As the Covid-19 pandemic rages round the world, New Zealanders are re-discovering food production is the fundamental engine of the economy. And farming is not a sunset industry.
Instead of being rubbished by lobby groups for so-called “dirty dairying”, the country’s core export industry has the chance to transform itself to be both more sustainable and profitable, along with remaining one of the main props of the economy.
Coincidentally, dairy giant Fonterra gets a new leader in Peter McBride who takes over as chairman in November. McBride steered Zespri through several crises. Now, he says, he is looking forward to “creating value” for the co-operative’s 10,500 suppliers.
It’s a challenge even more acute because the co-op has only just emerged from racking up a $605m annual loss in the 2019 financial year. Fonterra did that as other dairy companies were turning into stars on the NZ stock exchange: A2 Milk, for example, became the NZX’s second-highest capitalised stock.
For some, the puzzle is why A2 Milk and Synlait can deliver such strong financial results while Fonterra can’t. After all, the weather’s the same for everyone’s cows, they eat more or less the same stuff, and basic milk prices are the same.
Clearly, McBride will have to inject creative thinking into the Fonterra boardroom, not just to turn around the co-op’s fortunes, but to capitalise on the new opportunities of the post-Covid world. Down on the farm, they will be looking for a new dynamic in the boardroom to drive Fonterra ahead.
Sir Peter Gluckman, Chief Science Advisor to the New Zealand Prime Minister from 2009 to 2018, says the socio-economic consequences of Covid-19 present “an unparalleled opportunity to rethink our future”.
Sir Peter talks of NZ becoming a global leader in sustainability.
“Taking a proactive approach to emphasising the qualities of sustainable, low-carbon dairy production, agriculture, horticulture, fisheries and aquaculture could be highly valuable”.
He sees many different technologies, including sensors, big data and artificial intelligence, and breakthroughs in the life sciences as dramatically changing agriculture and food production systems around the globe.
“The common assertion that our food production is a mature industry is wrong. There are major opportunities … but a more strategic approach to research and development is needed…. To be strategic, the science system needs to fix its splintered nature and the misplaced incentives on which it is based”.
R&D is one of the problems confronting not just Fonterra’s new chairman but the co-op as a whole.
While companies like Fisher & Paykel Healthcare (the highest capitalised company on the NZX) outlay as much as 9% of revenue annually on R&D, Fonterra spends far less (so much so it seldom discloses precisely how much it has allocated to R&D). Critics say it is as low as 0.5%.
Fonterra for years has sought to increase the amount of value-added products it sells, but is stymied by its cooperative structure when it seeks to outlay more on research or it needs to build the expensive plants to process specialist products. Farmer shareholders insist on the co-op maximising the milk price its pays to suppliers.
Building mega-factories and creating brands are very capital-intensive and Fonterra can’t finance it through debt like a normal business.
The company has three different categories of sales which fall into the “value added” basket: consumer (branded products for households – Anchor butter, Anlene adult milk powder, Anmum baby formula ); food service (specialist Anchor branded products for restaurants, hotels, cafes etc); and advanced ingredients (clever stuff like pharmaceutical ingredients and designer proteins).
Fonterra has invested $850m in new production capacity for foodservice since 2013, $700m of which has been in NZ. These include expansions at Waitoa for UHT creams, Eltham for slice-on-slice cheese, Clandeboye in Canterbury for extra stretch mozzarella, and Te Rapa (Waikato) and Darfield (Canterbury) for cream cheese.
Yet somehow Synlait and A2 Milk, pro rata, have invested more and succeeded in making their products more exciting to the consumer.
Fonterra as a dairy company may rank among the top five in the world in terms of revenue, and has indeed shown it is possible to grow a global company from “the edge” of the world — but it still is not quite the “national champion” which its founders believed it would become.
The question is whether it can meet the fresh challenges the post-Covid environment will present. Business-as-usual, incremental approaches will not lead to the necessary transformation which Sir Peter Gluckman believes is needed.
Fonterra is a complex business. Its cooperative structure, vertical integration, sheer size in the market and reliance on not one but several commodity price structures all come together to make the company, as one analyst put it, “like a machine with a million moving parts”.
Can McBride apply the spark for that machine to zoom into a new era?