Comforting news for dairy farmers as companies report results and the world price rises again

Encouraging signs emerged this week that key elements in the structure of NZ’s largest export industry are whipping themselves back into the shape they should be.

The giant  co-op  Fonterra  has  gone back  into the  black  with a net profit of $80 million in the  first half,  after previously recording  a  net  loss of  $186m.

Meanwhile Westland Milk Products, NZ’s second biggest dairy co-op, is in line to be  sold  to China’s biggest  dairy company,  Yili,  in  a $588m  transaction that would inject nearly half a million  dollars into the operations of  each  of its  suppliers.

Alongside these co-ops, the Canterbury-based Synlait has underlined its strength in the  industry with a  solid result in  its half-year after  achieving   higher sales  volumes.  It reported a half-year net profit of $37.3m,  9.6%  lower  than   the  $41.3m  in the previous first   half,  but  with the  focus  on investing for  growth,  with a  second processing  plant due  to come on stream for  the  2019-20 season.

Fonterra’s milk-price news is soured by chairman’s critique of the co-op’s earnings performance

At last a ray of sunlight into  the  country’s cowsheds:  giant  dairy co-op Fonterra has lifted its forecast farmgate  milk price  to $6.30-$6.60kg/MS, up from $6-$6.30, on the back of   strong  global  demand.

The good news extends to next season, with ANZ  economists  predicting – because dairy commodity prices are improving more quickly than expected – the  forecast for  2019-20   could go as  high  as  $7.30kg/MS.

And there is  something  else  Fonterra suppliers might get a  bit of  a glow from: the  recognition   by  Fonterra’s  top brass  that the  co-op  has not been  performing anywhere  near  where it should be.   They’ll  be looking for a   sharp improvement,  even  if  the  co-op has a long  way to go to  match  the   achievements of  smaller outfits   like  A2 Milk and Synlait.

Fonterra must learn to be driven by profitability, not volume

Fonterra  chairman  John Monaghan  sought to   cheer  up  the  co-op’s farmer-shareholders  by telling them  at what was reported to be a “packed” annual  meeting  that  “For a time this year, NZ farmers were paid this highest milk prices in the world.”

He  insisted there has been a structural change in  the co-op’s milk prices since Fonterra was formed.

“We’ve gone from being paid about half as much as our global peers to the point now where we are consistently paid the same or thereabouts.It sounds arrogant to say it, but the fact is that simply never would have happened without a strong Fonterra”.

Great Scott – could this be the source of fresh thinking from Fonterra?

Fonterra’s new chairman, John Monaghan, the man chosen to resuscitate the co-op’s flagging fortunes, got a big serve from the NZ Herald’s  Andrea  Fox this week.  Under the headline “New chairman – same old Fonterra song”, she wondered  if  anyone else  had a sinking  feeling  when Monaghan presented his idea of the biggest  challenge facing the embattled  dairy  company:  the need  to change  the law  that forces Fonterra  to accept milk  from  any  farmer and sell it to  rivals at a subsidised  price.

Fox  went  on:

“Meanwhile back in real life land, Fonterra had a crisis of confidence among its 10,000 farmer-owners due to its financial and investment decisions, its balance sheet wasn’t pretty reading, and our so-called ‘national champion’ was being scorned by the public and the Beehive.

“With the chief executive as well as the former chairman gone, Monaghan, rather than jump into the leadership void and address these inconvenient truths head-on, pitched a tired old complaint that’s worked for Fonterra’s spin machine before, firing up righteous indignation among farmers when it’s needed a distraction tactic.

“It’s also been a handy one for implying if only Fonterra didn’t have this pesky bit of the legislation holding it back it’d perform better.But challenged by the Herald to produce evidence of the hardship created by its statutory milk obligations, New Zealand’s biggest company cried commercial confidentiality”.

A flow of “fresh air” – here’s hoping Fonterra’ s financial performance gets a good whiff

Fonterra’s  latest move, appointing Miles Hurrell as interim CEO  “with immediate  effect”, has   sent  fresh rumbles  through the  dairy industry.

The  co-op’s  chairman John Monaghan, announcing the move,  spoke of the need  to  “breathe  some fresh  air  into the business”.

He is  not alone with this observation:  several  politicians  have been calling for just that – but  many of the  co-op’s 10,500 farmer-suppliers may be wondering  what exactly  a  blast of   “fresh air”  may do.

