Decarbonisation is one option for Fonterra bosses to consider as they strive to make the co-op a national champion

Rabobank’s  latest   survey    of farmer   confidence found dairy farmers more upbeat about the fortunes of the agricultural economy  than meat and wool  producers.  Dairy farmer net confidence rose to -29% (-33% previously).

Improving demand is the key reason for optimism among  dairy farmers. That’s  largely  because global demand for dairy has held up well during the course of Covid-19 with many consumers opting for simple, familiar, stable food products such as dairy during the pandemic.  And   since the last survey,  Fonterra has  lifted  the lower bound of its farmgate milk price pay-out range for the 20/21 season.

Then there is  Fonterra’s  performance  under   the  stewardship of  Fonterra chief executive Miles  Hurrell,    who  has succeeded  in  turning  the  co-op’s fortunes  around   after  two   grim  years.

Now,  as  the  global  economy  stumbles  into  a  pandemic-induced  recession,  the  dairy  industry  more than  ever   has   become   the  main prop  in sustaining  NZ’s  export capacity.

The  question  is   whether   Fonterra  – as  the  major  player  in  the  industry  – can accelerate   the  progress  it  has  recorded  under  Hurrell’s  leadership.

Dairy farmers  themselves   feel  they  have  been  under the  cosh  of  an  unsympathetic   government, influenced  by  critics  who have talked so  incessantly  of  “dirty dairying”.

But  it is  not  only  from  the  Labour and  Green  elements  of the coalition   that  dairying  has  felt  the  lash.  Former   finance  minister   Ruth  Richardson  (a  director  of  Synlait Milk)  was  quoted  in the  NZ Herald’s  Mood of the  Boardroom  as  saying  in the face  of  a constrained  global  trading environment it  is  scandalous that  much  of  NZ’s  valuable  produce  from the soil leaves as  a  commodity, not  as a  premium  price  point. 

“It is  imperative to  address  the drag on the  economy  from  Fonterra  in  particular  and the  co-operatives in  general  which account  for much of our  soil-based  businesses”.      

Other  critics   focus  on  the  failings of  Fonterra  under its previous  CEO,  Theo  Spierings,  who  championed a  strategy  labelled  Velocity   which    aimed  to   boost   global  milk  volume, but  seriously  drained  finances   through several  loss-making  ventures.

Typical   was  Fonterra’s  purchase  of  an  18.8%  stake  in China’s  infant food  company   which  cost $755m  but  which  by  late last year  had been  written down  by   more $430m,  with  the  co-op  still trying to  offload its  holding.

Hurrell  believes  Fonterra’s  “appetite for  risk”   may  now  be  different.  Its farmer-suppliers   will certainly  believe  it  should be.

Under  the  present  chairman,  John  Monaghan,  Fonterra  has  revised  its  strategy,   and  now  the  objective  is  to  grow  value,   and  not  necessarily  volume.

Monaghan   vacates   the chair   this  year   and  new   board   members   are  being  elected.   Whether   new  ideas   will  emerge   from   the  reconstituted  boardroom  is  far  from  certain.    But  there   is    room  for   them.

Farmer-suppliers  will  be  looking  to  Hurrell  to  build  on  his   achievement  so  far.  His  turnaround  strategy  was  focussed on  getting  back to  basics,  including   concentrating  on  the  value  of NZ milk,  and pursuing  a  customer-led  operating  model. 

Debt  has been  sliced  by  $1.1bn.  And  global  returns   have  outpaced   earlier  forecasts.

Yet   the hard   truth is that  Fonterra  has fallen   short  in  fulfilling the ambitions  of  its  founders   of  being a  “national  champion”.  

In  revenue   terms  it  hasn’t  matched   the   earnings  per share  which  outfits  like  A2 Milk,  Synlait, Open  Country or other  co-ops like  Tatua  have  achieved.   Its  defenders  argue  it  was  leg-roped  from the  beginning    by  the  constraints  imposed on it  in the original  legislation.    

It’s   an  opportunity   for  Hurrell    and  his   staff    to  build  on  what has  been  achieved  so  far.  Perhaps   the  answer  may  be  in  specialised  products  that command a  significant   premium.

Latest  reports   suggest   there  is  keen  demand   for  new  Anchor milk powders , branded  Anchor  Immune  Support  and  Anchor Digestion Support.   Development of  these  two  functional  products  started only in  February. 

Beyond  that   could   the  NZ  dairy  industry  establish  itself  as a  true  world  leader  in its  field  by  putting itself  out in front   in tackling the  issues  of   climate  change?

Fonterra   could  lead the   way  in  the  process of  decarbonisation, switching from  fossil fuels to  renewable   energy  in  processing.   Analysts  reckon  most  companies can  cut their emissions by 10-20% and, in doing so, bring down  their costs.

Another  idea  is  carbon  removal.   The  London  Economist   reports  many  startups  are trying  to harness  nature’s own  carbon sequestration.  One is  Indigo.Ag.  Last  June it    launched a platform to pay  farmers for  absorbing  more  Co2  in their  land. 

Soil is  a natural  store  of  carbon:  the  organic  carbon into  which  plants transform the  atmospheric  Co2 is stored  there in abundance.  

Changes in agriculture,  such as  reduced  deep-ploughing,  help  keep carbon in the soil. Indigo.Ag’s first step is to measure  the   carbon  content  of  soil.  It uses  an algorithm to  crunch reams of  data,  from  satellite imagery to information from  tractor-based  sensors,  and generate estimate with  85% accuracy. 

Farmers  who  successfully use  carbon-absorbing approaches  will be  paid for  each additional  tonne of  Co2 sequestered. The firm  sells  the offset,  with a  mark-up for  its trouble.

The  dairy industry,  by  moving to  the  cutting  edge of  decarbonisation,  could    not only  vanquish  the   climate    change  warriors  who  continually  criticise  it,    but   give  itself a  marketing  advantage  over  its  global  competitors. 

If it  is  not in this  direction,  then   surely  there are others   which the  leaders of the  dairy industry can find  to  re-establish itself  as  the world  leader and Fonterra  as  a  national  champion.