Fonterra chairman wants two changes to governing legislation

Fonterra [NZX: FSF] chairman John Wilson says growth in the number of dairy conversions in New Zealand will slow and “we have to be very careful about where we convert land” but won’t say we have enough cows and believes conversions will continue.

He predicts the price of milk “is going to correct over the next six months or so.” 

Mr Wilson says Fonterra is about to start talking to the government about reforming its “unfair” governing legislation. 

"Having a very robust milk price is very important. We respect that absolutely, and we’ve got Commerce Commission oversight there. The requirement to provide milk to small, innovative, domestic companies - we absolutely support that provided it’s at the right price. But, historically, there have been two things that we’ve had to do that we believe the market has changed so much in the last 14 or 15 years in New Zealand. The first one is to supply milk to a new start-up to export, frankly, against us globally. There are well-capitalised investors arriving in New Zealand today that do not need a hand up from Fonterra farmer. It is unfair," he says.

"And the other piece that has now moved past its use-by date is that requirement to accept milk from all farms. The Commerce Commission is acknowledging that, and we would like to have a conversation with the minister on getting a change in that legislation. The requirement for our farmers to underwrite any potential new milk growth in New Zealand is very expensive for them. It is time for that to change."

He admits Fonterra forecasters have been struggling to read the volatile world dairy market. "This has been one of our frustrations … we’re putting in more work than we’ve ever done," he says.

About 19% of Fonterra production is value-added, he says. “We want to increase it. There’s no doubt about that,” he says. But he can’t give a target.

The board “absolutely” has confidence in Theo Spierings and his executive team," Mr Wilson says.

Source: GlobalDairyTrade.info (Click to zoom)

RAW DATA: The Nation transcript: Simon Shepherd interviews Fonterra chair John Wilson

Watch the interview here

Lisa Owen: After months of sour news, dairy farmers got something of a boost last week, with Fonterra doubling its profit and bringing forward its dividend payments.

But the rural economy’s still feeling wobbly and leaning heavily on Fonterra.

In each of the past two years CEO Theo Spierings has told The Nation the payout would start to pick up in about six months, but we’re still waiting and worrying.

We had told you last week that we’d be speaking to him, but he pulled out and instead we sent Simon Shepherd to Fonterra HQ to talk to Chairman John Wilson.

John Wilson: Yeah, just like virtually all farmers in the country, we’ve changed dramatically what we’re doing. We lowered our stocking rate across the farms, less maize silage fed to our cows, and for our staff, it’s really, really tough. You know, they’re driving harder, they’re working harder, and what’s a real concern is we’re just not spending money, and so that has a big impact on our communities.

Simon Shepherd: So you can forgive farmers for being a bit grumpy in terms of, like, nine months ago, a year ago, that Theo Spierings said, ‘It’s going to be okay in 12 months.’ Six months ago, ‘In six months, it’s going to be okay.’ You can forgive farmers for being grumpy.

Absolutely. And this is one of our frustrations - that we are really struggling to predict exactly where global dairy prices are going to go. But I think, to be fair, all commentators are having that challenge. Our other global dairy peers around the world are having that challenge. We had the problem on the way up and on the way down. We’re doing everything we can to understand it. It’s hard.

So you’re confident in your forecasting models?

Well, we’re putting in more work than we’ve ever done. But when you get events that are so far out of our control - for example, the Russian trade embargo, you know, significant change in demand out of China - these things are very difficult to predict and the impact they’re going to have.

Okay. It’s been very volatile, but do you think that the management has reacted quickly enough?

Yeah, well, they have. And, in fact, they’ve acted in advance of it occurring. So, we have been talking about volatility for some years now. Of course, none of us expected it to be this low for this long. So you’ve seen Fonterra drive its big transformation change for the business, which is we’re driving everything we can to be more efficient and get every cent we can out of the business. It’s a huge change across the business. We’re seeing our peers globally now starting those programmes, whereas we started this some time ago - over a year ago now. On top of that, you’ve seen us shift a lot of milk across from ingredients to consumers and food service. But you’ve got to develop that market, develop those brands, put the investments in place in New Zealand, and we’ve been doing that for the last three years.

I’ll just talk about that in a moment but can I have it on record that the board is happy and does back Theo Spierings?

Oh, yes, absolutely, we do. Yes. Again, you’ve got to be very careful here. Yes, we’re talking about salaries as well. You know, there’s a lot of talk about, ‘What about the payment for our senior executive?’ We’re a global dairy business. Now, I know that grates here within New Zealand. We absolutely accept that, but we have to get the best people in the world. We sell 95% of our product globally. I can assure those who are watching this that our senior executives absolutely are aware of what they are trying to do. Our farmers need to see our executives delivering every last cent they can to our farmers, and that’s hopefully what they’re seeing today.

The farmers will want to know, as does the country, when is it going to pick up?

