Fonterra a failure in concept and in practice

Written By: - Date published: 6:10 pm, February 9th, 2018 - 109 comments
Categories: business, Economy, economy, Environment, farming, farming, Financial markets, water - Tags: , , , ,

Fonterra as a construct – the establishment of a NZ Inc monopoly for the dairy industry – has been an abject failure for dairy farmers and a disaster for the environment.

In a stunning analysis from a quarter least expected, share market analyst, Arie Dekker of First NZ Capital, reveals there have been negligible increases in dairy farmer returns in the 17 years since Fonterra was formed, despite a 108 percent increase in milk production over that time.

“Taking inflation-adjusted milk prices from just prior to Fonterra’s formation to 2017 highlights very limited improvement in the total payout received by New Zealand farmers over the last 20 years,” he said in a note to investors.

“Despite some elevation in the payout evident for periods over the last ten years, it is hard to argue that the creation of a national champion in Fonterra has led to a sustained material upwards impact on the farm gate returns received by farmers over the last 20 years.”

Essentially, what Dekker is saying, is that the amazing and unprecedented degradation of our environment, particularly our waterways, in the last 20 years, under the guise of economic imperative, all has been for nothing.

Farmers have slogged away, doubling production for no improved return. Farmer and industry returns would have been no different had the whole movement of dairy conversion and intensification never taken place.

Not only that, but Fonterra’s shares have been a poor investment – their price over the last five years has fallen 3% against the NZX50 index’s 92% rise over the same period.

Dekker suggests the whole raison d’etre for Fonterra could come under intense scrutiny following the new government’s “surprise” announcement last month it will undertake a comprehensive review of the dairy industry.

He said that given that the Commerce Commission and previous government had just completed an industry review, and another review was scheduled in 2020/21, this announcement suggests the government clearly has an agenda.

It was also not surprising that environmental issues would come under scrutiny during the review.

“The inclusion of the Green Party in the Coalition Government accentuates the prominence that environmental matters will likely get and there is clearly some scope for matters regarding volume vs value-add and the environmental impost of dairy in New Zealand to overlap,” he said.

Agriculture Minister Damien O’Connor said the review would “allow a more strategic focus to be taken for issues facing the dairy industry, including, for example, environmental issues, land use and how to achieve the best outcomes for farmers, consumers and the NZ economy.”

The Labour-led government was likely to take a more holistic approach to all dairy matters and was likely to focus on farmer returns, the success the dairy industry and economy has had to move up the value curve and how more intensive land use to increase volume has affected returns, Dekker said.

The government was likely to support moves to place constraints on milk supply, which would help force the industry to consider adding value rather than volume, Dekker said.

His analysis throws into question the whole concept of pushing milk as a commodity and going for volume, something that was integral to the former National government’s economic strategy.

New Zealand milk production has more than doubled over the last 20 years, partly due to a 35% increase in land use for dairying, and partly due to a 12% increase in average cows per hectare.

“Greater land use and intensification (as measured by cow numbers/hectare) only explains part of the increase in milk production with genetic improvement and greater intensity on other inputs likely explaining the rest,” Dekker said.

Total payouts to farmers have barely lifted

He said there has been an inability in New Zealand to “lift the mix of its output to value-add sufficient to flow through into better co-operative payouts”.

The co-operative’s share price reflects the failure to move away from commodity milk powder to value-add.

“For New Zealand farmers then, it is more in the increase in milk supply (a portion of which has come from more hectares and cows) that has driven an increase in their revenues over any strong evidence of material benefits from the New Zealand industry’s push into value add.”

Other inputs such as palm kernels, which also increase costs, also explain the higher volume.

Dekker said that if total milk supply in New Zealand is to be constrained following the review, Fonterra will have to look more and more offshore and that’s where the limitation of the company’s structure as a co-op will come into play – its lack of access to capital from cash-strapped farmers.

Fonterra as an investment has been a dog

It is interesting to contrast Fonterra with a company such as A2, which has put all its eggs into the value-add, intellectual property game.  The Auckland headquartered company turns over just $262 million against Fonterra’s $19.2 billion, has seen its market capitalisation soar to $6.5 billion, around two thirds of its giant neighbour.

Fonterra’s efforts to move offshore raise questions not just about the appropriateness of its structure but its ability to operate offshore. Basically, the evidence shows the farmer-run company is out of its depth.

Its move into China has gone from catastrophic to the merely financially disastrous.

It would be hard to imagine a worse investment than what Fonterra made in SanLu, whose melamine-tainted milk caused 294,000 Chinese infants to be ill or hospitalised, including six deaths. Some Sanlu staff were executed, at least one executive given a life sentence and one committed suicide. No Fonterra staff took responsibility. Fonterra had to write off its $200 million investment in 2009.

As a PR disaster, that’s almost impossible to top.

Still, in financial terms, Fonterra is giving it a go with its Beingmate investment in China.

Fonterra paid $774 million for an 18.8% stake in 2015, buying in at 18 RMB (Chinese Yuan) a share. The share price today is under 5 RMB, so Fonterra is sitting on losses north of $550 million. And it looks like a total write-off is on the cards.

Beingmate’s shares today sank below 5 RMB

The idea of forming a global partnership with a Chinese player seemed sensible enough.

But another PR disaster, the botulism false alarm – which resulted in major customer, French company Danone, successfully suing Fonterra for $193 million, meant Fonterra was limited in its choice of potential Chinese partners and ended backing the wrong horse.

