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It’s time to reform Fonterra

Written By: - Date published: 9:00 am, March 25th, 2016 - 49 comments
Categories: Economy, Environment, exports, farming, farming - Tags:

At the formation of Fonterra in 2001 it was thought New Zealand could essentially monopolize the world price of milk. From here, OMG, and what folly that appears now. Now, it is New Zealand’s largest economic liability, apart from real estate. Why hasn’t Fonterra worked?

The NZ Herald generated some thoughts last year from Tony Baldwin, leader of the government’s group that help change the whole industry.

You don’t have to agree with everything he said. I don’t agree that Fonterra should revert to bulk commodities at all, for example. But he made some good points.

Waikato Professor of Agribusiness Jacqueline Rowarth discussed the subject recently again in the Herald.

She understands the folly of Fonterra continuing in a race to the bottom of production, where its brands do not promote the values of our comparative advantage to other dairy producer nations, such as higher animal welfare, higher environmental regulation, extensive pastoral production, massive national branding strength, and more efficient production. That is to say, it does not advance the interests of New Zealand. It is not even close to generating strong competitive advantage.

It’s time the collective opposition stated that it will hold Fonterra to account as a core economic priority. Fonterra holds more power over our economy than Telecom did before it was forcibly split up by Labour’s 1999 government. It is a commercial entity formed by legislation and should therefore be regularly held to account by Parliament, and isn’t. No regulator currently touches it.

In the last two months, prior to its financial result a few days ago, its leadership faced up the the media a total of zero times.

Our regional economies and our regional environments are so vulnerable to Fonterra that it must be regulated. Even our current Prime Minister can see straight through their corporate lies to their suppliers.

Maybe it’s time for a Minister to sit on its board. Maybe a national water price regulator would help. Whatever. Apart from banks, Fonterra is our only economic Too Big To Fail. The Opposition must plan to pay as much policy and executive attention to Fonterra as it does to banking and real estate. Fonterra is New Zealand’s Nokia.

We are all too vulnerable to Fonterra for government to stay neutral to it.

49 comments on “It’s time to reform Fonterra ”

  1. Saarbo 1

    That Tony Baldwin is a free market ideologue, …surprised to see you promoting his views against a farmer owned co op. Fonterra may have some issues at the moment but for fucks sake don’t look to Tony Baldwin for solutions…he’s the sort of arsehole who would suggest that farmers own the commodity side of the business and Fonterra should float of the Branded side on to the New York stock exchange (Actually that idea was promoted by Matthew Hooten on Nine to Noon on Monday)

    • Ad 1.1

      I dismissed quoting Oram because he’s so well known to readers here. I like an oppositional framing – good for dialectic.

      Plenty of other Fonterra critiques around, and they’ll get stronger.

    • Henry Filth 1.2

      I thought they’d already flogged off the “Anchor” brand in various parts of the world.

      But the trouble is that New Zealand has no products. French cheese-brie. Italian cheese-parmesan. British cheese-cheddar. New Zealand cheese????

      • Draco T Bastard 1.2.1

        /shrug

        Cheeses are the result of the mould used to create them. How many cheese moulds are unique to NZ?

        I figure the best we can do, as far as cheese goes, is say that it’s grown in NZ.

  2. RedLogix 2

    In my experience successful enterprises, regardless of whether they are public, private or any structure whatsoever, push operational decision-making down to the lowest level possible in the organisation, while ensuring the role of management is to provide communication and strategic coherence.

    Invariably it is the people doing a job who know how to do it best. I’ve encountered this so often, plant operators while they may lack a degree or be able to fully express an issue in the right jargon, almost always have a more intimate sense of what is right than I do. I make it a rule to listen to them, even if it seems wrong at first. Then I try to figure out what I need to do to help them get the result they already know they need in the larger context of everything else going on.

    Writ on a larger scale this is the correct role of management; acting as a conduit for operational knowledge and harnessing the collective power of the enterprise.

    Emphatically Spierings is taking Fonterra down a different, confrontational, top-down model which will only further damage the industry.

    • Ad 2.1

      I noted your comments on Open Mike re hollowed structures with a chill.

    • lprent 2.2

      The first rule of management is that their role is to be slaves to the people actually doing the work – from the drivers through the techs to the sales and marketing. Management are there to facilitate those people in becoming more productive and effective.

