Tuesday, 18 August 2015 12:00

Out of control

Written by 

Fonterra is losing control – control of correctly predicting the mood among commodity buyers and correctly predicting how dairy prices will fare.

The extraordinary statement by chief executive Theo Spierings that prices have fallen “below bottom” reflects the malaise at the world’s largest dairy exporter.

The co-op’s 10,500 farmers will be wondering how something can be ‘below bottom’. And why the co-op’s well-paid management and analysts had no inkling of the impending disaster.

Fonterra-owned Global Dairy Trade (GDT) has been acclaimed a transparent system of determining dairy prices; everyone sees how prices track at the two auctions every month.

Prices have tumbled for the past 10 consecutive auctions; futures markets were predicting price slumps.

Fonterra has conveniently deflected the cause of the current downturn to volatility. Frankly, Fonterra farmers are sick and tired of the hearing the word.

Yes, volatility is here to stay; so what? What is Fonterra doing to make sure our milk price remains competitive, they ask?

For Fonterra’s management it seems the ‘V3’ strategy has been paramount. Volume means growing milk production volumes to protect its place in a growing market; value means extracting more value from every drop of milk by providing high value products and services to consumers and customers; and velocity means executing the strategy at speed. But this all comes across as meaningless corporate jargon.

Sure Fonterra needs to grow and be globally competitive; it has to invest overseas. But why should Fonterra farmers produce and sell their milk at half the cost of production while Fonterra spends billions in overseas milk pools? Its suppliers in Australia are getting almost double the milk price right now.

The current forecast price is below many farmers’ cost of production. For two years Fonterra has been predicting recovery in prices within six months. Sadly, farmers are still waiting.

It’s obvious that Fonterra’s strategy is backfiring. Producing more milk and pumping more dairy products into global markets should not be the end game for Fonterra. It’s also required to look after its shareholders and ensure profitable returns to the farmgate; for the last two years, Fonterra has failed miserably.

There’s nothing the Government, politicians and farmers can do about global dairy prices; Fonterra must get its strategy right in delivering the best returns to farmers. It must change its course.

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