- Date published:
9:35 am, September 13th, 2018 - 67 comments
Categories: business, capitalism, China, Economy, Europe, exports, farming, farming, Free Trade, Globalisation - Tags: fonterra
Fonterra has just reported an after tax loss of $196 million for the 2018 year. It’s never had an annual loss in its history. The new Chief blames optimistic forecasting, high butter prices impacting sales and margins, and increase in the forecast farmgate milk price, and high operating expenses in parts of the business.
They had a $745 million profit last year. So they’ve written down $405 million from Beingmate in China, and paid Danone $183 million from the botulism scare.
It means that farmers lose on average $8,000 in income.
Fonterra is the largest business we have, our largest exporter, our largest driver of R&D, largest private employer, largest driver of environmental effects on New Zealand, and it is completely invented by legislation.
This year, Fletcher Building, our second largest majority locally-owned business with any international competitive impact, made catastrophic losses on projects and is rapidly shrinking to about half its size. The government simply didn’t care.
Those are our two largest businesses by far.
It’s well time this government took Fonterra to task about its direction, its existence, and its responsibility to New Zealand.
It would be great to see Minister O’Connor and Minister Jones get together and have an actual economic development plan for the country. What we have instead is a haphazard free giveaway of $1 billion per year to business and local government projects, and a bit of promised mild tinkering with Fonterra’s legislation.
We are vulnerable to just a handful of companies in New Zealand, for both our competitive export growth and for our jobs.
We need a government with a plan to address Fonterra.
Or let growing milk powder on a large unsustainable scale whither.
Instead the government could put R&D into wool fibres and lead the world in this wonderful product. Fire and water resistant.
It is obscene that the plastic/fossil fuel based outdoor wear is even sold in Aotearoa, let alone on the back of 4out of 5 farmers.
Those textiles are letting plastic into the ocean too, every time they are washed.
Our coarse wool has been a dead product for 30 years. Tonnes of r&d thrown at it. Just a very few good producers making a go of it now.
So there is nothing more to learn about wool?
Surely now that we are starting to be anti plastic, wool is the natural fibre to fill that void.
Perhaps the oceans will be ok once we stop using supermarket bags…
Second thoughts, same comment above but replace wool with hemp.
Ad is part of the big plastic group. Sustainable natural fibres don’t sit well with them. Next he’ll claim it’s the best thing to do with petroleum by product
Every piece of clothing I own is wool or cotton.
All wool items made here.
Except shoes. We don’t make hardly any shoes here.
Made here or designed here? The word ‘made’ has been made to have flexible meanings. Business loves ‘flexible’.
Exactly. In a world rapidly moving away from plastics NZ is ideally placed to offer alternatives made from wool, hemp, paper. The dairy industry should look at other milks as well from sheep or goat which may be better suited to areas where cows aren’t?
As someone here is fond of saying: Don’t panic go organic!
Organic goat/sheep milk. Premium product for the overseas market.
Same with hemp.
Organically produced fibres textiles, plastics, building products, medicines.
Exploit this before a Big Pharma/Big Ag company ties it up.
Tourism, local jobs there isn’t a down side.
What is it with politicians and business leaders, do they get an imagination by-pass once installed?
Could have sworn that we had problems with too many tourists especially ones crapping anywhere they please. Been popping up in the news quite a bit.
So the answer is to lower tourism rather than invest in infrastructure?
Seems like a downward spiral to me draco.
How much tourism can we sustainably support without trouncing the very thing that tourists are coming here to see? That infrastructure that you propose has to go somewhere and it’s going to require the removal of the environment that sustains us. Then, of course, is all the GHGs that those tourists emit on their way to and from their homes.
There is a place for limited tourism. There is no place for open slather.
The downward spiral comes from the belief that we can continue to do what we’ve always done despite all the evidence to the contrary.
Organic may be a 5% of the market share.
You need 5-10x as many goats to get same volume as a single cow.
is the market premium 10X ? I didnt think so.
Taking you at your word: organic market share of 5%, that means there is 95% to capture. Plenty of room for growth I would have thought.
The babies that can’t digest cows milk, godparents that are philosophically opposed to dairy, goats milk is a great alternative.
C’mon Duke what is your real reason for opposing organics.
They are the modern version of corsets and whalebones.