Beingmate was China’s largest infant formula manufacturer and distributor, founded by respected food scientist and entrepreneur, Sam Xie Hong. It offered Fonterra a huge distribution network for its Anmum infant formula brand. But the joint venture they set up, Darnum, has proved dysfunctional and Beingmate was a bricks and mortar retailer/distributor, a factor that proved fatal.

Beingmate has resisted distributing Anmum, while formula retailing in China shifted suddenly online, leaving Beingmate’s 40,000 outlets virtually useless.

Two weeks ago, the previously profitable Beingmate announced the latest in a series of earnings downgrades – from a previously forecast loss of 350m-500 RMB to 800m-1b RMB (171m-$214m).

A serious board split and doubts about the reliability of its financials resulted in Fonterra saying publicly it was “extremely disappointed”.

The Shenzhen Stock Exchange, where Beingmate is listed, then requested the company to provide documents to the China Securities Regulatory Commission’s Bureau of Supervision. Beingmate reportedly sent a letter to the regulators blaming Fonterra for its losses, telling Bejing News, “due to a variety of reasons (most of which were caused by Fonterra) Beingmate had a sharp decline in operating performance and encountered business difficulties”.

“It has come to a point that the two parties could not reach agreement, which is seriously affecting the company’s business operation and development,” it added.

Business commentator Rod Oram, said in a Newsroom article that Chinese media are reporting Fonterra is seeking to take over Beingmate, something the co-op is denying. Such a desperate move is either bold or even more foolhardy.

FNZC’s Dekker says that Beingmate’s terrible financial performance is not as concerning as the reservations expressed by Fonterra members on Beingmate’s board about its financial management and reporting practices.

Pressure will come on Fonterra when it reports its half year results next month, “for a much more open discussion on Beingmate”, he said.

However, openness is not in Fonterra’s DNA. It won’t come easily any more than changing its untenable structure.

(Simon Louisson is a retired journalist who reported for The Wall Street Journal, AP Dow Jones Newswires, New Zealand Press Association and Reuters and briefly was a political and media adviser to the Green Party.)

109 comments on “Fonterra a failure in concept and in practice ”

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  1. Rooney 1
    9 February 2018 at 6:29 pm

    Without he formation of Fonterra the NZ dairy farmer would have become serfs to the multnationals – whom at the time of the Dairy Board dissolution would have swooped in. How about “NestleKiwi” and “KraftNZDairy” controlling the means of production?

    How beneficial would have that set-up been for the dairy farmer?

    • Leonhart Hunt 1.1
      9 February 2018 at 8:03 pm

      although groups of NZ owned consortiums could have been viable instead of this market controlling fonterra, competition healthy and stops abuses like massive CEO payments (isn’t he over $500,000 per year now?,) and rampant domestic price growth, butter at $5 – 6 per block anyone?

      Fonterra has market dominance in NZ with little/no competition and with the rise in synthetic milk (very neat, you should look it up, its brewed) which is cheaper for production that local milk and can be made in country so no export costs on demand what will fonterra do? (the same goes for NZ meat industry with the rise of “clean meat” vat grown that is 1/3rd of the price of normal meat and tastes the same.)

      NZ is in for some tough choices as our export markets crumble.

      Edit: Correction Fonterra CEO is on 8.3mil per year.

    • Ad 1.2
      9 February 2018 at 8:13 pm

      The from-formation counterfactuals are endless and entirely pointless.
      We are dealing with Fonterra and the NZ dairy industry as it exists now.

      Fonterra is never going to be another Danone while it continues to be required to take all fresh milk offered. So there’s a little hint.

      Fonterra can be reviewed and usefully tilted. In the interests of New Zealand, it needs to be.

      • Antoine 1.2.1
        10 February 2018 at 7:09 am

        “We want to review you and usefully tilt you”
        “Piss off Noddy, our strategy is none of your business, we only answer to our shareholders”

        • One Anonymous Bloke 1.2.1.1
          10 February 2018 at 7:54 am

          What Parliament has done, Parliament can undo, Noddy.

          • Antoine 1.2.1.1.1
            10 February 2018 at 8:40 am

            I doubt Parliament is in a hurry to declare war on the farming sector

          • Gristle 1.2.1.1.2
            10 February 2018 at 8:46 am

            9% of global milk production is exported: the rest is consumed within the country of origin. Fonterra (with milk from NZ) accounted for 25% of the total milk production that was exported. That means that of all the milk produced in the world, Fonterra exports 2.25%.

            The production from farms around the world needs to only rise by a couple of percent for them to swamp the demand for export milk. (A couple of percent rise in the 91% is equivalent to Fonterras total export.) This why Fonterra are extremely vulnerable. Anytime prices start to rise “reserve” capacity will kick in within12 months and more milk will be made available to the market.

            Being a supplier of Milk powder for processed food is probably the worst place to be in. This is a commodity that is easily substituted by another supplier. Milk powder is also the most likely entry point for “brewed” milk (the stuff that will come from yeast and can be made with way less water, power, land and pollution than we do it with cows.

            The brewed milk is a GM product. Yeast is being manipulated to produce goat milk, sheep milk, cow milk. It won’t be long before infant formula will be included in that list.

