Why Fonterra’s farmers should be wondering what the Irish can teach us

It’s a critical  week for   the country’s largest company,  Fonterra, which has to find a new direction  after shipping out its  chief executive, Theo Spierings, writing off  more than  $1.5bn from its balance sheet, and posting its first loss  in its  17-year  history.

Meanwhile,  back  on the farm,  Fonterra’s suppliers  are  absorbing  payout  downgrades  as  well as a slump  in  dairy farm  prices. At the  same  time  they are  seeing  the valuations  of other companies in the dairy industry—notably  A2 Milk and Synlait— soaring  on  the  NZ  sharemarket.

So  they’ll be looking  to Fonterra’s  leaders  for  some  fresh ideas  on  how to  turnaround the fortunes of the  big  co-op.

Fonterra’s critics — and there  are lots of them — contend the  co-op  model  has failed.  Underlying profit  has fallen two years in a row. Over half  of a $750m  investment  in Beingmate, a Chinese infant nutrition company, has been written off  (though some reports  the  company  may now be on  the point of   recovery).   Then there was the  $183m  compensation payment to  French food group Danone  over the  2013  botulism  scare.

Problem  is  there is no  way  the farmers who own it will abandon the  co-op model.

So   how  does  Fonterra   pull  out of the  downward spiral?  That’s  what  farmer-shareholders  will be   wanting to  hear this  week.

But whatever    plan is  being formulated,  it  will  take   time—and  capital.

Some think   Fonterra  should  split off  its consumer  business  into a  separate operation,  still   controlled  by  the co-op   but  introducing outside   capital.

The first step  of  a  new management  team  may be  to  focus on debt  reduction  and  sell  off   what  may be regarded as  surplus assets.

Others  see  a  restructuring of  a  top heavy  executive, particularly   at  head office,  as  vital   to trim   inflated   overhead costs.  Stronger  disciplines   around costs and  assets  would certainly  make a difference.

Many  question   how   A2 Milk  can achieve  margins  far  greater than  Fonterra  does  on the products  it sells.

These critics  point to  the Irish co-op,  Kerry,  which on listing  in  1986 had a   valuation  on its  51% stake of the listed entity worth 40m euros.  Today its holding  – while reduced to around  14% – is  reported to be worth  2300m euros. The  enterprise  is now a diversified multinational  food business – just what  Fonterra  should  be,  but  isn’t.

There’s a big gap   between  Fonterra’s   strategy  and its actual  performance.

Let’s see  if  the first   steps  in closing that  gap   can be  executed  this week.

After all,  we  still   want  Fonterra    to be the national  champion  it  set out to be  when it was launched.