An effete fancy for the well to do which only result is they feel better.
If you knew what acids where in your stomach juices you wouldnt worry so much about how organic the goats milk was.
Keratin surgical implants?
Go back and have a look.
And check the graph of woolgrowers in NZ.
In regards to wool growers numbers, I am surprised there are any struggling along.
That demonstrates the neglect and poor management of the past.
We need to stop looking back, engage our imaginations and he creative.
For all you naysayers here is Tim Finn again.
‘No idea it couldn’t be done’
Most wool in nz is course wool suitable for carpets not so good for clothes. Marino is clothing and that markets good .
A recent story I read was about turning wool to pet food and possible human food in the future!!!
Maybe they could just clarify legislatively that Fonterra exists to sell milk made in NZ.
That would collapse the entire dairy industry here.
Outside of the entire public service, Fonterra pays out more $100k salaries than anyone.
What? How? What have salaries to do with selling foreign milk?
They’re an exporting business.
It’s how they make money.
So they should stick to selling milk that was produced in NZ, not getting into joint ventures and such.
That do that because selling milk – a perishable commodity- in their overseas home markets gets higher returns.
Not all milk products are easily exportable unless they are in dry ingredient for or as cheese.
Maybe they should stick to the less perishable products. Otherwise they’re taking a big bath in foreign rules and regs and the local farmers are underwriting them.
Milk powder is fairly volatile too. Its a cyclical business like most.
Fonterra needs a royal enquiry after years of mismanagement especially around Chinese investment failures $billions lost through poor decisions,
Environmental destruction, low investment in R&D,
The dumb idea of putting a commodities trader as CEO.
Fonterra needs a massive shake up.
From crisis to crises.
To big to be restructured.
Management has been short termist keeping payouts up at all costs.
Short sighted lowest R&D of any large company.
Change of direction is desperately needed.
An expensive PR campaign designed to cover up its many failings is dereliction of the overpaid bean counters and managers.
around Chinese investment failures $billions lost through poor decisions,
The Chinese market is too big to ignore, but deeply problematic to operate in. NZ has been incredibly naive in its dealings with China.
And much of that can be sheeted back to Helen Clark’s ill-advised FTA with China. It was the one thing she did that I really didn’t feel right about.
How much manufacturing does Fonterra do?
It wasn’t invented by legislation but it did require legislation to come into existence else it would have been breaking all the anti-competitive laws.
It’s a private business so why should the government care?
It’s not the government’s role to protect and sustain a private business.
True. That’s always been necessary.
That’s the neo-liberal ideology.
Export growth is unsustainable except in weightless exports and we should be eliminating jobs as fast as possible and boosting R&D to increase those weightless exports.
Thing is, every other country can also do those weightless exports. Can do everything else as well. In other words, we should be developing our economy away from exports and imports.
Who spends the most on R&D in New Zealand?
Fisher and Paykel Healthcare used to be higher but are now foreign owned in majority, and do most of their work overseas. Fonterra are the largest spenders on R&D here at $80m.
Much of what Fonterra does is manufacturing, as you would have found with a cursory glance at their website would have explained to you.
The legislation that formed Fonterra is the DIRA Act of 2001.
It really is the role of the government to sustain Fonterra when it is such a large part of our economy. If you want to argue something different, run up a post about it. Sure, there’s WTO rules against assisting specific countries, but FInland still hasn’t recovered from the decline of Nokia.
When it falters, we all falter.
Whatever you call “sustainable” should be spelled out. It would be wonderful if we had an entirely digital economy. We don’t. We’re a specialised agricultural economy, with tourism, i.t., services, education, and construction taking up most of the rest of what we do for a living.
There is not a single economist in New Zealand or political party who is proposing doing away with exporting and importing as you suggest.
Can’t say that I’d classify turning milk into milk powder as manufacturing.
No it’s not.
It is the government’s role to ensure that everyone in the country has enough to eat which is grown from our own resources. They’re failing to do that.
This is obviously the problem that occurs when a nation/country becomes too dependent upon a single industry. The solution is more diversity. As I’ve pointed out before, we could support ourselves with 2% of the population in agriculture which would free up some 150,000 people to improve that diversity.
Nations don’t specialise. That’s part of the problem with the failed economics of Adam Smith and Ricardo. They assumed that nations worked the same way as individuals and the economists of today haven’t changed that wrong assumption.