            When I want to drink milk or have yoghurt or butter or cheese, I imagine Heidi with a couple of cows in a sun kissed alpine meadow. Industrial milk production is no where close to this image, but IMO, the consumers of high end products will follow producers who do move into better treatment of cows, land etc.

            Payment structure for milk at the farm gate should be changed to include recognition for:
            All water ways being fenced
            Bush planting season along water ways
            Nitrate levels
            Phosphate levels
            E-coli count in water
            Shade for stock
            Antibiotic usage levels

            • Antoine 1.2.1.1.2.1
              10 February 2018 at 9:29 am

              > Payment structure for milk at the farm gate should be changed to include recognition for:
              > All water ways being fenced
              > Bush planting season along water ways
              > Nitrate levels
              > Phosphate levels
              > E-coli count in water
              > Shade for stock
              > Antibiotic usage levels

              Why bother to incentivise those things when you can simply regulate for them?

              A.

    • Nic 181 1.3
      9 February 2018 at 8:21 pm

      So we did not become serfs to the multinationals and we invested billions into China and bugger, the Chinese took it and gave Fronterra the finger. We buggered our environment to do it to but we are MUCH better off as a result. Arn’t we??????

    • Ed 1.4
      10 February 2018 at 7:47 am

      We are becoming serfs to China anyway.

    • steve bradley 1.5
      10 February 2018 at 10:54 am

      Recall the persistent international pressure (read USA) to demolish the state monopoly system pre-exisiting. This consisted of regional Coop Dairy Companies owned by farmers coordinated by the NZ Dairy Board owned by the Crown. The Dairy Board also smoothed prices from good seasons to bad. The ‘single desk seller’ which had helped build a viable NZ dairy industry was replaced by Fonterra and as the research shows, not a very sustainable outcome.

  2. Jack Ramaka 2
    9 February 2018 at 8:10 pm

    Councils have let the Dairy Industry pollute our rivers and streams, by not enforcing the law ?

    • ropata 2.1
      10 February 2018 at 12:58 am

      Yeah they saw what happened to ECan when they tried to stop the irrigation lobby from hogging all the water. Disbanded and taken over by Nat henchmen

      • Antoine 2.1.1
        10 February 2018 at 7:10 am

        So now we have a Labour led government, it should do the opposite and make councils enforce the law

  3. Nic181 3
    9 February 2018 at 8:12 pm

    Here is my take on the part of the last National government in this.
    Lets increase GDP by doubling dairy exports. What do we need to do here? Lets give Fronterra more encouragement.
    Lets intensify farming by irrigating dry land. Bugger, Canterbury is the best place to do this but ECAN won’t consent it. Lets sack ECAN and appoint a set of pussy commissioners who will do what we want. Bugger,the locals don’t like that. Lets give Fonterra more encouragement.
    Lets allow overseas investors to buy up farms and give them an easy ride to dairy conversions. Bugger, the production won’t increase without irrigation so ECAN can consent that. Bugger, there is no money for irrigation so lets sell off our power stations to fund it. Bugger, there is a public reaction to this, we can’t understand it and we get a lot less than we hoped. Bugger again! Bugger, there is a huge increase in dairy profits going overseas, we didn’t see that coming! Lets give Fronterra even more encouragement.Lets allow increased nitrates in leached and run off water and lower water levels in rivers. Bugger, Lake Ellesmere is now a swamp, the Selwyn river is a dribble and bugger, there are toxic algae in places where kids swim. Bugger, nitrate levels are rising in Ashburton, Dunsandel and in shallow wells across Canterbury. Bugger, Fronterra have cocked it up with investments in China, lets encourage them anyway! Bugger, none of this is usual but it is OK, we are all making money. Bugger, the dairy auction price dropped again and we are facing a drought. Bugger, the river levels and expensive dams are too low to irrigate.
    Bugger, we have farmers needing taxpayer drought relief, they face going broke and might not vote National!!
    My apologies for any incongruence in the timelines above. 🙂

  4. Corrie 4
    9 February 2018 at 8:14 pm

    It seems to me that Fonterra was sold to farmers as the next best thing to the Dairy Board, since there had been huge competition and shoving about from various dairy companies prior to Fonterra’s formation as they juggled for potential control.
    Henry van der Hayden seemed privately committed to getting “nzdairy.inc” listed on the NZX and allowing non-farmers to buy shares in Fonterra (where shares had previously only been available to farmers themselves) – an act that opened the way even further to “Queen Street farmers” who were interested in ROI to the exclusion of anything else.

  5. Ad 5
    9 February 2018 at 8:18 pm

    Simon can you please link to the research that you cite.

    • Bill 5.1
      10 February 2018 at 8:32 am

      I think Simon may have taken the analysis from other published articles rather than from research per se. I can’t find anything by way of a research paper when I google search Arie Dekker and Dairy or Fonterra or First NZ Capital, but get article hits from the quotes.

  6. Draco T Bastard 6
    10 February 2018 at 12:49 am

    Reading all the shit about what’s happened to them in China it’s almost like they’ve been targeted.

    The big problem for them in NZ is that they’ve failed to add value and going the cheap route of simply adding more cows. Flooding the market doesn’t really produce better returns whereas producing higher value products does.

    They should be forgetting the export of milk powder.

    And then they’ve been acting like their a capitalist company rather than a cooperative. Extending into China and elsewhere should have been the same as NZ – bringing in farmers as part of the cooperative.

