Fears for exporters as stricter freshwater rules come in
The transition and support for the Government’s stricter freshwater policies will need to be “carefully managed” to ensure key export companies such as Fonterra survive economically, says an internal Ministry for Primary Industries report.
The briefing, released under the Official Information Act, said gradually falling milk supply in key dairying regions would impact dairy processors, negatively impacting revenues and profitability.
“In particular, co-operatives such as Fonterra will be operating in an environment where their farmershareholder base is potentially falling in size and facing constraints to fund their own on-farm investment.
“As increasing pressure on their own margins reduces their ability to retain earnings, they may find themselves stretched for investment capital sources to finance the necessary transition.
“The transition and support for these policies will need to be carefully managed to ensure that all New Zealand’s key exporting companies (including Fonterra) can adapt and reposition their businesses in an economically sustainable manner.”
The August briefing from MPI’s economic intelligence unit was to provide ministry directors with an assessment of Fonterra’s strategic position and some key risks it faced.
It was written in the run-up to the dairy co-operative’s signalled negative earnings result for the 2019 financial year.
New Zealand’s single largest multinational company went on to post a $605 million net loss, mostly due to asset writedowns of $826m. Without these, net profit after tax would have been $269m, compared with $382m in 2018.
With inventories accumulating to a record $5.1 billion, Fonterra generated negative cashflows of $578m from its operating activities over the six months to January 2019 — $327m worse than the previous year, the briefing said.
The transition and support for these policies will need to be carefully managed to ensure that [key exporting companies] can adapt and reposition their businesses in an economically sustainable manner. MPI report
Sizeable redactions or cut-outs were made from the released briefing’s assessment of the implications of Fonterra’s high debt levels, and when discussing Fonterra’s business strategy review and proposed government policy on freshwater management and the economic implications for dairy processors, including Fonterra.
The briefing said as part of the “essential freshwater programme”, the Ministry for the Environment was recommending the Government consider new nutrient management attributes and national bottom lines for dissolved inorganic nitrogen and dissolved reactive phosphorus.
“Both the existing and proposed bottom lines will introduce stricter freshwater standards in some lowland agriculturally dominated areas.”
Fonterra is owned and supplied by around 10,000 farmer-shareholders.
Created in 2001 under special enabling legislation, Fonterra exports 95 per cent of its production to more than 140 countries.
Last dairy season it processed 1.5 billion kilograms of milk solids — about 80 per cent of New Zealand’s milk supply.
The MPI briefing said Fonterra’s ingredients business earned nearly 65 per cent of 2018 revenues, and was the world’s largest dairy ingredients operation, making and marketing more than 1000 ingredients products to the international food industry under the NZMP brand.
Fonterra’s consumer and food service business brought in 34 per cent of 2018 revenues and its loss-making China Farms venture, 1.3 per cent.