Living within our own means. Specifically, utilising our own resources to meet our needs without exporting any of them as exportation of resources is unsustainable and will result in a decline in resources available to us with the inevitable decline into poverty and finally collapse. It’s happened several times before.
If you can’t classify what Fonterra does as manufacturing, you disagree with the Department of Statistics and with MIBIE, so you can take it up with them.
Nations do specialise, as any cursory reading of Porter and Enwright will tell you. New Zealand is very specialised. Not always in the best things, but it’s certainly specialised.
It’s arguable that we are too dependent upon one industry.
It’s less arguable that we are too dependent on a very few large companies.
Only as a result of free-market economics which ignores reality. That’s my point. It wasn’t specialisation of the nation that drove the Industrial Revolution but the capability of the nation being able to produce everything it needed.
Yes, I know. It’s why so many of our best and brightest leave. Not everyone wants to be a dullard down on the farm.
That’s actually your entire argument for the government supporting Fonterra. You’re quite literally saying that the government has to because we’re dependent upon it.
As far as our national responsibility to the Rest of the World in regards to GHG emissions we should be dropping agriculture down to being enough to support us and no more.
Yes, the government should intervene in Fonterra because we are too dependent on it as a country. They’ve already said they will by addressing DIRA. It’s simply a matter of degree.
Many months back, someone on the threads alerted me to a presentation by a New Zealand economist who broke the numbers down in terms of “bang for buck”. (I think the guy’s dead now. And I think it might have been Rosemary MacDonald who put me onto the link)
What he demonstrated was that dairy and tourism are garbage. I think he used the production of some piece of discrete medical equipment to illustrate his point.
Wish I could remember his name. Can’t. Or re-find the link. Can’t.
But if that scatter of thought and memory rings any bells, the guy’s presentation is well worth looking up in relation to this post.
Probably not what you were looking for, but this is the dirty dairy story – a bit shocking for most NZers to think about.
But those are the industries that we have.
I have friends in Hawkes Bay with a large set of apple orchards. In their packhorse they have been able to decrease their seasonal staff by robotizing the fruit packing. It’s some complex homegrown equipment from an engineering firm near Tauranga.
Net effect is fewer crap jobs, higher profits, more durable business.
The horticulture industry trade publications on mechanization, value-adding, and packaging technology are pretty astonishing for a little country.
“It means that farmers lose on average $8,000 in income.”
No it doesnt. Most of the money is just book keeping moving from one column to another.
Gross margin is $3.1 BILL out of the $20.5 Bill revenue.
Not to forget Fonterra is two businesses. One is a Coop where all the income is paid to farmers as the milk price. That Fonterra doenst have a profit and its the biggest part of the $20 bill business
The other Fonterra is owned by shareholders ( mostly the same farmers) which has the numbers which are being used. This Fonterra is a smaller part of the $20 bill business.
getting actual real numbers from the media is a waste of time as they wont report the real data.
Same with Rugby Union 2 weeks ago. real numbers were $91 mill in ‘reserves’ plus a $20 mill surplus in player payment pool of mony. This was the same Rugby Union which was asking government help to pay players more – hello .
Not one media or sports journalist pointed out the real facts.
$8000 equals roughly 1300 kgs of milk solids .
That’s about the production from 4 cows. I think they’ll survive 😎
Good to know they’re flush waggers.
I’ve only meet won owner in all my years who admitted doing well out of farming .
Most of them plead poverty,funnily enough though when I offer to trade places not one has accepted my generous offer.
They don’t call their power boats SMP any more, so times are hard.
Fonterra results every half our channel 950 on sky if anyone’s interested until 10pm tonight
Fletcher Building is not a NZ-owned company… hasn’t been for some time. A quick scan of their largest shareholdings (58%) is a who’s who of foreign investment banks.
Thats because that isnt the owners.
Those are just nominee companies who ‘hold’ the shares without ownership
A common mistake when looking at share register of large companies
Interesting discussion with a near neighbour,One of Fonterras biggest suppliers (non milk) is to strike over the coming weeks. More headwinds.
I love your optimism sometimes Ad. This government is tethered to supply side, laissez-faire economics – or as Jane Kelsey so aptly put it ‘the fire economy’.