    And they shouldn’t be trying to own the distribution of the products. Put the products up online and with direct sales from the local farmers who are part of the cooperative to customers with delivery via courier. Bypass the middlemen.

    To be honest, I’m not surprised by their failure to read the market. All of NZ business seems reluctant to go online.

  7. Antoine 7
    10 February 2018 at 2:25 am

    Fonterra has clearly had its woes, including some bad misadventures in China.

    Some of its problems (particularly recently) are driven by the international dairy market rather than being its own doing.

    I guess it is all very well to speculate about whether the creation of Fonterra was a good thing, but ‘where to now’ is a better question.

    If I was the Govt I would not be thinking about meddling with the structure or strategy of Fonterra. Those things are not the proper domain of a modern Government. Rather, I would be thinking about cracking down on land and water management practices – both tightening the regulations and adding some teeth to their enforcement. Leave it to the dairy industry to figure out how to clean up its act, and how to continue to make a buck in an increasingly difficult operating environment.

    A.

    • One Anonymous Bloke 7.1
      10 February 2018 at 5:54 am

      That settles it. The government should definitely re-assess Fonterra’s entire structure and strategy.

    • Keepcalmcarryon 7.2
      10 February 2018 at 7:56 am

      If it was the proper domain of the government when it was set up, its their proper domain to make sure it works and change it to suit NZ as a whole when needed.

    • Pat 7.3
      10 February 2018 at 8:10 am

      Leaving it to the industry to figure it out hasnt worked too well for the red meat industry to date…and an 8 million remuneration package for the CEO that oversaw Beingmate venture….I think your faith may be a little misplaced.

      • Antoine 7.3.1
        10 February 2018 at 8:42 am

        It really is up to the shareholders. Its their money

        • Pat 7.3.1.1
          10 February 2018 at 8:43 am

          yes it is….as it has been for 20 plus years for the meat co’s.

        • Keepcalmcarryon 7.3.1.2
          10 February 2018 at 8:50 am

          Antoine Fonterra was “ allowed” by government for the national good.
          Bearing in mind the national interest, shareholders be f&$ed, they haven’t looked after the rest of the country environmentally let alone with reasonable pricing.
          Let’s hope their pigeons come home to roost.
          It’s our country

          • Antoine 7.3.1.2.1
            10 February 2018 at 9:28 am

            So the role of the Govt is to hold them to account on the environmental side. Let’s see some of that!

            A.

            • Keepcalmcarryon 7.3.1.2.1.1
              10 February 2018 at 11:08 am

              The National government dismantled environmental protection by stacking Ecan with irrigation toadies, they could certainly govern to destroy the environment. Why shouldn’t the current government govern for the environment?

        • tracey 7.3.1.3
          12 February 2018 at 10:14 am

          Not when it impacts our environment

          • Antoine 7.3.1.3.1
            12 February 2018 at 12:48 pm

            Sure! Let’s regulate the environmental impacts and make sure that regulation is enforced.

            A.

  8. Keepcalmcarryon 8
    10 February 2018 at 7:41 am

    Sounds like the Chinese simply scammed them, fronterra bought in and suddenly the books are hazy and distribution changes overnight. Bye bye 500 million dollars.
    That’s an obscene amount of farmers money to lose how do those muppets at the top get payed at all let alone bonuses.
    As far as fronterra saving us from nestle etc, frankly having several players in our market would be better for the consumer and prevent rorting the public eg local butter, milk prices etc. Farmers are more than happy to sell farms to overseas “ investors” to get top dollar ,it’s hardly like they are patriotic.
    By rorting the kiwi public over dairy prices fonterra have helped to withdraw dairy farmers social license to operate.
    It will be interesting to see if there will be meaningful change after the investigation, I hope so but suspect not.

    • Jack Ramaka 8.1
      10 February 2018 at 3:57 pm

      New Zealanders are very naive when it comes to International Trading, many executives are as green as grass, and do not have the experience or understanding of these countries and the marketplace.

    • Jack Ramaka 8.2
      10 February 2018 at 5:28 pm

      The Chinese will always look after the Chinese people and their companies first, we learn’t that in International Economics at University in the 1970’s.

      NZ could learn a lot from the Chinese and the Japanese, rather than following new world neoliberal economics ?

  9. Ian 9
    10 February 2018 at 10:27 am

    Fonterra may be a dog at times but apart from Tatua it still leads the way in returns back to farmers.
    It is obvious that most commenters here know jack shit about dairy farming and Fonterra and are so used to regurgitating anti dairy farming propoganda they have lost any ability to look at the subject rationally.
    Why not come and see and hear for yourself
    In a move aimed at showcasing on farm water quality and environmental management Align Farms in Mid Canterbury is inviting to an open gate field day.

    In conjunction with MHV Water, Align will open its Longfield farm just south of Ashburton to the public on February 13.
    A spokeswoman for MHV Water said balancing environmental, social and economic sustainability is critical as the farming community continues to seek improved water quality and environmental outcomes.
    It was always top of mind as farmers and industry worked together in farm management and planning, especially when it comes to water quality and sustainable use.
    “Our farming community is committed to implementing good management practices to help achieve improved water quality and other environmental outcomes while concurrently enjoying the success of thriving businesses.”
    She said MHV Water and Align Farms were proud to showcase such a business through the open gate field day.
    The day would feature a farm walk with industry experts at Align Longfield, 1037 Rangitata Highway, Hinds, starting at 10am.
    “This is an open invitation to see first-hand the hard work being done in the agricultural sector to ensure that production goals and profit are achieved in balance with environmental goals.”