Whatever Fonterra does is important  not only  for the farmers,  but also for the  country, because  the co-operative is the only  NZ business  which can  be truly  labelled  a  multinational. It is the country’s biggest  exporter and has  20,000 employees worldwide.

Fonterra   was  already  undertaking a  global  search for a successor  to Theo Spierings  as  CEO,  who  was  due to leave the  post in November.   He will  now leave on  September  1.

Hurrell, who has been with the company since 2000, is currently chief operating officer of Fonterra’s Farm Source unit, which is responsible for working directly with its roughly 10,500 farmer-owners.

Monaghan, who himself took over as chairman only last month, said it was not best practice to have the chairman and CEO stand down at the same time, but events have overtaken that decision.

“I have agreed with the Board that we will stop the global CEO search while we review the co-operative’s current portfolio and direction. It’s important that we give ourselves the time to take stock of where we are as a co-operative, breathe some fresh air into the business, then determine any changes that are needed. Appointing a new CEO is the most critical decision a board will make. We will take all the time we need to find the right person.”

Monaghan said in the meantime, Fonterra needed a new leader who could hit the ground running and Hurrell had the experience, intellect and commitment to do that.

Fonterra has faced criticism about not disclosing the illness of former  chairman John Wilson, who  stepped  down  last  month, as well as – more fundamentally – on its financial performance.  On Monday, the dairy processor and exporter dropped  its forecast  payout  to  its suppliers and said it was unlikely to pay a final dividend.

Federated  Farmers’ spokesman Andrew Hoggard says the timing of the announcement is “rather strange” because Fonterra must be close to choosing a permanent head.

He said he lacks an in-depth understanding of Hurrell’s skills.

“All I know is he’s very approachable, I’ve never heard him say anything stupid. He’s a safe pair of hands.”

Hurrell,  who is  44,  has been with the co-op  since  2000.  As Chief Operating Officer at Farm Source, he has been responsible for Fonterra’s global farming strategy that includes farmer services and engagement, milk sourcing and the chain of 70 Farm Source™ rural retail stores throughout NZ.

Monaghan  insists appointing a new CEO is the most critical decision a board will make.

“We will take all the time we need to find the right person.In the meantime, we need a new leader that can hit the ground running.

“Miles has great mana. He has a deep understanding of our business and has demonstrated his ability to manage large, complex business units in most of our global markets.

“Miles is well-respected both within our co-op and by our key global customers and wider stakeholders”

But critics may find it odd that Monaghan further says:

“Our CEO role requires intellect, energy and commitment. Miles brings that in spades.”

Those who toil in the sheds could  think  this goes without   saying —- especially  as the departing CEO  received   $8.3m  in  remuneration.

Hurrell is quoted  as  saying Spierings

“ … leaves behind a talented leadership team that includes some of the best minds in global dairy. I’ve been privileged to be part of that group for the last four years and I’m totally confident that, by working as a team, we can deliver on the expectations New Zealand has of us”.

But, significantly, he added:  “As a group, we haven’t always got everything right”.

Would that  be the  dud investment  in   Beingmate?   Or the slow  progress  in  adding value?  And what else?

Certainly   some  analysts contrast  the plodding  performance of  Fonterra   with the spectacular results  achieved   by  relative  newcomers  in the industry, such as Synlait  and  A2 Milk.  Others   see  the  culture   in  Fonterra’s  HQ   as  “dour”.

If   Fonterra  needs   more oxygen  at  the top, as Monaghan seems  to  suggest,  it is  not the  only  corporate  in NZ  with this problem.  Fletcher Building  has been   through the same treatment.

With  the  government   reviewing  the  legislation  governing  the  dairy industry, it is   a critical year  for  the giant co-op.

Monaghan  says  Spierings  has   led the co-op   through  a period of great change and  “some real challenges”.

But the latest  move  suggests  not all  of those  challenges  have been met.

The fiercely  loyal  farmer-suppliers  will be  looking  to the board to  suck in  that  “fresh air”  and  crack the whip  a bit more vigorously.  They — and NZ — need  Fonterra to be  the global leader it aspires to be.

UPDATE:  Investors have reacted positively to news of fresh air being pumped into Fonterra.  The share price on the NZX started the day at $4.81.  At noon it was $4.85.