      As an overhead cost, that is managements only effective contribution towards productivity.

      Unfortunately often management get a tin God mentality.

      Incidentally this was the reason I dropped out of management and into programming in my late 20s. Rather than spending a lot of time, worry, and effort in 5 minute time slices trying to get others to be more effective, I found I just liked doing the actual work myself. It was a lot more fun.

      • Macro 2.2.1

        Exactly – but you try telling that to the young managers of today, and they will never believe you! 🙂

        • lprent 2.2.1.1

          I have been known to point it out..

          But fortunately with the slow demise of middle management through technology, it does appear to have gotten a lot more traction in the last decade.

    • Draco T Bastard 2.3

      Thank you for explaining why management should be getting lower pay than the workers.

  3. millsy 3

    Stop me if I am wrong, but all these problems seem to stem from when Fonterra listed on the stock exchange.

    It may have been a rather convoluted listing without it being a listing, but as Fonterra directors are now bound by insider trading laws, it is most definetely a listing.

    Genuninely cooperative Tatua and Westland seem to still be doing alright.

    • nadis 3.1

      Fonterra’s problems have existed from way before the listing – note its not a full listing – the normal shareholder rights still reside with the farmer shareholders. The listed fonterra shares are kind of irrelevant to the actual management and capital structure of the company.

      Fonterra’s problem is cultural one. It is an engineering and logistics company. Give them a problem like “increase production of milk powder and reduce costs” and they’ll do that better than anyone in the world. But charge them with growing a consumer brand and they’ll spend $100 million on the task, fail and then write off the investment. I think the cultural bias extends right back to farmers who think only in terms of milk production and input costs (rational as they are the only things they can control), and then management who have always been able to be successful enough through selling bulk commodities.

      But that game is over – traditionally NZ accounted for something like 30-40% of global dairy trade but around 1% of global production. Now with other countries starting to export Fonterra is no longer a whale in the export world.

      The smaller dairy companies have been successful (imo) because they have been unable to rely on a dominant position in exporting bulk commodities. Rather they have had to build added value brands to make money.

      If there is any kind of split that makes sense for fonterra it is in to a bulk business and a brands business. Problem for current management though is that this would advertise their failure as the current brands business would look like a joke.

      • David 3.1.1

        For a brand on the scale of Fonterra you need billions, not a hundred million. The smaller players have been successful because they are operating on a very small scale and their farmers have been committed to the longer term rather than just the upcoming payout.

        Splitting Fonterra is a logical step, but brands are not something Fonterra has succeed at, so I can’t see them improving that short term.

      • millsy 3.1.2

        A listing is a listing is a listing.

        As I said, the directors are now bound by NZX rules and insider trading laws. That makes them a listed company, and not a co-operative.

  4. Time to reform Fonterra? Sure – all you need to do is buy a dairy farm, join the cooperative and then try and persuade other members of the cooperative that reform is necessary. Let us know how you get on.

  5. Bill 5

    Maybe if Fonterra had been a genuine cooperative at the outset; one that gave farmers genuine agency, as opposed to the typically rigid, short sighted, top down corporate model that it is…

    Anyway. That as it may be…getting out of the hole might not be an option now. I note the post reports Jacqueline Rowarth as suggesting things like “higher animal welfare, higher environmental regulation”.

    And that’s all good, but then I think TTPA.

    Put simply. Better welfare or enlightened regulation etc – costs. And under a TTPA, with no tariffs to equal things out, foreign suppliers who don’t hold to the same standards will be able to offer cheaper products. That in turn will lead the domestic regulated industry (whichever industry it may be) to lobby for a relaxation of standards in order that they can compete on a level playing field. (The argument being that the will ‘go under’ otherwise)

    • Murray Simmonds 5.1

      Not dead, Draco T. But I wouldn’t mind betting that is being set up for an offshore corporate takeover.

      Just a guess.

  6. Gristle 6

    Fonterra’s fundimental problem is that the international export market accounts for 9% of internationalproduction and Fonterra’s share is 25% of that export market. So NZ’s exported dairy product is around 2.5% of the world’s production. Increasing world production by 2% matches the entire Fonterra export quantities.

