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Fonterra is a major part of the New Zealand economy. It is the country’s largest company and its fortunes affect not only dairy farmers but also the wider community.
There is no denying farmers are unhappy with the current performance of the dairy co-operative and the loss it posted for the 2018 financial year, its first annual loss. While the Danone and Beingmate writedowns were large and grabbed the headlines, the underlying business performance has deteriorated.
Fonterra’s normalised earnings before interest and tax has fallen for two consecutive years and was down by about a third over the period.
Observers say a worrying pattern has developed. Fonterra starts the year positive about its forecasts before failing to deliver financial results to match its plans. Even in the years when the milk price is low, profits and dividends have been modest at best.
From a $745 million profit last year to a $196 million loss this year is simply not good enough for a company packed with high-paid executives who are not performing at their best. Nearly 6000 Fonterra workers are paid more than $100,000 — 750 more than in 2017.
One of the country’s biggest employers, with 21,500 workers, also has 24 staff on at least $1 million, one less than in 2017.
There is no argument about paying the best people good money. But to have them overseeing such a terrible couple of years is surely not good enough. The lack of accountability of Fonterra, as a company and from the people involved in its running, has been appalling.
An analysis of the financial accounts shows Fonterra continuing to underperform financially. Fonterra has struggled to put financial returns on the board.
Former chief executive Theo Spierings left suddenly from his job. He was paid $8 million in the past year but it does not appear he will receive a bonus. The search is now on for a new chief executive and chairman. The stand-in replacements were open and honest with the problems Fonterra has faced. The co-operative now needs to take firm action, and quickly. Having the right people at the top to drive the co-operative back into profit is imperative.
The result and its impact on earnings, dividend and carrying value is regarded as totally unacceptable by its farmer shareholders, a result family farmers will not want repeated.
Farmers want to see positive steps under way as soon as possible, calling for forecast earnings per share of 25c to 35c being an absolute minimum.
The money from the shares is icing on the cake for dairy farmers. The cash goes back into the community, pays off debt. And in most cases it is spent locally.
Federated Farmers says it will continue to have regular meetings with Fonterra and it is more important than ever for the farming representative organisation to push for improvements.
An important part of Fonterra’s contribution to the economy at large is its $20 billion of revenue. The New Zealand public needs to recognise that, out of the $20 billion, a good portion remains in the economy. No other business delivers that sort of return.
Shareholders say they are encouraged in the recent short-term willingness of the board and management to take an honest look at the position of the co-operative and make the necessary changes. Those changes mean a continuation of more open and transparent discussions and seeing those translate into long-term results.
The Fonterra shareholders council remains firmly resolved Fonterra as a strong co-operative is the only model that serves to deliver a strong future to farming families in New Zealand.
The growth of smaller competitors will be seen as a challenge to the future of Fonterra. To survive, as in any competitive industry, means suppliers have to receive the best service and best price.