Fonterra’s last chance to reform and rebuild
Fonterra’s greatest risk is not of further write downs, which are possible, but of a timid new strategy. Shaken by the failure of its 17-year quest to become a dairy multinational, it could retreat into being an exporter of commodities, ingredients and consumer goods, writes Rod Oram.
Fonterra's price tag of failure is the thick end of $1 billion. The co-op announced this week write downs totalling up to $860 million, which could result in a net loss of up to $675m this year. Coupled with last year’s loss of $192m and the risk of further write downs in China and South America, the co-op is debt heavy and capital light. As a result, its strategy is shot, its confidence sapped and its shareholders rattled.
And that counts only the actual losses. It’s impossible to quantify the cost of lost opportunities. But just imagine, for example, the value Fonterra could have created if it had invested some of that squandered capital in A2 milk. Instead it fought the science and ignored the market, leaving the a2 Milk Company, the category pioneer, to reap the lion’s share of the rewards.
Latterly, Fonterra has reversed course and became a supplier to a2, which is a pure marketing company. Meanwhile it is struggling to build its own A2 production, products and brand. Yet, a2’s market capitalisation is twice that of Fonterra’s stock market listed Shareholders Fund. For analysis of Fonterra’s latest losses and thwarted ambitions, please read this Newsroom piece by Bernard Hickey.
If Fonterra wants to recover from this low point in its history and thrive it needs a bold new and practical strategy, not a tidy up of its failed one. The obvious opportunity is to become one of the world’s leading exponents of dairy farming that’s healthy for the planet, while producing dairy nutrition that’s healthier for people.
Currently, that’s an oxymoron. Dairying is an extractive industry that always damages the climate, and often land and water too, unless it is done exceptionally well. But dairy farmers mustn’t feel picked on. Many ways we produce food globally are as damaging or worse, as a growing body of research details.
The latest and most comprehensive to date is the UN’s report on climate change and land use released this past week. For more on it, read this Newsroom article; and for more on the urgent need for global changes in diets and farming systems, read this Newsroom column I wrote in February.
When it comes to the dairy response to the challenge of healthy people and healthy planet, a fair few companies here and abroad are working on the human nutrition part of that equation. But only a few anywhere in the world are working on the far harder farming challenge. On that Fonterra has four significant advantages over its foreign competitors:
- it has large scale and many (but not yet all) of its farmers are eager innovators;
- their co-operative relationship is increasingly effective at sharing knowledge and driving progress;
- we have a national science system that would gear up to deliver a big transformation of dairying, which the Government would help fund generously if farmers raised their ambitions (for example, Our Land and Water, one of the 11 National Science Challenges, includes a focus on regenerative farming systems that go beyond minimising damage to the environment to actively helping ecosystems to recover their vitality, diversity and resilience); and
- we have abundant natural capital and a unique and valuable national brand based on it - but to justify our claims, we urgently need such transformations of land use to end our degradation of our ecosystems and to start their recovery.
New core attributes for a 'new' Fonterra
Should Fonterra rise to these challenges to create and execute a bold new strategy it will need, broadly speaking, three core attributes which were scarce in its failed, old strategy.
Foresight: Fonterra was created 17 years ago by rolling up some 95 percent of our dairy industry into the new entity. It was seen to have three winning advantages: it was low cost, thanks to its farmers’ pasture-fed systems and the co-op’s highly efficient processing plants; it was one of the largest dairy processors in the world; and it was by far the largest dairy exporter in the world, although only 6 percent of global dairy products are traded across borders.
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.
This time around, to thrive in a global food market which is changing very rapidly, it will need far greater and longer term insights about its best and enduring opportunities.
Structure and capital: Fonterra failed to evolve either of those fast enough to deliver on its strategy of rapid volume growth coupled with some shift from commodities to higher value products.
This time around, the co-op structure is even more important because that’s the best one for building and sharing knowledge to drive on-farm innovation to create truly regenerative systems.
But the co-op also requires equally great innovation to make highly nutritious products, to develop much closer relationships with consumers to help sell them on the value and virtues of the improved farming systems and products, and to find partners and capital to do so.
Culture: Fonterra isn’t quite the fortress it was but it still has a way to go in being the open, creative and agile business it needs to be if it wants to lead in the dairy sector here and abroad in these crucial transformations of food and farming.
Such an ambitious strategy would create a valuable future for the co-op’s farmer-shareholders while greatly benefitting the country at large. But it is also Fonterra’s last chance. If it fails this time around, it would have neither the capital nor support to attempt another revival. Its shareholders would have to break up the co-op, sell off its assets and redeploy their much depleted capital in other ways.