    So whenever there is an increase in demand in the export market that drives up prices will see the rest of the world’s dairy production capability ramp up and the price will drop. There will be a continual Vulnerabilty wherever you base your products in the commodity end of the market and where competing production can easily be scaled up to meet increases in demand. When you have feed lot cows producing milk, adding an extra 10% in herd size doesn’t see much on farm investment required as it is bringing feed into the feed lot all the time already.US Feed lot cows are treated as machines and produce maybe 50% more milk that NZ cows. They are milked hard and culled out of the herd in half the time a NZ field based cow. Guess which type of system is more scalable more quickly. So New Zealand turning every bit of soil into a dairy farm is not the solution when the answer is exporting commodities.

    Fonterra’s profitability is dependent on sourcing material cheaply and processing it. As such it is happy to have low prices at the farm gate: $400m profit cannot be wrong. And as such sets up conflict with its farmer owners.

    Being a commodity supplier increases Fonterra’s risk in the future as there is a high probability that synthetic milk will produced from yeast. Milk powder is milk powder, right. So where is the value of organic, or grass feed, or cow produced if all you do is take all the water out of it as send it to a food manufacturing factory to turn it into bread or Coke or whatever.

    Fonterra setting up farms overseas to supply export markets is just compounding the problem. Increasing production into a volume sensitive environment is crazy unless this production offers some unique advantages, eg counter cyclical, removing trade barriers.

    • Draco T Bastard 6.1

      So New Zealand turning every bit of soil into a dairy farm is not the solution when the answer is exporting commodities.

      Actually, simply exporting commodities isn’t the answer. Samsung, with about the same number of employees as Fonterra, produces about 25% of our GDP.

      Fonterra is proof that we’re doing it wrong.

  7. Fustercluck 7

    Danone makes several times the amount of profit per kg of milk solids than Fonterra.

    Finished, value-added products with brands and product names owned by the milk processor are the only way to make money in the dairy sector. The commodity approach was and is guaranteed to fail.

    Investing in overseas farms that compete with NZ farmers and drive down commodity prices was also a puzzling move.

    • RedLogix 7.1

      The farming sector in this country can only be bitterly disappointed in the performance of it’s industry leaders on so many fronts. This is just the latest.

      But until a majority of farmers wake up, understand they’ve been duped and dumped by the elite capitalists like everyone else … nothing much will change.

      • weka 7.1.1

        High stakes gambling. There must be a lot of denial going on about the people who lose.

      • Gristle 7.1.2

        Hate to say it but most farmers had and continue to have a low level of education. At a stage where you need a degree to get an entry level job how is it that it’s appropriate to base the future of the country, and multimillion dollar businesses on somebody who didn’t like maths science and English. You see a farmer in trouble and more than likely they compensate by doing more tractor work- iron disease.

        Don’t give me anecdotal evidence on how you are or know someone who left school at the age of 9 and now has 5 farms. I’ve got an inlaw just like that. He has 15 farms and does all his paperwork at the kitchen table (just like Crayfor). He also has no succession plan.

        There are some who are absolute guns, but there is very little opportunity to replicate there knowledge/experience elsewhere whilst the owner -operator model dominates. I am reluctant to endorse corporate farming. Hybrid models may be the answer.

        But this is all at the front end of a chain that likes commodities over value add and relies on a benign climate when this advantage is changing.

        • RedLogix 7.1.2.1

          Totally agree with your comment on the absolute guns. Whether it’s conventional or non-conventional ideas they are implementing, there are some operators who are absolute role models.

          Some are remarkably deep green guardians of the land, but for too many heavy levels of debt force them into unsustainable practices which ultimately degrade their businesses and their own health. More than a few men have been broken this way.

          As you suggested, education has to be the key. While it’s true many farmers may lack paper qualifications, most are no fools. Farming is not an easy business, it’s damned hard work and one wrong decision at the wrong time can bugger a whole season or more. So it’s not surprising many of them become very risk averse and in the absence of better information will stick to what’s worked for them in the past. But the key to change is showing them new ideas that are working.

          While most will have an informal bunch of mates in the district they’ll talk with and help each other out, my impression is too often these small networks also reinforce conservatism rather than promote change. Field days have often been a good thing, but perhaps too captured by commercial interests. Industry groups have been too often crippled by in-fighting between conflicting interests.