    • One Anonymous Bloke 9.1
      10 February 2018 at 11:23 am

      First NZ Capital are anti dairy propagandists? Doesn’t sound very likely. All those promises of increased returns haven’t panned out and we’ve got a huge cleanup bill to boot.

      Very shoddy.

  10. Roy Cartland 10
    10 February 2018 at 10:59 am

    Request to Author:
    Can you elaborate a bit on this A2 company? What kind of value add? How could fonterra learn from them?

  11. RuralGuy 11
    10 February 2018 at 2:09 pm

    This post, and the articles of which it draws itself from, lack any genuine analysis of options, solutions and alternatives.

    It’d be worthwhile to reflect upon why Helen Clark and the then Labour government allowed for the formation of Fonterra, but also think about some of the flaws that the original legislation had.

    Ultimately, the creation of Fonterra allowed for a single seller export desk. Prior to Fonterra, NZ Dairies, Kiwi, Tui etc etc all used to compete internationally with each other with a similar basket of products, and they used to compete on price which was to the detriment of NZ farmers overall. That was dumb, and forming Fonterra was the right thing to do.

    The legislation that allowed for the formation of Fonterra had some issues. This isn’t a criticism of the government as it probably couldn’t have foreseen the issues.

    Issue 1 – the allowance of free entry into Fonterra. This meant that Fonterra was not allowed to refuse any new farms or any new milk. So you’ve created a business that has little control in it’s manufacturing volumes because they need to pick up and pay every drop of milk that farmer offer it. As a farmer, this was a huge benefit to me, effectively it completely de-risked my business as I always had a market for my produce. Fonterra became an insurance for the entire sector. It allowed me (and others) to grow uninhibited. Fonterra have never once asked me to grow my business despite what some here may think.

    This issue then creates further down stream issues for Fonterra – as in we need to invest an manufacturing and find markets to sell this tsunami of milk. As Fonterra is a co-op, it is limited in its capital raising capability (can’t do IPO’s etc to raise capital for growth) as the capital needs to come from farmers. So it had to deal with this tsunami of milk by building powder plants to making commodity products because this is the cheapest way to turn a raw perishable product into something that can be sold easily. It couldn’t put all the new milk into value add because it was cost prohibitive to do so.

    Interestingly enough, Fonterra has consistently lobbied to remove this obligation whenever DIRA has been reviewed. I wonder how many Standardista’s were aware that Fonterra were doing so, and I wonder how many were away that Labour & National were reluctant because it would disadvantage farmers from growing there farming businesses. See the DIRA review of 2017 for more detail.

    Next Issue was DIRA milk. It made Fonterra give discounted milk to smaller NZ operators. This was intended to support NZ’s domestic competition. Largely it still works well for the domestic purposes. Consider Goodman Fielder, Lewis Road, Pam’s, Dairy Dale etc etc. But what happened is that it also provided an insurance to overseas based companies to come to NZ and set up a dairy factory and export product overseas, all using milk from Fonterra. So Fonterra became an insurance company for other businesses so could guarantee them milk for export. We’ve got Chinese milk companies setting up here exploiting this loop hole.

    Fonterra had again submitted that they support supplying milk to any domestic milk business, but feel they should not have to subsidise other exporters.

    Finally, let’s think about the other domestic companies as a contrast to Fonterra. Let’s start with Open Country Dairies. This is a business owned by Talleys, who are NZ’s second largest player. They actively exploit the cheap milk from Fonterra rules, and have virtually non-existent environmental rules. They believe that it’s up to farmers to sort out their own sustainability and that they shouldn’t be involved. They actively recruit farmers from Fonterra who are disgruntled about having to meet Fonterra’s far more strenuous environmental rules. You need to understand, if you want to dismantle Fonterra, you’re giving a green light to Talley’s to grow their business.

    Ultimately, I think what’ll actually happen Fonterra will actually be given more sensible commercial expectations around milk collection and DIRA milk provisioning, and they will get more leeway on suspending and milk for non-compliance then they currently have. In other words, export Fonterra to have reduced levels of regulation so their not hamstrung in chasing haigher value products.

    • Keepcalmcarryon 11.1
      10 February 2018 at 4:25 pm

      It’s not all about inability to capitalise. Fonterra shut the Kaikōura cheese factory which was profitable but could make more profit sending milk further to another factory so closed it no thought given to the rural community.
      That Factory could have been used for high value niche cheese production but Fonterra didn’t want more niche brands it has Kapiti already. Before joining Fonterra the factory made great local cheese also profitably.
      It’s the mass production mentality vs the good of keeping rural business.
      The consumer more and more wants to taste local and know the story of their food
      Fonterra wants to churn out milk powder that can be blended in to whatever.
      Small scale environmentally sustainable grass fed niche dairy is where the consumer is going. It also happens to keep jobs and people rurally.
      That is certainly not where Fonterra is going.

      • RuralGuy 11.1.1
        10 February 2018 at 9:23 pm

        Incorrect. The Kaikoura product mix was a dog, and (as a legacy plant with significant maintenance costs), had a poor roi in comparison to other sites, especially when you consider the north Canterbury pasture curve. The stainless utilisation was horrible.

