A business-as-usual approach at Fonterra won’t produce the food-production transformation which Sir Peter Gluckman is urging

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?

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