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.