        You’ve got to remember 97% of Fonterra’s consumers are international customers that wouldn’t know Kaikoura from Kawakawa, so Fonterras customers aren’t interested in a regional factory that they have no connection with.

        • Keepcalmcarryon 11.1.1.1
          10 February 2018 at 10:28 pm

          Not incorrect. Said factory was turning profit.
          Fonterra refused to onsell factory on closure despite local interest, to negate competition and dismantled it, sold buildings to bee keepers. 30 jobs lost locally.
          Footnote,corporate beeping company said to use Filipino labour.
          Your language is arrogant.

        • Keepcalmcarryon 11.1.1.2
          10 February 2018 at 10:43 pm

          International consumers value grass fed environmentally safe product ( why did China value NZ baby milk powder?origin has value)
          . Damn straight they wouldn’t know a Kaikōura product from a kaikohe product when it’s a powder in a bag and the manufacturing company doesn’t give a shit to differentiate or value add .
          Developing that value is where Fonterra and clearly you are totally missing the boat.

          • RuralGuy 11.1.1.2.1
            10 February 2018 at 11:25 pm

            And if Kaikoura was a nutritional drier, then you’d be right. But it was a old cheese plant that had big big issues with the whey by-product disposal with limited stainless utilisation in Autumn and Winter. It’s roi was less then moving the milk south and banging it thru Darfield.

            Ultimately when Darfield went up and Fonterra stepped into buy Studholme when NZDL went into receivership, all stainless in Canterbury was up for review, and the poorest performing asset was shut.

            You might think I’m arrogant, I don’t really care what people think. It was a legacy factory making the wrong product in the wrong place.

            • Keepcalmcarryon 11.1.1.2.1.1
              10 February 2018 at 11:41 pm

              It’s a fair call- you don’t care what people think.
              It’s an industry failing.

              • RuralGuy …
                10 February 2018 at 11:46 pm

                So, rather than complain; what are the DIRA policy settings (as this is the topic at hand) that you want too see?

                • Keepcalmcarryon …
                  10 February 2018 at 11:53 pm

                  Break up the monopoly.
                  Farmers believe in the free market and overseas land sales, so open it up let them actually experience the market sans monopoly. The environment and the local dairy market are worse off for the monopoly albeit some people have become rich and own multiple properties.
                  Ban overseas land sales
                  Cancel irrigation subsidies and buy back or cancel ove4 allocated water.
                  Tax N
                  Disallow imported farm labour.
                  Btw I’m not complaining I’m observing.

    • Draco T Bastard 11.2
      10 February 2018 at 7:02 pm

      As Fonterra is a co-op, it is limited in its capital raising capability (can’t do IPO’s etc to raise capital for growth) as the capital needs to come from farmers.

      See, this is the problem with people talking about the financial system without knowing anything about the financial industray. Fonterra, being the massive organisation that it is, can issue bonds to raise money.

      An organisation doesn’t actually need to sell itself to raise money.

      They actively recruit farmers from Fonterra who are disgruntled about having to meet Fonterra’s far more strenuous environmental rules.

      Which means we need government regulation that’s at least as good, if not better, than what Fonterra have.

      • RuralGuy 11.2.1
        10 February 2018 at 9:15 pm

        See, this is the problem with people commenting on the rural sector without knowing anything about it.

        Bonds were considered but were unable to be issued on the scale required. During the growth when the capital was required, Fonterra were constantly very close to a 60% gearing ratio, which would’ve triggered breaches in their banking covenants which would’ve restricted the ability to pay farmers for milk. Bonds for value add processing sit as a debt on the balance sheet, so would’ve caused significant issues. They therefore funded growth via retained profit and the issueing of shares to new farmers at a nominal share price (another govt legacy of not letting Fonterra apply a market value share price until 2012)

        I agree that the govt regulations need to catch up and overtake Fonterra. It should be an embaressment to the governments of both hues that Fonterra’s environmental standards makes the MfE look pedestrian. Think about it, Fonterra decided independently that it wanted to implement rules restricting stock access to water in 2011, and then made good on the commitment; yet the MfE keep postponing the same stock exclusion rules for non-fonterra farms and will likely be setting targets circa 2030.

        • Keepcalmcarryon 11.2.1.1
          10 February 2018 at 10:33 pm

          Yet we know fencing streams is a side issue and nitrogen leeching from urine continues with more irrigation, intensification and 100 kg ha N being tipped on.
          You sound like an apologist and a spin merchant. “Maybe if you lived rurally you would understand “

          • RuralGuy 11.2.1.1.1
            10 February 2018 at 11:08 pm

            I’m most certainly rural. I’ve got 2200 ha across 7 properties of different land use in 4 regions employing 38 staff. I do approx 600k mskg per year, so have about 3.5mil of my own invested in Fonterra

            Did you happen to read my commentary around a flaw of Fonterra’s creation allowing unchecked intensification? The point I was making, and that you’ve failed to grasp, is that Fonterra set a standard and implemented it, whereas MfE have not done similar.

            You might disagree that the mitigation is insufficient, but quite frankly, I’m not talking about mitigation I’m talking about policy and implementation.

            If you want to seek a N cap for land use, I encourage to advocate for it. But, seen as MfE can’t even organise a set of rules and standards for stock exclusion, I have no confidence that they’d be capable implementing a nutrient capping policy.

