Fonterra in a 'Nutskell' 
Thursday, August 4, 2016 at 4:32PM
Bill Barclay

This article by Tony Baldwin that originated from the NZ Stock Exchange, and reprinted in today's NZH is probably the best summary of Fonterrra's dilemma that I have seen in a long time.

Tony has a long history of advising governments on industry de-regulation, and is probably more knowledgeable that anyone currently on Fonterra's Board regarding the rationale for its existence, and why it has failed to live up expectations when Government decided to allow Kiwi and the Dairy Board to amalgamate their operations, while allowing Goodman Fielder a piece of the remaining 4%.

The farmer dominated Board structure has unfortunatly proven totally incapable of making the necessary decisions regarding the competing demands for equity, and pay-out by suppliers, and appears unlikely to be able to undertake the required reforms in the immediate future - the recent referendum on Board membership saw to that!

Steve's suggestion are therefore timely - he was wise enough to avoid a fight over capital requirements, and the natural predicament arising from the inability of Fonterra's management to achieve its goals of diversifying from its heavy reliance on commodity trade. To quote Tony - "The simple reason for its dilemma is that the gains from diversity typically hugely outweigh any gains from scale."

It is a scale of a different type that has blinded farmers and their representatives over the years when its excess cash should have been used to fund diversification instead of simply bowing to the demands of producer shareholders who often squandered their largesse on fripperies that I have drawn attention to in the past. Why anyone would wish to be a non-producer shareholder, with no vote or influence completely escapes me. I wonder just how much Kiwisaver money has ended up in this direction simply to 'balance' the books of of the big funders. 

It is for this reason that our Government must be prevailed on to resist being sucked into a rescue situation - one that could easily arise over the next twelve months before the election. The cockies have made their bed, and they must now sleep in it, regardless of the effect on the wider economy - we may just have to wear that, and the pathos of foreclosures.   

Here again is the article.




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