Tag Archives: Fonterra Australia

Light at the end of the tunnel: Fonterra

Well, as you saw in the previous post, I’m looking for light at the end of the tunnel (other than an oncoming train!) for Australian dairy farmers like me. In that post, ADF’s Terry Richardson took up the offer to present a vision. Today, Fonterra Australia’s new(ish) managing director, René Dedoncker, presents his view. My brief was pretty open: give farmers a reason for optimism without going into all the intricacies of Fonterra’s strategic direction.

I’m very grateful to René for sending Milk Maid Marian not just the written response below but a video too. Both are worth a look because they’re a bit different.

There’s no question that there have been challenges in recent seasons. What happened last season was a reminder that we operate as part of a global market – we can reap the rewards, but it also means we share in the risk. We as companies have a responsibility to tell it like it is, so that our farmers are prepared – positioned for prosperity when conditions are good and able to weather the storm when they aren’t.

However despite the challenges there are still plenty of opportunities for Australian dairy – it’s about knowing how to capitalise on those opportunities. Today, around 406 billion litres of dairy are consumed globally every year. By 2020 it will be 465 billion litres. That’s a 59 billion litre difference – around seven times the size of Australia’s current milk pool.

We know that countries that don’t have enough milk will look to the countries that have a surplus. Australia is one of those countries. But simply selling our surplus supply in the global marketplace will only ever achieve commodity returns. It will not be enough to win back confidence on the farm.

We need to be providers of premium dairy products that are aligned with specific consumer needs and life stages, and we have to make sure we produce and deliver those products as efficiently as possible.

Two years ago Fonterra embarked on a mission to change the way we operate to enable us to better capture that demand. Overseas consumers want Australian cheese. We have a reputation for quality and excellence. Across Asia demand for cheese is growing. Mozzarella demand in China is growing at around 30 per cent each year.

In China, and across Asia, pizza is a social food – they eat it with friends and with their hands rather than a knife and fork. That’s why it’s important that as a dairy company we create a cheese that enhances that social experience.

Understanding what our customers want is crucial to our long term success as an industry. The reason there is such high demand for Fonterra’s cheese is because we’ve been immersed in the Chinese market for 25 years.

We know what Chinese consumers want. For example, we know how they eat their pizza, and how they want it to taste. Chinese consumers want their food to look as good as it tastes – they want that slightly brown crust on melted mozzarella, they want those stretchy cheese strings as they pick up a slice. Now, Fonterra cheese tops around half of the pizzas in China.

As companies, we need to leverage Australia’s reputation for high-quality dairy to make the most of the opportunities before us. The way we do that at Fonterra is through innovation – innovation in farming, in manufacturing, and in product development.

It’s why we’re investing in modern and efficient manufacturing; using technology to make dairy foods that tastes and performs the way our customers want it to. We have the technical know-how to deliver what they want – products developed with the end user in mind.

When it comes to nutritionals, the fundamentals in China remain incredibly strong, despite recent dips in demand. Here are just a few figures to consider:

  • The Chinese economy has been growing for 26 consecutive years, with economic growth still relatively strong at 6.8 per cent per year.
  • Over 54 per cent of Chinese people live in cities; by 2030 it’s expected that over 1 billion people will live in Chinese cities.
  • In 2000, just four per cent of Chinese families were considered middle class. By 2020, 76 per cent will be deemed middle class
  • China’s birth rate is climbing after the relaxation of the one-child policy – in a country with only four weeks of maternity leave many Chinese mums rely on infant formula to feed their babies after they return to work.
  • The next 12 months will be tough, as authorities seek to get greater control through regulation over the supply chain. However, the reputation of Australian dairy and the quality associated with that in China is invaluable.

We take a base commodity product and leverage everything that we have – high quality farm practices, best in class manufacturing and a point of difference on country of source, and make it into a higher-value product that is highly-desired in China.

That’s why we are continuing to back and develop the nutritional partnerships that we have so that when we get to more stable settings in China, we can take the opportunity to flourish.

There is huge potential for dairy looking ahead – not just in China, or Asia, but across the developing world. If we as processors work smarter, developing products that meet the needs of our customers and fulfilling that demand, our entire industry will benefit through greater investment, more jobs, and most importantly, a higher farmgate milk price.

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Fonterra, farmers and that fat profit

fonterraprofit

Fonterra rocked its Australian farmers last May with a price drop following Murray Goulburn’s own shock price announcement. I think it was fair to say nobody was surprised there was a drop – Fonterra had been signalling one for months – but the savagery of its execution left many farmers aghast and distraught.

Salt was added to the wound three weeks later when Fonterra chief executive Theo Spierings reportedly said:

“What we are doing is drive (sic) every cent of money which we can out of Australia back to New Zealand shareholders in this extremely low milk price environment,” he said.

“That is what we are doing everyday. And Australian business this year will be at a plus.”