    • Ad 11.3
      10 February 2018 at 10:44 pm

      Thanks Rural Guy.

      Your last paragraph seems a pretty minimum outcome, given the reputation that Fonterra has dragged this country through.

      I honestly want Fonterra to succeed.

      • RuralGuy 11.3.1
        10 February 2018 at 11:12 pm

        As we all do, what’s often forgotten is that by being New Zealand’s largest exporter that it’s our largest money importer. Treasury did a review in 2012 during a DIRA review, and NZ went from 1st world to 3rd world in most OECD measures if Fonterra’s impact was removed for the treasury books.

        • Keepcalmcarryon 11.3.1.1
          10 February 2018 at 11:24 pm

          Should be able to look after their local kiwi market then eh, it’s small fry. Probably makes sense not to alienate the people paying for your pollution.

          • RuralGuy 11.3.1.1.1
            10 February 2018 at 11:28 pm

            Could you advise what pollution from my farms do you pay for? Especially since you think it’s my responsibility that I should subsidise your grocery bill as well.

            • Keepcalmcarryon 11.3.1.1.1.1
              10 February 2018 at 11:49 pm

              You will have to share some more information for me to answer and I won’t expect you to out yourself on the internet so what if I show an example of the taxpayer paying for cleanup?
              https://www.mfe.govt.nz/more/funding/closed-funds/fresh-start-fresh-water-clean-fund

              You are so right, you own 7 farms and can’t afford to look after the taxpayers cleaning up your mess.

            • tracey 11.3.1.1.1.2
              12 February 2018 at 10:20 am

              RuralGuy farmers need city slickers cos we are your consumers. I have enjoyed your posts but am sick of the rural/city divide that Nats and Fed Farmers push.

              Not all farmers are polluters and not all city dwellers are ignorant of the part farmers play in our lives.

              The pre election divide that Nats pushed harms us all.

              As a Green voter I cant change Nat behaviour but given we are told many farmers vote National…

    • Pat 11.4
      11 February 2018 at 12:14 am

      “Ultimately, I think what’ll actually happen Fonterra will actually be given more sensible commercial expectations around milk collection and DIRA milk provisioning, and they will get more leeway on suspending and milk for non-compliance then they currently have. In other words, export Fonterra to have reduced levels of regulation so their not hamstrung in chasing haigher value products.”

      K…so if what you foresee actually occurs what do you think would be the likely outcome in regards to supply volume and environmental impact? Would it lead to a reduced herd with a higher operational standard overall or would it simply shift more operations outside the Fonterra umbrella? …or would you advocate for additional/higher compliance requirements in addition for those outside the Fonterra model? (acknowledging MfEs limitations)

      It appears to me that an ability to set production targets against expected demand could only benefit the price regardless of product type but it would also likely impact the viability of a number of operations…..who and how determines?

    • Antoine 11.5
      11 February 2018 at 1:16 am

      Great comment RuralGuy. Nice to get some input from someone who actually knows how Fonterra works

      • Ian 11.5.1
        12 February 2018 at 9:14 am

        Thanks rural guy for presenting the facts re Fonterra.Hopefully any Govt. Review will take the DIRA issues currently hobbling Fonterra into account and make some sensible changes.

    • tracey 11.6
      12 February 2018 at 10:17 am

      Thanks for your thoughtful post. Labour approved Fonterra but they didnt disbandtake over one of the safeguards in ECAN

  12. Gareth Wilson 12
    10 February 2018 at 10:19 pm

    “It is interesting to contrast Fonterra with a company such as A2, which has put all its eggs into the value-add, intellectual property game. ”

    Sounds great. Could you explain why A2 milk is better than conventional milk?

    • Keepcalmcarryon 12.1
      10 February 2018 at 10:36 pm

      Diabetes or more specifically a2 not linked to diabetes
      Unlike conventional (a1) milk
      https://www.stuff.co.nz/business/farming/opinion/98523840/study-suggests-link-between-a1-betacasein-and-type-1-diabetes

      • Gareth Wilson 12.1.1
        10 February 2018 at 11:17 pm

        So A2 milk can help prevent diabetes? That’s really important information for the consumer, so I assume it’s printed on all the bottles.

        • Keepcalmcarryon 12.1.1.1
          10 February 2018 at 11:21 pm

          Why don’t you go look and tell us

          • One Anonymous Bloke 12.1.1.1.1
            11 February 2018 at 8:11 am

            So I checked, and it would be very unwise for the manufacturers to put that on the label.

            The linked article is well beyond my ken, but I can follow its conclusions:

            There is, thus no convincing or probable evidence that the A1 β-casein in cows milk is a factor causing DM-I diabetes…

            There is thus no convincing or probable evidence that the A1 β-casein in cows’ milk is a factor causing CHD.

    • Molly 12.2
      10 February 2018 at 11:30 pm

      Get yourself a copy of the Devil in the Milk. I found it available at Auckland Libraries.

      This groundbreaking work is the first internationally published book to examine the link between a protein in the milk we drink and a range of serious illnesses, including heart disease, Type 1 diabetes, autism, and schizophrenia.

      These health problems are linked to a tiny protein fragment that is formed when we digest A1 beta-casein, a milk protein produced by many cows in the United States and northern European countries. Milk that contains A1 beta-casein is commonly known as A1 milk; milk that does not is called A2. All milk was once A2, until a genetic mutation occurred some thousands of years ago in some European cattle. A2 milk remains high in herds in much of Asia, Africa, and parts of Southern Europe. A1 milk is common in the United States, New Zealand, Australia, and Europe.

