Some farmers are questioning the business fundamentals of New Zealand’s biggest company and its capital investment expectations of them in the wake of another downgrade in the 2014-2015 season milk price forecast and the prospect of a grim farm cashflows into 2017.
The questions come on top of recent calls for more communication transparency from the exporter.
One questioner is large-scale Marton farmer and accountant David Marshall, who has switched 30 per cent of his production from Fonterra to Open Country Dairy. His 1400-cow operation produced 660,000kg milksolids this year.
Marshall said he was not criticising Fonterra but genuinely needed a better understanding on several fundamental fronts.
«I remain a Fonterra supporter. I’m not panicking about Fonterra or the milk price but I do want a sensible, commercial business that creates value.
«I believe Fonterra’s milk price structure is based on a formula which is very hard to understand.»
His view is shared by Federated Farmers national dairy chairman Andrew Hoggard who said the formula needed to be broken down into layman terms. It was an issue he had asked the Fonterra Shareholders Council to address earlier this year.
Marshall also asked if realistically, farmers had the capital for Fonterra to create a consumer foods business.
«My concern is farmers are starting to say no, and moving away from Fonterra. It’s hard enough to be a farmer without having to invest in a business that’s going to require a lot of capital in the next few years.»
He said he would like to understand why Fonterra thinks «global relevance» is important and what it means financially to farmers.
Fonterra chief operating officer Jacqueline Chow said the company needed to take a global perspective with manufacturing and assets because it was in a competitive market for milk. This meant building milk pools in the right locations.
«Global relevance means complimenting New Zealand milk with supply from key strategic markets to reduce the complexity of supply chains where there is strong demand and build volume and value using those milk pools,» she said.
Marshall asked if it would be sensible to offer A and B shares in Fonterra. The concept of basic co-operative-type shares for milk collection and processing and different shares for added-value product and overseas venture investment has been raised increasingly this year, including by Hoggard.
Hoggard said the prospect of Open Country paying a higher milk price than Fonterra for 2014-2015 «ain’t a fantastic look».
«Where’s the value of being a co-op? It’s a fair question worth debating. I think it’s a discussion that should be had but right now the focus is on getting ourselves out of the current shit. The best time to have that discussion is when things are rosy and we can think clearly.»
Fonterra’s debt level is also being discussed by farmers.
Its interim financial statements showed total borrowings increased $2.6 billion to $7.5b from $4.8b at July 31 last year. Its first half gearing ratio or debt to debt plus equity ratio was 51 per cent compared to 44.6 per cent at the same time last year.
Questioned by NZ Farmer about debt in April, chairman John Wilson said the balance sheet was in «a good position».
Agricultural consultant and Fonterra shareholder Will Wilson said Fonterra’s investment in overseas added-value businesses was its Achilles heel because it had all been done with debt.
«The implementation of this strategy has raised the risk profile file of Fonterra. It is unacceptable.»
Wilson called on directors to have a good look at whether Fonterra’s business focus was in the right place.
Marshall said it would be helpful for farmers to understand the basis for Fonterra’s claim it had a «reasonable» level of debt.
Hoggard said it was up to the Fonterra Shareholder Council to explain Fonterra’s debt level to farmers.
«These are key things the council should be all over, explaining to farmers in clear terms and having a clear view on it and comparing Fonterra to other businesses.
«To me, the council is there to give me a straight up, no bullshit view on whether the company is looking after my interests.»
Plain-speaking from Fonterra leaders is also wanted.
Their use of «velocity», «turning the wheel» and «global relevance» when telling farmers about the business strategy is not bringing clarity.
Marshall said he did not know what that meant in financial terms for farmers.
«What do those words mean? Why don’t they say ‘this is how much we have to invest and this is what your return’s expected to be?»
Hoggard agreed.
«If you’re going to come up with catch phrases you’ve got to make sure people understand it and how it is going to impact on their life, change their life. Hearing the 101 different rumours and takes on this stuff I do is a sure sign of non-clarity in the message.
«I’ve always scratched my head over this global relevance stuff. I ask myself if Tatua’s Steve Allen or Paul McGilvary give a rat’s arse about being ‘globally relevant’?»
Fonterra’s Chow said «turning the wheel» meant moving milk into high value products such as Anlene and Anmum and food service offerings, and continuing to grow market share for Fonterra’s strong consumer brands.
The company had achieved volume growth and improving pricing in these businesses in the first half of the current financial year, she said.
Fonterra was in constant contact with its farmers in an «on-going conversation» about milk price, performance and business strategy through a wide variety of means, she said.
Fonterra last week cut its milk price forecast for the 2014-15 season by 10ckg milksolids to $4.40 and said its initial forecast for the new season was $5.25.
Source: Stuff