Fonterra navigates its way through rising trade tensions

Fonterra executive Kelvin Wickham believes the dairy giant can navigate its way through an increasingly turbulent environment for world trade.
Share on twitter
Share on facebook
Share on linkedin
Share on whatsapp
Share on email

Britain’s exit from the European Union, tit-for-tat exchanges between the US and China, the re-negotiation of NAFTA, and the re-imposition of trade sanctions by the US on Iran is adding up to an uncertain outlook for international trade.
«Overall, the trend line at the moment is not positive for small trading nations like New Zealand,» said Wickham, chief operating officer for the co-op’s substantial ingredients business NZMP.
The authority of the World Trade Organisation (WTO) was being questioned and trade rules were being flouted, he said.
As an example, Wickham said Fonterra would argue «quite strongly» that Canada is not adhering to WTO rules in the export of skim milk solids to the rest of the world in markets that it competes in.
«But on the other hand, this is the world that we’ve been living in for my entire time in the dairy industry, and we are just going to have to adapt.»
«And there are still very good markets out there where we can get really good returns for New Zealand milk,» Wickham said.
Trade spats and sanctions had nevertheless disrupted Fonterra’s business in various parts of the world.
IRAN
In Iran, America’s re-imposition of trade sanctions had affected an important and valuable market for New Zealand butter.
«With the sanctions in place, we have to comply and we do comply, but it makes it a lot more challenging and some of our customers don’t have access to funds to purchase,» he said.
«We still have customers who meet all the requirements, but the trade is certainly down,» he said.
The Middle East has been an important market for Fonterra for the past 40 years, but low oil prices can affect demand for dairy, and conflicts in Yemen and Syria have affected the the dynamics of the region as well.
«Over the last three years there have been lower dairy exports into the Middle East, reflecting the fact that they had not had the funds to purchase,» he said.
Demand from Iran had been strong up until the change in the sanctions policy, he said.
Elsewhere in the region, Egypt still recovering from a significant devaluation of the Egyptian pound.
In Algeria – the second biggest importer of milk powder in the world after China – there had been a rebound in demand.
CHINA
Trade issues aside, China was a bright spot, with strong demand for milk powder.
«Yes, it’s been robust. In fact if I look around the world in the past 6 months, China and South East Asia has been a highlight.»
There had been solid growth for whole milk powder from China.
«So if you go back to that peak in 2014 and drop, it’s climbing back up.
«So I’m positive on China, not just for milk powder but for some of the newer products the protein products and new ingredients.»
Indirectly, Fonterra was feeling the impact of newly formed China/US trade barriers because its US competitors who normally trade with the world’s second-largest economy were starting to look elsewhere.
«There are opportunities and risks for us, because we can face increased competition from US suppliers in other parts of the world as they have been displaced from China,» he said.
«We navigate that, because that’s just what you do,» he said. «And we think we can do that very well because we have such a breadth of market and a range of outcomes that we can move those products around with the ebb and flow.»
Wickham recalled the intense demand for product by China in 2014 that was followed by sharp fall in demand the following year, which meant the co-op had to scramble to find a home for surplus powder.
«You have to be a bit fleet of foot,» he said. «It makes it difficult in some circumstances to lock in long-term investment plans.»
«We would like to be able to go out to our shareholders and unitholders every year and say this is the value that we are going to achieve, and then to lock that in and improve that, year-on-year.
«But when you get some of those uncertainties such as tariffs and barriers that value side can be impacted significantly,» Wickham said.
Fonterra is conducting a strategic review of its operations following on from reporting its first ever loss of $196 million earlier this year.
The review includes the co-op’s minority holding in China’s Beingmate, which has been heavily written down in the co-op’s books from its initial purchase price of $755m.
Commenting on Beingmate’s decline in fortunes, Wickham said the company’s experience showed how quickly conditions can change in China.
«I have seen other Chinese infant formula companies and dairy companies lose market share and recover market share,» he said.
«I have seen others come from nowhere in five years. (Dairy companies) Mengnui and Yili become significant companies in just 10 years.»
«There are no guaranteed winners and no guaranteed losers.»
«All the companies have to be adaptable.»
In the established markets of the West, it was common for the top three brands to occupy two-thirds of the formula market. But in China, the market remained fragmented.
«You could be in a situation where one brand could be very strong in one province and won’t even exist in another province.»
Overall, he said that «migration» towards a consolidation of the leading infant formula players was still happening.
«That will continue to happen for a number of years yet, and it’s not clear which will be the absolute winners and which ones will fade away.»

Mirá También

Así lo expresó Domingo Possetto, secretario de la seccional Rafaela, quien además, afirmó que a los productores «habitualmente los ignoran los gobiernos». Además, reconoció la labor de los empresarios de las firmas locales y aseguró que están «esperanzados» con la negociación entre SanCor y Adecoagro.

Te puede interesar

Notas
Relacionadas