          We used to have a strong MAF that heavily invested in best-practice on the ground; I’m not so sure how much of this remains after decades of neo-liberal slash and burn. But ultimately sustainable agriculture is one of the core and vital responsibilities of government we ignore at great risk.

    • David 7.2

      Fonterra doesn’t have the capital needed to create brands on the scale it needs for the whole milk supply, on top of which, it sets itself up in direct competition with all its current major customers.

  8. cowboy 8

    Its important that farmers don’t get duped into throwing the baby out with the bathwater re Fonterra. They will realise becoming price takers at the end of the supply chain at the behest of foreign corporates is an incredibly dangerous place to be. Fonterra may not be perfect but at least they have the ability to evolve it in their own interests.

    While I agree Fonterra has not progressed the value add part of their business as fast as it should have, I didn’t hear those howls of criticisms a couple of years back when the payout was $8.40kg. The current collapse in commodity prices is a huge wake up for all concerned.

    Its timely the DIRA legislation gets reviewed as the mandatory requirement to take new milk, and supply a certain amount to the competition to effectively subsidise their establishment, has run its course.

    • Draco T Bastard 8.1

      I didn’t hear those howls of criticisms a couple of years back when the payout was $8.40kg.

      Actually, there’s been huge amounts of criticism on here for years regarding Fonterra’s (and NZ’s) lack of diversification. And warnings about what was going to happen because of it.

  9. gsays 9

    while this may not be exactley along reform lines, i suggest this:

    massively cut the pay of the knobs up top.

    whoever came up with the idea that fonterra would treat their contractors as a bank (60 day extension of payment terms), and while they are at it give us a 20% discount needs an uppercut.
    they should be shown the door and every other executive that went along with it.
    apparently the high salaries are needed coz they attract quality workers….

    value added, value added, value added.

    go organic.
    i think it was on the standard i read the bog standard milk powder price was nz$2800 per tonne compared to organic milk powder @nz$14,600.

  10. Draco T Bastard 10

    Apart from banks, Fonterra is our only economic Too Big To Fail.

    If anything in the economy id too big to fail then there’s only three options:

    1. Break it up so that’s no longer ‘big’
    2. Regulate it so that the government has a say in it’s running and a payout of it’s dividend
    3. Nationalise it into a state monopoly

    Fonterra is New Zealand’s Nokia.

    No it’s not although it probably likes to think it is. If anything, it’s what’s holding us back from developing our economy properly.

    What we’ve been doing over the years is focussing too much upon the stuff that’s easy to do rather than pushing on the stuff that’s actually a challenge. The reason for this reticence seems to be that out ‘leaders’ are focussed upon the costs and ignore the benefits.

    We need to reach further if we want to succeed rather than doing the same stuff over and over again hoping that we’ll all suddenly get rich. We need to look at the hard to do and say: This is going to be fun. Because it will be. Doing the easy stuff is boring, mundane.

    And now you know why the best and brightest of us leave – they’re bored and to do anything interesting requires leaving.

    • Macro 10.1

      “What we’ve been doing over the years is focussing too much upon the stuff that’s easy to do rather than pushing on the stuff that’s actually a challenge. The reason for this reticence seems to be that out ‘leaders’ are focussed upon the costs and ignore the benefits.”

      QFT

    • Hammerman 10.2

      3 very poorly thought out suggestions.

      Break it up – so we end up cannibalising each other in the overseas marketplace?
      Regulate it – because the government are really good at running businesses?
      Nationalise it – because that’s worked so well in the past.

      As a dairy farmer, supplier and shareholder of Fonterra – I look forward to you buying a dairy farm which will give you the ability to raise your 3 suggestions for a shareholder vote at this years AGM. I’m sure you’ll get 75% of milk solids to support your remit.

      Ultimately, it works like this. Me and 10,499 other farm owners will run our co-op in our interest. So you can either buy a farm and join us or move on. Fortress Fonterra is my co-op, not yours.

      • Ad 10.2.1

        Definitely agree that the shareholders are the key. But the effect of Fonterra on New Zealand is also bigger than shareholders – it’s the largest international corporate we have.

        It’s made its on-farm shareholders far too vulnerable. To banks, to their ability to respond to market signals, to succession and leadership planning. And yet Fonterra can’t return enough to make a profit that rewards the life.