Yesterday, the wound was opened afresh with Fonterra’s annual results headlined by a profit of $834 million after tax, including a healthy profit from the Australian division. With all this in mind, Milk Maid Marian asked Fonterra’s GM Australian Milk Supply, Matt Watt, some rather blunt questions. To his enormous credit, Matt had the following answers for us in less than 24 hours.

MMM: Fonterra Australia is very good at assessing farmer sentiment with its regular forums and Mood Meter surveys. How did the pricing changes announced in May affect the sentiment of farmers supplying Fonterra Australia?

MW: On the back of the shock and challenge that the price revision in May had to our farmers, we have seen a significant drop in farmer sentiment measures – that’s absolutely reflective of the discussions I’ve had over the phone and in person with our farmers and as has been fed back via our field team, BSC board and supplier forum.

MMM: How has sentiment changed since?
MW: Since opening price, we have seen a slight increase in sentiment. Importantly, the aspect that does rate positively is our field team interaction and support – we are proud of the work that the team does and, despite the surrounding circumstances, they continue to find ways to help our farmers through this period.

MMM: How much money did Fonterra Australia save by slashing the milk price in May and June?
MW: The milk price revision in May reduced our losses by around $40M which, on its own, enabled the Australian Ingredients business to get to around a break even position.

MMM: Given the reshaping of the Australian business was already well underway, why was it considered necessary to make the radical price cut?
MW: There has been significant effort and investment in the turnaround – we’ve divested loss-making businesses and non-core assets, such as our yoghurt and dairy desserts business, our Bega shares and our stake in Dairy Technical Services.

We reduced our working capital and our headcount, and undertook a program to drive efficiency throughout our business. However, the simple truth is, we were paying a milk price that was not being returned by the market, and that was impacting our profitability.

Our results today show improvement for the Australian business, which has contributed to the strong result for the Co-op, however, our turnaround is not complete and we need to continue to invest – our new, more efficient warehouse investment and further expansion of cheese capacity at Wynyard are examples of investments that have been made recently. Without a profitable business we compromise our ability to invest, risk devaluing the business, and risk our ability to provide sustainable returns right back to the farm gate.

MMM: What, if anything, do you regret about the decisions made in May?
MW: Whilst I can’t personally feel the impact on every single farm and the business and family circumstances, I am acutely aware of the massive impact that this decision had. In hindsight I often reflect as to how we could have more overtly communicated the disconnect between the Australian farm gate price and returns available in the market.

Having said that, the attempts that we did make about Australia not being immune to global challenges and that the milk price did not reflect what was being earned in the market had a discernible, negative impact on our supplier sentiment. We were accused of talking down the market.

MMM: How does Fonterra justify such harsh cuts while making a profit?
MW: While the milk price revision was regrettable, it is important that both our farmers and Fonterra have a model that ensures sustainable profitability.

The reality is that Australian milk price last year was not reflective of the global dairy commodity prices and around the world, all dairy farmers have experienced low farmgatge milk price. Our business is owned by farmers, and they have $1 billion of equity invested here. Last year these farmers received $3.90 per kgMS (NZD) in milk price plus a 40c per kgMS dividend on the back of the profit result. This takes them to $4.30 per kgMS (NZD) vs a final farm gate milk price of $5.13 (AUD) here in Australia.

MMM: Where have the 200 million extra litres come from?
MW: The new milk has largely come from MG farmers moving to supply Fonterra.

MMM: The presentation also says Fonterra Au’s outlook is to continue efforts to fill Darnum and notes that Stanhope will be online in 2017. How many more litres will be needed?
MW: The additional milk that we have brought on goes part way to meeting these needs. However, we continue to expect to see market opportunities continue to emerge, meaning that we will want to continue to grow volume, particularly in Northern Victoria.

MMM: The presentation says Fonterra Australia has gone from “Disconnect between milk price and reality” to “Market connected milk price”, yet Fonterra Australia is still bound by the Bonlac Supply Agreement to match or better the price of Australia’s largest processor. What are Fonterra plans in respect to that agreement?
MW: Our opening price and forecast close of $5.00 per kgMS reflects market conditions, but also is well above MG, the benchmark milk price. We remain committed to meeting our obligations under the BSC agreement, which is why, in 8 out of the last 10 years, we have paid a higher price than the BSC minimum commitment.

Thank you very much to Matt Watt, Fonterra’s GM Australian Milk Supply, for answering Milk Maid Marian’s questions.

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Which dairy farmers will survive?

Damocles

The Sword of Damocles. Pic credit: Moritz Aust

I was digging a post hole today when my phone binged a message in my pocket. And binged again and again and again and again.

I paused to check the messages, still with the post hole digger under my shoulder and stared in shock at the Murray Goulburn announcement.

As the biggest milk processor, MG tends to set the benchmark price and, in the new financial year, it will be $4.31 per kilogram of milk solids or about 33 cents per litre. After you take off the compulsory fees the processor charges for milk collection, it’s around 30 cents. Even less again for the many Gippsland farmers whose cows calve in Spring in line with Mother Nature.