      In Devil in the Milk, Keith Woodford brings together the evidence published in more than 100 scientific papers. He examines the population studies that look at the link between consumption of A1 milk and the incidence of heart disease and Type 1 diabetes; he explains the science that underpins the A1/A2 hypothesis; and he examines the research undertaken with animals and humans. The evidence is compelling: We should be switching to A2 milk.

      A2 milk from selected cows is now marketed in parts of the U.S., and it is possible to convert a herd of cows producing A1 milk to cows producing A2 milk.

      This is an amazing story, one that is not just about the health issues surrounding A1 milk, but also about how scientific evidence can be molded and withheld by vested interests, and how consumer choices are influenced by the interests of corporate business.

      • Gareth Wilson 12.2.1
        10 February 2018 at 11:36 pm

        Again, I hope all of this information is printed on the bottles.

        • Antoine 12.2.1.1
          11 February 2018 at 1:56 am

          Gareth, is your point that these purported health benefits are unsubstantiated?

          A.

          • Gareth Wilson 12.2.1.1.1
            11 February 2018 at 8:00 am

            Yes, that’s why the A2 company itself makes no medical claims. Selling a useless product to ignorant people is a way to add value, but it doesn’t seem very sustainable.

        • Simon Louisson 12.2.1.2
          11 February 2018 at 7:47 am

          I am not sure the science of A2 is that relevant to this discussion – the point is A2 the company has a product and a market that adds significant value. As a company, A2 has moved away from commodities and added huge value to shareholders.

          • Antoine 12.2.1.2.1
            11 February 2018 at 8:21 am

            Do you think it is good to build shareholder value by selling a product that does not do what it is claimed to do?

          • Gareth Wilson 12.2.1.2.2
            11 February 2018 at 8:29 am

            You’re right that you don’t need real science for a profitable product. But that means your profitability depends on people continuing to believe the fake science. That’s not certain – not many people mediate under pyramids these days.

      • Keepcalmcarryon 12.2.2
        10 February 2018 at 11:37 pm

        My understanding is the diabetes link has some science to it, not so sure on the other stuff

    • Jess NZ 12.3
      11 February 2018 at 8:26 am

      Yes, studies are showing quite reputably that milk proteins can trigger an autoimmune attack on the cells of the pancreas, resulting in failure to produce insulin. But the science of the negative health impacts of humans eating the milk cows produce for their calves (and is then processed into an interesting supermarket product or even more exciting technological wonder like A2) is far too extensive to even skim 🙂 over here.

      If anyone is interested, you’ll need to start with information from organisations like Physicians Committee for Responsible Medicine http://www.pcrm.org/health/diets/vegdiets/health-concerns-about-dairy-products and follow the trails where they lead. Or the material from Professor Emeritus T. Colin Cambell from Cornell. http://nutritionstudies.org/search/dairy

      Enjoy!

  13. KJT 13
    11 February 2018 at 6:59 am

    Be careful of statements about Fonterra, from capital market advocates, who are still shitty that Fonterra’s co-operative structure, prevented them from buying in and making an asset stripping killing. As they have done with so many private and Public companies in New Zealand already.

    This is all going to end in tears. Just like New Zealand’s over reliance on past, single commodity, booms.

    Fonterra having to buy all production, has encouraged farmers to go into debt, and increase production to economic and environmentally unsustainable levels.

    I wouldn’t be surprised if dairy farm debt servicing costs now exceed export profits.
    No one has done a cost benefit analysis, of sacrificing manufacturing and value added exporting, on the alter of increased access for milk powder exports.

    Ultimately, with the EU, North and South America and soon, China able to produce lakes of milk, if they wish, there is always going to be a cap on dairy earnings.

    Not to mention we have already exceeded the environmental limits, of NZ style dairy farming.

  14. Jess NZ 14
    11 February 2018 at 7:56 am

    Stepping back from the particular dairy market model for a moment…

    If our ultimate goal is to feed our planet of fellow human beings, feeding natural resources through an animal first is an incredibly inefficient way of doing that and produces that inconvenient waste problem that everybody’s complaining about but nobody wants to have to pay or lose votes to do anything about. (Some animals are raised on land that truly can’t be used for human food, but not the majority. And the majority is killing us, not the loud proud exceptions.)

    If our ultimate goal is to make lots of money off our fellow human beings from ‘value-added products’ then Fonterra’s plan is excellent.

    I know which side of history I want to be on.

  15. smilin 15
    13 February 2018 at 5:24 pm

    Did Fonterra think that its ego driven backing from the Key govt was going to allow them to become a global monopoly ?
    There’s at least half dozen other world companies that have upped their game since the heady days prior to the share float of Fonterra. That share float basically stuffed any monopoly because of the major food industries like Nestles who sit in their eagles nest with a pulse on everything food and water can now move in on what used to be a closed shop
    So goodbye to the sovereignty of Fonterra being nz owned and controlled and hello to TPPA and whatever multinational consortium comes to take it over
    We have to decide if were are going to allow them to pollute the rest of the country in the process or wake up to the fact that the old imperialists are going to continue to turderate this country for their profits
    Disgusting yes and real