        It’s shown too little capacity to stop mistakes, of a magnitude that damages the whole country. It’s bigger than its shareholders by a long way.

        We can wait for shareholder activism to work. It almpst never works.

        Nokia is the right comparison because it’s had to completely redirect its business model to survive. And so does Fonterra.

        • Hammerman 10.2.1.1

          Couldn’t disagree more.

          I’m less vulnerable with Fonterra then without it. Fonterra have delivered to dairy farmers over the long term. They’ve underpinned my farm value as a co-op member, the introduction of gDT has normalised NZ’s milk price with the rest of the world, and my ability to own and profit from the manufacturing asset beyond my farm gate is key to diversifying my farming portfolio and hedge my risks.

          This years milk price shouldn’t be a catalyst for change. FYI – I have farming interests in the UK and we’re getting 17 ppl from Arla for our milk over there. Convert that to solids and NZD and you get $3.96 so my $4.30 from Fonterra isn’t too bad after all. If Fonterra were behind internationally, then we’d be concerned.

          Our farm does 182,000 solids and Fonterra shares are about $6 each. I’ve got skin in the game, so my say counts. Until you get a tanker roll up your drive, and you make an equivalent investment like I have in Fonterra shares, you’re opinion is irrelevant. That’s the beauty of a co-op after all. It’s run for the benefit of its members only.

          • Cowboy 10.2.1.1.1

            Dairy farmers need look no further than the meat industry to see what a disparate beyond the farmgate model delivers.

          • Ad 10.2.1.1.2

            I’m not proposing ‘doing away with Fonterra’. Silly straw-man argument.

            My opinion matters because I’m a New Zealander and it’s the largest NZ business. It affects our entire economy.

            As for milk price (per kg ms) it was last under $4 in 2006. The next year it went to $7.5. Next year just over $4.5. By 2011 back to $7.5. 2014 around $8.3. You know where it is now.

            Congrats if you can plan on that. You’re a walking talking miracle too arrogant to admit improvement needed in Fonterra.

            BTW do you know how many Waikato dairy owner suicides there have been this year? I do.

            Do you know the % of forced sales ANZ is planning in mid-Canterbury this calendar year? I do.

            You could do with some of the cocky taken out of you.

      • Draco T Bastard 10.2.2

        Break it up – so we end up cannibalising each other in the overseas marketplace?

        That’s what competition is all about.

        Regulate it – because the government are really good at running businesses?

        Well, generally speaking, they’re better at it than the private sector.

        Nationalise it – because that’s worked so well in the past.

        Yeah, it did. The problems we’ve got now are because of privatisation.

        Ultimately, it works like this. Me and 10,499 other farm owners will run our co-op in our interest.

        Great, we’ll leave you guys to it. Don’t come to us next time there’s a drought, storm, long winter or any of the other myriad things that you usually come demanding the government (us) bail you out for.

      • Gristle 10.2.3

        The 3 solutions offered by DTB are not exhaustive and effectively represent non-solutions.

        Fonterra needs to be reconceptualised as an entity that delivers a premium range of products.

        And for farmers being suppliers of premium inputs will mean:
        1. A focus on environmental management that sees improved water quality
        2. Ethical treatment of animals. Tail breaking, Bobby calves, slinks, culling, lameness all need to be sorted out.
        3. Staff welfare is an issue. Look at the hours and lack of breaks, the drug and alcohol usage, the accident and death rates, as well as the low real pay rates.
        4. Resource consumption needs to be managed. A dairy farm can go through 80,000 litres per milk. A milking cow requires about 110 litres per day, so that’s another 80,000 litres. A quarter of a million litres per day per dairy farm is about the same as 250 homes. If you require irrigation then the water usage doubles.
        Over allocation of water resources has already occurred.
        5. Cows have to be pasture based eating mainly grass.

        Imagine a picture of Heidi in a meadow with a few cows. That’s what consumers want their dairy product to come from.

        I am a farmer but accept that as a consumer of a vast number of free high quality inputs that the NZ society can demand things of me, such as exceptional production values.

      • millsy 10.2.4

        You guys dont run the co-op anymore.

        Not since the backdoor NZX listing.

  11. Tautuhi 11

    Executives are very well paid at Fonterra, probably got their bonuses as well this year?

