Fonterra is well placed to win Kiwi acclamation as a corporate champion

Can  Fonterra, with  its capital restructured,  become   the national champion,  it  was always  intended to be?.

The  stars   are  aligned  as  they  never have been before.

The  dairy  giant  has  the  products,  the  bosses,  the  markets, the  support of almost  all  its suppliers,  plus  the  government’s  backing.

It seems the  high  international prices  currently  prevailing  will  persist  for  another  season, and  maybe  two, which  would  be  the  longest stretch   in  Fonterra’s 20-years- or-so history.

With  Peter McBride as  chairman  and  Miles  Hurrell as  CEO, Fonterra   has  re-shaped the  leadership  and  narrowed  the   goals.

Critics  say  there is  still  some  pain to  come  from the capital restructuring, which now  has been agreed  by  the  government.   Agriculture Minister Damien  O’Connor,  who  only last  November was  expressing reservations, has accepted  it  after  securing  some refinements, particularly  in building  additional protections  to  Fonterra’s  base price-setting  mechanism.

There  will be two  ministerial  nominees   instead of  one on the  Milk  Price  Panel  and  the  panel  chair  must  be  independent of  Fonterra  and  approved  by  the minister.

The  capital  restructuring  is  intended  to  make  it  easier,  and  cheaper for  farmers  to  join Fonterra  and  supply  it  with  milk.  This has assumed  greater  importance  as NZ  milk production flatlines and  is expected to  fall.

An independent  report   by Castalia for  Open  Country  indicated the  capital  restructure  would  cause  its  farmers a  short-term  loss  of  $4 billion  and  push  up  the  price of  milk to  consumers.

One  of  the  problems   with  the   current  capital  structure    is  that  Fonterra  is  supposed to  maximise dividends  for  shareholders  at  the  same as it  maximises  the  payout  to  suppliers.

In  accepting  the  short-term  balance-sheet hit, farmers therefore will be  providing  Fontera  with  the  ability to   attract  new  farmers more  easily and  increase  milk  supply.

Certainly  with  the  payout  this  season  expected  to  be  a  record  above $9kg/MS, Fonterra  is  well  placed  to  mitigate  the  short-term  pain of  the   capital  restructure – and then  with  more  efficient utilisation of  capacity  can  ensure  lower processing  costs, and  enable the  payment of  a  still higher  milk price.

It is  this  virtuous   circle   which  the  McBride-Hurrell   team   are  aiming  to  consolidate and  is   essential   if  Fonterra is  to  avoid  the all-too-familiar cycle  of a  peak  price  one  season  followed by  a  loss-maker  the  next.

This  season   Fonterra  is  looking    at  pumping $14 billion into NZ’s rural  regions  with  its  payout,  the  highest  it  has ever achieved.

But what might it  mean for  those  regions if  they  could  be  assured of that and of continuous rises  each following  season?

This  almost  certainly is  the  goal of Fonterra’s  bosses.

If  it  is  achieved   the   Fonterra   could  truly   earn  the title  of  national  champion.

One thought on “Fonterra is well placed to win Kiwi acclamation as a corporate champion

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.