Should Fonterra be broken up?
Fonterra has been the big cheese of the dairy industry for 18 years but it could be in for some significant downsizing. It’s approaching its annual report on September 12 amid talk that Fonterra’s crisis could become its farmers’ crisis – and ultimately New Zealand’s.
Levin sharemilker Richard McIntyre said there were no easy answers, even as some suggest the dairy giant could be split into two.
‘‘Relying on milk processing to make powder and selling off non-performing assets is a good argument to make when commodity prices are high, but when they drop all of a sudden you become dependent on the value-add.
As a sharemilker, he was not affected by the lack of a dividend, but he saw the impact on his farm owners who had seen a drop in land, cow, and share values in recent years.
Just two years ago there was little sense that Fonterra was heading for the financial rocks. But recently chief executive Miles Hurrell prepared the market for the worst.
He said New Zealand’s largest company expected to make a reported loss of between $590 million and $675m this financial year, taking into account likely writedowns. Federated Farmers vice-president and Fonterra supplier Andrew Hoggard is
more than a bit bewildered. ‘‘I can remember a few years ago and the roadshows talking about the world domination thing – how did that come about because now it’s ‘turn the bus around completely and focus on New Zealand’.’’
Next week, Hurrell will unveil Fonterra’s new strategy. What are its options?
■ Split it into two: one, a milk processor and two, a consumer food service, which becomes a
50:50 joint venture or listed entity;
■ Create a ‘‘good’’ company of the bits that are successful, and a ‘‘bad’’ company that might include Soprole, DPA Brazil, China farms, Beingmate and Fonterra Australia, and try and rapidly sell the latter distressed assets;
■ Hock off non-performing assets of the co-op bit by bit.
A director of TDB Advisory
and himself a Fonterra supplier, Geoff Taylor, said the Northington report from last year lifted the lid on the accounts for the first time.
What it showed was that Fonterra made the most money out of processing milk and drying it, then shipping it to overseas markets.
‘‘The good news is that it is a world class logistics processing company. The lowest risk is for them to process my milk here in New Zealand, suck the water out of it, put it on a ship and get a fair return. That consumes the least amount of my capital.’’
That core business uses about 50 per cent of Fonterra’s capital. Anything else Taylor describes as ‘‘discretionary’’.
He is quick to downplay notions of Fonterra or the industry being in crisis, citing its positive credit rating, high milk price, and very low costs of finance.
But it goes against the grain to hear of Fonterra turning its back on the ‘‘value-add’’ mantra.
Economist Peter Fraser told RNZ that while Fonterra had not entered into a ‘‘death spiral’’ yet, at some stage it would reach a point of no return.
‘‘The first thing is do you have a rotten balance sheet – Fonterra has a rotten balance sheet. Secondly do you pay your farmers too much for their milk – Fonterra pays its farmers too much for their milk.
‘‘The third part is because you pay your farmers too much for milk, you can’t fix your balance sheet by recapitalisation – you’ve got to go and sell stuff – and once you’ve sold everything you’ve got nothing left.
‘‘That’s when we get to the fourth stage, – the fourth stage is where Westland got to – is that they started losing milk supply and once they started losing milk supply, they’ve got empty factories, it all starts turning bad very, very fast.’’
He said the writedowns might not be enough to forestall disaster for the co-operative.
When it released its interim report, Fonterra heralded a number of ‘‘emerging themes’’ which would be addressed in its strategy review, including a move to value from volume, prioritising New Zealand milk production, and an increased focus on return to capital.
The first thing is do you have a rotten balance sheet – Fonterra has a rotten balance sheet.
Economist Peter Fraser