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Will Fonterra Follow Westland?

Economist Peter Fraser has again highlighted in Stuff the fundamental fault with farmer co-operatives operating in a capitalist environment.

Fonterra apologists and loyalists are on the defensive, and responding to his specific thesis with irrelevant and evasive responses that should do nothing to reassure farmer members whose demands for maximum milk returns have been the root cause of the Co-operative's problems.

The demise of Westland Milk from the same fundamental failure to build up capital in the face of farmer demands for the instant gratification of milk payouts is now the 'canary in the mine' for Fonterra, and unless farmer members are prepared to face the need for a substantial increase in capital, it will likely follow exactly the same route as Westland.

The scale of the problems is of course dramatically greater, and I predict that between now and such a re-structure, Government funding will be called for in order to ‘save the day.’ Just how that would be even possible given the current state of the economy beggars belief, but you can bet that the embattled farmer members will put up a massive fight to get it.

You may ask just how such a situation arises in co-operatives. It is a pattern repeated internationally – Murray-Goulburn, the largest milk cooperative in Australia followed exactly the same path, and yet our farmer members still appear incapable of learning the lesson.

Tatua north of Morrinsville is the exception with a tight collection area, highly profitable consumer products, and a conservative Board that has demonstrated commercial savvy and understanding of the direct relationship of capital to payout – almost unheard of anywhere else in the industry, and Yilli will likely exploit this weakness to the utmost.

Fonterra by contrast has been a victim of its initial structure into what was very nearly a monopoly that carried with it Government regulation requiring uneconomic ‘pick-up,’ and share compulsory ‘buyback.’ That could alone cripple the business in the absence of Government intervention that is almost too late to be in any way effective.

‘Peak-cow’ is now upon us, along with limits on the ability to increase production to make full use of the vast facilities it has established nation-wide. These capital intensive units will eventually prove its undoing unless more profitable added value products can be identified, and I don’t mean vast facilities grinding 40kg blocks of mediocre cheese into bags for world-wide distribution to Pizza-Hut – that is still a commodity by any other name, not value added as understood by the rest of the dairy world.

If attacking Fraser's integrity, and answering his arguments with irrelevant claims of being “Well down the path of a strategic review” is the best that they can offer, then it is surely in big trouble. Nothing short of biting the bullet by its farmer dominated Board to reduce the payout by at least 50c in order to rebuild its capital base will provide the Co-operative with a future – that is the unpalatable truth.




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