That to do what you suggest is almost impossible, at the very least their heads would explode, and the corporate owned press would have conniptions. Won’t happen, no matter how sensable the idea is. Sensible and hard right economic ideology don’t mix.
Yes, Fonterra got too be for their boots. Who remembers the news that Chinese are becoming lactose tolerant? BS to flip flop the milk price, boom n bust, so China et. al. can buy up the fallen farms. Don’t panic, go organic.
Value addition, organic. USDA organic is a problem (non-tariff trade barrier), EU certification is the way to go. Fonterra should start a new pool (one factory) on EU org cert. EU rules are required for up-take of dairy conversion to organic. Exceptions to use herbicide for noxious weed management do exist, but govt/fonterra should add pressure to make this slightly more liberal.
New Zealand doesn’t have a consistent definition of what “organic” is.
There’s plenty of private certifiers in every country, but not a New Zealand legal definition. There’s work being done on it, but sure doesn’t help when one country can claim theirs is “really” organic and yours isn’t.
Lobby IFOAM is partly what I’m saying, but its a grey zone, for short term management of gorse etc with herbicide on organic land, so lobby Biogro too.
Many point, go EU not USDA for export.
That’s what happens when you export raw exports. Anyone can do it. You can value add, but meh. So can everyone else, and not have to ship it half way around the world.
Dairy would be the last place I’d be putting my money.
Milk quota was removed in Europe in 2015. In the few years before this, milk price was high. I suspect China conspired, and paid higher-price, to help stimulate over production, especially in Europe, but it also worked in NZ on the back of our favourable trade deal. Milk prices are low these last few years. Partly natural a fluctuation in price, but also a bit of economic war.
From the four reasons quoted for loss, two seem true, two seem to be simple rhetoric.
Milk Price forecasts where obviously too high. Farmers where joking that it was simply to give hope to those who over-invested on dairy conversions, so they wouldn’t top themselves.
High operating expenses also sounds true They would over pay contractors, so contractors would abandon work for competitors. They did this to sink an organic cooperative, before it could get going.
The third reason I would add is, they borrowed billions of dollars at close to 6% interest rate, while global interest rates where heading for 0%. Over expanding globally. Time will tell if that was a smart long term strategy. At this stage it’s looking stupid.
After thought: Playing the futures market is probably another reason for the bull shit price forecasting. Perhaps if Fonterra had used the futures market as a genuine hedging buffer, rather than playing it and doing global expansion, they may have done much better for farmers.
Yes that debt:equity level is pretty chilling.
Add in a culture of largesse, inefficiency, club member behaviour such as the arrogance and naivety in China dealings and its hard to see Fonterra delivering the value it should and could ever under the current MO.
This is the thin end of the wedge as more will follow after the 2 flown in CEO’s reigns decisions come back to the roost as cycles do what cycles do after the up phase is passed.
Cue up the ‘to big to fail’ rhetoric folks as this behemoth is only as good as its milk suppliers who have been trying to get away from it in numbers for awhile now.
The loss is probably a good strategy for borrowing even more money, while both interest rates and milk price are low. But, if prices don’t bounce back, Fonterra will be in even deeper pooh.
Fonterra have become moronic fat cats at the top and not surprising when you get an outsider, whose experience was ‘mergers’ in a co-op with little to zero cultural fit on an 8 million plus salary, they screw everything up.
It should be obvious that Fonterra had to transition away from commodity and go high tech, high value…. because artificial meat and milk is on it’s way so value add is very important to structure to quality…
In 2015 they were laying off people in research and developments, healthy and safety, food quality etc…
“The 230 cuts announced on Monday hit administration roles in sales – ingredients, consumer, marketing, research and development, communications, health and safety, food safety and quality, group resilience and risk, property, procurement and change management.”
Says it all…
The bosses are rearranging the books, keeping wages low by employing morons that fit their own culture for peanuts (but senior morons obviously need massive pay increases)…. from 2017..
Fletchers Building workers strike over pay negotiations
“Workers have elected to take strike action. It’ll be about one hundred workers across five different companies and I would say that will last through later into the week including on Wednesday when Fletcher’s will be having their annual general meeting.”
He said the CEO received a 17 percent increase in pay up to almost $5 million, while the workers are struggling to pay their rent.
