What Would Synlait Be Worth to Fonterra or a2 Milk?
Speculation of a possible joint move by Fonterra and a2 Milk to buy Synlait raises a much bigger strategic question, says agribusiness expert Dr Nic Lees.
Meanwhile, there’s not a lot of inventory of milk products globally and buyers will have to come back, says Fonterra’s chief executive Theo Spierings.
He can’t promise that will happen in the next month but it will happen at some stage, Spierings said in an interview with Radio NZ last week.
He said a business plan will go to the board this week, then to farmers. His management team is also heading an ongoing, wider business plan that will lead to “trimmed sails and an aligned crew” and “we will win this race”.
The ongoing review of Fonterra begun in December is led by Fonterra’s own talent with outside consultants with a global view, he said.
Fonterra needs more people selling in market and fewer people in support and group functions. That would have “consequences” but was part of trimming the sails.
Spierings was asked whether the co-op’s marketing took full advantage of the appeal of New Zealand’s pasture based systems. He said Fonterra’s milk commands a 20-30% premium in markets because of its appeal, but more of that is needed.
Spierings says the co-op’s review is looking at everything. In the last four years Fonterra has increased it milk production by 22%, 80% of which came from within New Zealand and 20% from outside. Fonterra had a 10-12% return on capital from its global business; if it could run that at 13% it would have a very strong performing business.
Spierings was questioned on whether farmers were pushed too hard to boost production, raising their cost structure, and whether the focus should have been on value added premium products.
But Spierings said they require scale to “have a ticket to the game”. Volume and value must both be boosted.
In this financial year 26% of milksolids were sold on GDT, an increase of 40%; that should lead to a stronger milk price, he said. However China was playing a waiting game, Russia was locked up and the Middle East had geopolitical troubles. Fonterra needs a clear eye and view of the markets because change in Russia or the Middle East can have a big impact, as can weather in production regions.
While he was concerned about demand, Spierings said Europe’s production had only increased about 1% since quotas were lifted and the US was scaling down.
“There’s not a lot of inventory around. People have to come back… the demand will come back. I am not going to say it will lift in the next month but it will come back.”
Meanwhile all the cash Fonterra can find will be assigned to the balance sheet and hopefully will end up in farmers’ hands, Spierings said.
