Fonterra shaves 50c off forecast milk price
Fonterra has dropped its forecast milk price mid-point by 50c as a surge in global milk production is putting downward pressure on commodity prices.
On March 29, 2012 the chief executive, Theo Spierings, explained that “strategy refresh was built on an in-depth look at the co-op’s strengths, social and economic trends as well as underlying projections for a marked increase in global demand for milk”.
“Strong economic and population growth in emerging markets is driving a situation where global demand for milk is forecast to grow by more than 100 billion L by 2020, with New Zealand expected to contribute only 5b L of additional supply by that date,” Spierings said.
Shareholders have been reassured about the strategy at frequent intervals.
On September 25, 2013 the co-operative said it had “continuing confidence in its ‘volume and value’ strategy in its key markets. Looking ahead, prospects for the dairy industry and for Fonterra look positive and its growth ambitions remain unchanged.”
On February 27, 2014 the chairman, John Wilson, said the higher forecast (over $8.00 that year) was good news for farmers and for NZ. “The increase reflects continuing strong demand for milk powders globally.”
Six months later he is on record as saying the decision to maintain the forecast farmgate milk price (at $6.00) reflected the longer term outlook for international prices for dairy.
These statements have underpinned farmer decisions to invest in productivity – high breeding worth cows, supplementary feeding, feed pads and shelters – ensuring environmental compliance and increased resilience during drought and flood.
But now shareholders are being told there is oversupply, and though the current prices are unsustainable, Fonterra is doing everything it can to support farmers. The 50c a share temporary loan is the main initiative.
At the same time we have been assured by Fonterra managing director global ingredients Kelvin Wickham that Fonterra is “doing everything to move powder and other commodity products into higher value contracts and higher margin products,” and that “demand will come back”.
Shareholder confidence is evaporating. Suppliers have voted with their feet and moved to new companies; social media is rife with comments and statements on the Fonterra website such as “nearly all the product offered on GDT this week sold to willing buyers” don’t help confidence rebuild. Who isn’t willing to purchase quality product at a bargain price?
But the suppliers are not happy that Fonterra is selling milk at below costs of production.
Creating a successful future from the current state will take a rethink of the strategy – and that will demand a fresh approach. Shareholders have been promised this in the past by people campaigning to represent their interests on the board, but well-intentioned new directors find themselves constrained once they are part of the Fonterra board of directors.
Fresh thinking requires a fresh start. If all directors stood for re-election this year, not just the three on rotation (John Wilson, Nicola Shadbolt and Blue Read), it could give them a chance to let shareholders know what they really think should be done. It doesn’t mean they wouldn’t get re-elected – it is important to maintain some corporate memory – but it would allow freedom of speech.
They might also explain their skills, abilities and competencies to create the new future. Part of this must be the time they are prepared to invest in Fonterra’s direction.
The reward for being a Fonterra director is about $200,000, reflecting that being a director is a ‘big job’.
Only a strong co-operative will get us through – a co-operative that watches trends and boldly rethinks strategy in time to pre-empt a crisis, creating value for shareholders with velocity in reaction.
Internal reorganisations and backroom staffing cuts are not enough; it is time to get real about governance and management. Shareholders can show leadership by making the call.
• Jacqueline Rowarth is professor of agribusiness, The University of Waikato. She is also a Fonterra shareholder.