Look, based on consumer demand continuing to grow, looking at these shocks that have hit the market over the last sort of while, which together have added around four billion or five billion extra litres of milk into the global traded market. Now, the global market is about 400 billion to 450 billion litres of milk, but of course all this extra milk has occurred because of more milk in Europe and embargoes and change in buying patterns out of China all ends up in the traded dairy market, which is only 60 billion to 65 billion litres of milk. We believe that that imbalance is going to correct over the next six months or so. It is very difficult to predict the exact timing of it.

Some commentators are fearing that it won’t correct that quickly and that Europe might have lower costs, increased production in China, which is also going to affect it.

Yes.

Are those factors that you’re considering?

We’re considering all of those factors. Also where we’re seeing consumer demand globally. You know, good example is the US, where we’ve seen increased milk production in the US, but in actual fact, their exports have dropped dramatically because they’ve had a significant growth in consumer demand, particularly in the food service area as people are really starting to value dairy, dairy fats and protein higher than what they have in the past. We’re seeing similar in Europe at the moment  as well. So there is strong consumer demand, strong consumer demand for quality dairy. This all depends ultimately on how long that supply and demand balance takes to balance out.

Let’s talk strategy. I mean, New Zealand has 1.8 million hectares in dairy. The environment commissioner, Jan Wright, says that’s enough. Enough conversions. Where do you sit on that? Have we had enough?

I think there’s no doubt that we are- on a relative basis, growth will slow. It’s a defined land mass. We will see growth continuing in New Zealand, but it will slow.

Really? You’re not going to come out and say no more conversions - we’ve got enough dairy cows?

I think we have to be very careful about where we convert land, but that’s not in Fonterra’s control. In fact, Fonterra is required to pick up all milk. So any new conversion that starts, we’re actually required to pick that up. So this is actually not a- Fonterra  has no control over this.

You could send a message out saying, ‘Look, we really don’t want any more. Even though we have to, under the law, take it, we don’t want any more.’

It’s very important that our farmers are able to get on and do what they do well, which is to farm productively within the constraints that they may have in their areas. As I say, we’re seeing huge change in farming systems as they adopt systems, respecting the changes that are required in environmental outcomes.

You talked about in these results about value added being a key component for pushing up the product. That’s about 19% at the moment. Is that enough? Or do you want to see that at 30% or 50%?

We want to increase it. There’s no doubt about that.

Have you got a benchmark as to where you want to go?

Oh, we certainly just want to continue to increase it. But let’s put some context around that. Over the last five years, we’ve had remarkable milk growth in New Zealand, to your point earlier. Now, that requires the building of significant capacity of whole milk powder dryers so we can shift that milk as efficiently as we can from the farm gate into the marketplace. But at the same time, we’ve invested in consumer and food service.  In the last 18 months or so, just under a billion litres of milk has moved to consumer and food service. You will see us continue to grow that, both within investment here in New Zealand and how we process and produce the right products in New Zealand, but also our investment in market. For example, you saw the investment we made in Beingmate, for example, and that’s all about how we have the most efficient distribution chain, access to our customers.

You mentioned the restrictions of the current regulatory system. Do you want to see that gone really, where Fonterra has to take milk from dairy conversions? Do you want that gone?

We want it changed. We respect the fact that we should be operating under legislation. Having a very robust milk price is very important. We respect that absolutely, and we’ve got Commerce Commission oversight there. The requirement to provide milk to small, innovative, domestic companies - we absolutely support that provided it’s at the right price. But historically there’s been two things that we’ve had to do that we believe the market has changed so much in the last 14 or 15 years in New Zealand. The first one is to supply milk to a new start-up to export, frankly, against us globally. There’s well-capitalised investors arriving in New Zealand today that do not need a hand up from Fonterra farmers.

That’s unfair, isn’t it?

It is unfair. And the other piece that has now moved well past its time or its use-by date is that requirement to accept milk from all farms, and the Commerce Commission is acknowledging that, and we would like to have a conversation with the minister, and we will be having conversations, we hope, with the minister over the coming months on getting a change in that legislation. But the requirement for our farmers to underwrite any potential new milk growth in New Zealand is very expensive for them. It is time for that to change.

Just finally, because the milk price is so low, you’ve decided to not only be able to increase the dividend that you’re paying out but also bring it earlier as well. Is that going to be enough to get through these tough times?

Look, it has a small impact relative to the milk price. Our farmers are impacted so much by global milk prices and the exchange rate. But from us, from a cost perspective, that is their money. It’s our farmers’ money. So we have got that money now in the bank, literally, a very good profit result - double what it was this time last year. Get that dividend paid to our farmers as quickly as we can, and we look at our cash flows for the balance of the year. We see the opportunity to be able to bring forward what is normally a dividend paid in October to May and to August. Now, it is subject to final board approval, but that is saying as soon as the co-op has the cash, we will get it through to our farmers as quickly as we can.

All right. John Wilson, thank you very much for your time.

You’re welcome.

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