Farm Source’s rewards programme, farmers accumulate ‘eligible spend dollars’ -- helpful for sharemilkers and young farmers. It also offers extended credit on farm purchases.
Wilson says Fonterra has been focusing on its balance sheet for three years, working hard to return every possible cent of value back to farmers.
“Our business strategy is serving us well. We are moving more milk into higher-returning consumer and foodservice products while securing sustainable ingredients margins over the GlobalDairyTrade benchmarks, especially in specialty ingredients and service offerings.
“Increased earnings and continuing financial discipline have increased the return on capital and strengthened our balance sheet by significantly reducing debt.”
Fonterra’s milk supply over the past five years has grown at an average of 5% annually and the co-op has built more plant to process the extra milk. More efficient processing has shaved costs by 8%.
