Mathew Hooten & Brian Gaynors on Fonterra
Saturday, August 17, 2019 at 11:14AM
Bill Barclay

The following ultimate para in Mathew Hooten's columm in yesterday's Herald needs to be taklen aboard by both sides of Parliament - how likely is that?

"Paradoxically, fixing Fonterra involves removing some of its ongoing legislative constraints. It should no longer be required by law to collect milk from new entrants or those who want to expand — which only leads to overproduction, including at the peak — nor to sell raw product to its competitors.

It should be set on its path to being a completely normal company. That requires tough decisions and bold leadership from Jacinda Ardern, Grant Robertson and Damien O'Connor, or perhaps Simon Bridges, Paul Goldsmith and Todd Muller.

And it will require tough decisions and bold leadership from more dairy farmers. If they want to play it safe as commodity price-takers, the co-op will always be there for them.

But if they ever want the returns expected by shareholders of a2 or even Pic's, they will need to abandon that safety blanket and take a risk with something new, less conservative and less constrained."

And Brian Gaynor's ultimate columm in the today's issue;

"The new chairman and chief executive have adopted a more realistic attitude towards Fonterra's businesses, but the co-op's main flaw remains the same as identified by Allison and Fernyhough 18 years ago. That is "that other people's capital and ideas are essential for baking a bigger cake".

Kerry Group (previously the Irish dairy co-operative ) started down its road to success in 1986 when the co-op transformed itself into a limited liability company and listed on the Dublin Stock Exchange. This allowed it to attract "other people's capital" and a wider range of skills at the board table.

It has also aligned the interests of management and farmers as Kerry Group's senior management team has been successfully incentivised through the company's numerous share schemes.

Fonterra will only pull itself out of its huge rut when it is willing to accept "other people's capital and ideas".

This involves transforming itself into a limited liability company and appointing directors with significant consumer foods expertise, rather than relying almost totally on farmer directors."

Boy, that stubborn determination to maintain the flawed co-operative structure is beginning to look terminal. To repeast my earlier comment - they simply do not have the commercial nouse to dig themselves out of this hole, and Government will eventually have to step in to force a re-structure- our economy depends on it.


Update on Monday, August 19, 2019 at 5:07PM by Registered CommenterBill Barclay

and Rod Oram chimed in today in Newsroom with these vital statistics:

"But Fonterra had no foresight beyond using those three attributes to get bigger and hoping to slowly shift a proportion of its products from commodities to higher value ones. But over the following 17 years, it was swamped by the dairy boom it helped create. From the 2000-01 to 2017-18 season, the sector’s land use grew by 33 percent to 1.76m ha, the national herd by 43 percent to 5m cows, farming intensity by 8 per cent to 2.84 cows per ha, the average herd size by 72 percent to 413 cows; and milk processed by 49 percent to 20.7b litres of milk.

No wonder land, water, farmers, cows and co-op became seriously stressed. Yet, as it was hitting peak cows here, Fonterra pressed on with its volume driven strategy. It made some ill-considered and poorly executed production investments overseas in the likes of its China Farms and other “milk-pools”, and in downstream investments to try to shift the rising volume of products to market. Most damaging was the debacle of its failed $755m stake in Beingmate, the Chinese infant formula company."

Unfortunately, he spoiled his story by lauduing the now discredited co-operative structure - in particular,  he fails to draw the connection with the obvious indequacy of equity capital. He has always been enamoured this structure despite its obvious short-comings, and the demoinstrated inadequacy of the governance provided by its amateur directors. 




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