“You’re talking about a number of different negotiations going on that have broken down for various reasons.
A lot of it does come down to pay but a lot of it is just the way Fletcher’s has essentially conducted themselves.”
Fletchers are also so lazy they apparently completely rely on quantity surveyors to do their costings for them and then surprise surprise, their low wage, accountancy and paper based approach does not work in the real world!
Probably looks lovely on paper when they get a subcontractor price that is low and they turn a blind eye to people traffickers getting unqualified people in because it’s cheap and easy, the problem is, later on they find all is not well, the materials used are cheap, not fit for purpose, does not last, the workmanship is poor and just enough to pass for a brief inspection… but later on needs redoing and thus massive extra costs and time frames…
We in 2012 asked Fonterra to consider using rail in HB/Gisborne, and they sent us a letter confirming they will consider using rail where-ever they can.
Since then the rail has been left to wither and die because not enough freight was using it.
Since labour coalition got together the rail is being reopened and we need to see Fonterra use rail to more all there milk by rail now since we see in Bay of Plenty at Opotiki the milk tankers run all their milk for treatment now on road; – all the way south to Palmerston North over 400kms!!!!!
We think this is criminal, so Fonterra, we want to see milk tankers on rails please Fonterra even just to save you money and save our road deaths.
Fletcher CEO’s cult of personality – from 2013 – 2017…
“Eighty percent of the Fletcher management team has overseas experience, he said, but he plans to make that 100%. Adamson believes that experience will help Fletcher avoid re-inventing the wheel by having people on board who have seen how things work in other countries.
Adamson’s top management tips:
Hire the right people. “Unless you have people who get it, you’re not going to succeed.”
You don’t necessarily need to keep long-time employees. “I don’t really care if you’ve been on the job 20 years. It does not interest me in the slightest. It’s what you did in that 20 years. It’s not a hard and fast rule, but by and large I want to know what you’ve achieved, not how long you’ve been on the job.”
Celebrate wins. “A culture of winning is good. One of my regrets about leaving the US is that is a culture that knows how to celebrate success. At whatever level, it doesn’t have to be a manager, you can’t drive improvements if you don’t celebrate success.”
Learn from people’s global experience. “We have some great people. Most have worked in at least two countries. And that brings a breadth of experience to executive management, financial management from other places. Why invent something new when you can copy it?”
Get the structure right from top to bottom. “Most structures I see are too deep, they have too many layers between the CEO and the customer. There’s no way you can have customer relations from the head office.”
We seem to be seeing a history of overseas hires with big promises, running NZ companies into the ground and then right after they leave, huge losses….
“Fletcher CEO denies responsibility for botched quake repairs
The Government is getting legal advice on whether it can sue Fletcher Building for damages over the potential billion dollar cost blowout on Christchurch earthquake repairs.
Ross Taylor, chief executive of Fletcher Building, has denied that his company has any moral responsibility for the botched repairs.”
If we had guilds, then it would be alot easier for Farmers to set up their own production chain organisations based on local values, & then represent themselves in helping lead New Zealand’s presence in international forums via making value based trade deals and contributing to associated international relations in the world with the New Zealand way.
The role of Govt to the Guilds then is to make sure the business organisations representing the particular guild are applying legitimate gradings to all the business operations applying to that Guild. Another words to ensure that the Guild’s seals remain a race to the top for the overall local economy that they take place in.
For example, say a local entrepreneur wants to put together a labour providing business for a discipline of work in the local market. But the labour that this is going to be providing, is not well trained or performing, uses cheaper rates, uses cheaper materials, has no tea breaks, or the like. In all such areas it is the Guild’s responsibility to ensure that it’s seal standards given to this business are not the same as a business that excels in these ways.
The local consuming economy, also being a local producing overall community guilds economy, being free to choose quality for itself when it can, is thus able to self-regulate itself in a continual race to the top equilibrium in terms of local value systems. And the export market is the market that wants to be a part of that local economy’s value.
So how would that be different to forming a cooperative, and uniting the supply chain, in which the farmers have direct representation as a Shareholders Council? Because that is what the New Zealand dairy farmer have already in a thing called Fonterra.
Fonterra is a big monolithic economies of scale operation for it’s value system to a great extent, alot more of a speculatively removed demand and supply rigid monopolistic approach to it’s economy. Very different.