  12. saveNZ 12

    Personally feel the co operative model is working well, it is just the lack of talent and self indulgent agenda in the management side of Fonterra that is causing the down turn. They are getting too much corporate welfare from the government in water subsidies and lazy immigration etc. If they had to plan for less water, paying market rates for labour and a more sustainable future which is the likely to be needed in the future then they would have put research into water saving ideas and sustainable ventures.

    Fonterra executives are paid too much and produce more spin than long term results. They should not earn more than 1 million including bonuses. The bonuses should be pegged to a 10 year return not each quarter or year which incentivises executives to cut costs and investment to show better books. They should also no received bonuses if they have laid off workers.

    • Ad 12.1

      They’ve sacked their Head Office in droves this year to bring their exec overhead down.

      I haven’t heard anyone propose unwinding the entire coop structure.

      • sabine 12.1.1

        nope Ad, they sacked the workers and paid themselves a raise.

        from September 24 2015
        http://www.stuff.co.nz/business/farming/agribusiness/72361647/Fonterra-boss-Theo-Spierings-gets-up-to-18-per-cent-pay-rise

        Quote: “Fonterra’s chief executive received a pay rise of up to $770,000 last year, despite struggling milk prices and hundreds of his staff losing their jobs.

        Fonterra chief executive Theo Spierings’ salary for the year to July 31 was between $4.93 million and $4.94 million, it was revealed in the company’s annual result on Thursday.

        That’s up to 18 per cent more then what he was paid in the year to July 31, 2014, pushing his hourly take home wage up to $1595.” Quote end.

        but maybe you say, that he has had his salary frozen, cause you know shared pain and all of that …….

        October 1 2015
        http://www.stuff.co.nz/business/farming/agribusiness/72585204/Fonterra-CEO-Theo-Spierings-salary-freeze-offer-too-late-farmers-say

        Quote” Theo Spierings received an 18 per cent pay rise in the year to July 31, with an hourly take-home pay up to $1595.

        Fonterra boss Theo Spierings’ salary has been frozen at his own request, but he will still qualify for major bonuses on top of his salary.
        Spierings requested the freeze for the 2015-16 year at a meeting of the company’s people, culture and safety committee on September 21.
        That was the same day Fonterra confirmed 230 more jobs were going, adding to the 523 staff made redundant in July.
        Spierings’ total earnings for the year to July 31 were at least $4.93 million, representing a pay rise of about $770,000.
        The freeze will only apply to his base salary and he will still be eligible for short and long-term “incentive” payments.
        Unusually for a major company, the dairy co-operative only publishes Spierings’ total remuneration, without splitting out bonuses from fixed salary.
        It is not uncommon for such bonuses to make up more than half of top executives’ total pay.” Quote end.

        Nope they only kicked out the worker drones, expecting the remaining worker drones to pick up slack and doing two jobs for the wage of one – lest they want to loose their jobs too and face the WINZ created under the current National Governments Lady of Welfare Mismanagement Paula Bennett, share price goes up as labour costs are cut, and large bonuses are paid to those that just unemployed a few hundred people.

        • Ad 12.1.1.1

          Describing those in head office as ‘worker drones’ is neither fair nor true. Far better to show if the total staff overhead has gone up or down.

          And scapegoating the performance of Fonterra onto the CE’s pay is just silly. The problems have been there since 2001, and are not improving.

          • saveNZ 12.1.1.1.1

            Personally feel it is extremely relevant. Fonterra is a co operative. Why should the CEO be earning “at least $4.93 million, representing a pay rise of about $770,000. The freeze will only apply to his base salary and he will still be eligible for for short and long-term “incentive” payments.”, while laying off workers and paying farmers milk payouts below what it costs to produce the milk.

            There is something wrong with a co operative if a few are benefiting from their own decisions while most of the rest of the co operative are much poorer or worse off.

            It’s classic neoliberalism not good for the farmers, not good for the suppliers, not good for the country, but really good for the 0.01% in the co operative who run it (into the ground for everyone else) and then will have a brainiac idea to sell parts of it off and raise more money or cut costs further by laying off more people or getting more corporate welfare, or not guaranteeing to collect the milk.

            Obviously cutting their own wage costs is not in the equation. (P.S Steve Jobs paid himself $1 salary when he took Apple back from bankruptcy. He was not a saint, but he did understand business!)

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