It costs a farmer like me about:

  • 40 cents to produce a litre of milk when the season is good and nothing goes bust and the bank is happy with interest-only; or
  • 42 cents to make milk and maintain the farm; or
  • 45 cents to breathe and grow.

On top of the drought we’ve just endured, this fresh set of bad news will finish many farmers off. Not just the inefficient producers, either. Far from it.

Those coasting along with little debt will emerge at the end of the year with the fewest scars. In fact, it will be the youngest, most ambitious farmers who heeded the calls for growth from Murray Goulburn, Fonterra and the banks just 18 months earlier and invested accordingly who are the most vulnerable.

We stand to lose the innovators, the future leaders of our industry. They are also those who were in line to buy the properties of retiring farmers.

I am not a Murray Goulburn supplier but the opening price announcement left me reeling. The phone rang. In a daze I answered it but found I simply could not speak.

Words fail me and with Fonterra yet to announce the price it will pay us for our own milk, the sword of Damocles hangs low. Fonterra’s behaviour over the last few weeks has been inconceivable. Will it be able to rebuild any trust tomorrow?

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Who wants to sue who and who will pay?

DevondaleTwirl

One of the first things farmers asked about the Murray Goulburn and Fonterra announcements was: “Can they really do this? Is it legal?”.

The lawyers have duly arrived.

I know of three firms circling Murray Goulburn right now. While Slater & Gordon was the first to announce it was opening an investigation into a class action against MG, it has not yet confirmed whether it will proceed.

Last week, a so-called “maverick” lawyer, Mark Elliott, reportedly filed a class action against MG on behalf of unit holders who had bought shares in the listed part of MG.

At the same time, another lawyer, David Burstyner of Adley Burstyner working together with Harwood Andrews, is building a list of farmers affected by the sudden milk price collapse who might be interested in one or more of the three legal strategies:

  • a “group claim” against a range of processors to recover financial loss;
  • steps to change and take back control of MG management, and;
  • an urgent court order stopping the claw back.

The big question on farmers’ lips is: if MG gets sued, won’t farmers ultimately pay the price?

The stakes are high because MG farmers face a double whammy:

  1. Now more than ever, farmers are acutely aware that when processors don’t do well, the answer is to slash the price paid to farmers.
  2. Every farmer who supplies milk to MG must own MG shares, so its falling share price is robbing many retirement nest eggs. Some are even facing margin calls on loans they took out to buy more shares.

The targets
The Elliott class action is targeting the MG unit trust and its directors. The good news is that the trust and directors should already have insurance that deals with such a claim.

There’s likely, however, to be an excess they will have to pay, which the lawyers call “deductibles”, which means the insured party has to cover part of the loss out of its own resources as “self insurance”.

On top of that, director’s insurance is no silver bullet. This type of insurance is complex and it’s quite possible that out of court settlements won’t be covered.

The proposed action from David Burstyner could target any of the processors who stepped down: MG, Fonterra, Lion and NDP. Mr Burstyner expects to know in the next few weeks. If launched, class actions usually play out over several years, so buckle yourselves in.

Will it help farmers?
Because there’s likely to be plenty of coverage of the Elliott class action for unit holders, I’m concentrating on the Adley Burstyner proposal for farmers and its potential impact on MG, the hybrid co-op.

Speaking with Milk Maid Marian on the weekend, Mr Burstyner said his firm is investigating an injunction to halt the milk price drops.

“An injunction is difficult to secure but the situation is urgent,” he said. “We are prepared to try if it is achievable, but it depends on what we learn from farmers”.

He also plans a “group claim” against processor(s) funded by a litigation funder, which roughly works on what some people call a no win no fee arrangement (see more at http://www.adleyburstyner.com.au/group-claim-faq). This arrangement minimises the risk to participating farmers but, as a guide, around 30% of the proceeds after costs is likely to go to funders. Mr Burstyner said the participation of thousands of farmers is necessary but that it’s possible because more than 3000 supply MG and Fonterra alone.

At the same time, Mr Burstyner said he hopes there will be no need for “all-out war” and that a class action could be avoided with the processors reaching a settlement with farmers that could also improve the way milk prices are set in future.

MG, however, is not a normal company. The fundamental ways it interacts with farmers must be put to co-op members and voted on rather than hastily negotiated on the court house steps.

But what if “all-out war” is the only option? Mr Burstyner acknowledged the possibility of short-term pain for the processor (which may carry through to its supplier shareholders) but the long-term benefit would be a “clean up” of the industry.

Asked why farmer shareholders could not simply reshape their co-operative by voting on special resolutions rather than litigation, Mr Burstyner strongly agreed that strategies along those lines could be very useful, saying, “Although MG is no longer the cooperative it was prior to July 2015, we would like to assist farmers with the solutions which could be possible in the newly formed corporatised structure, using farmers’ significant rights as shareholders which we think could really improve their position.”.

In notes he offered to Milk Maid Marian, Mr Burstyner clarified his point:

o    Murray Goulburn Co-operative Co Limited ACN 004 277 089 is an unlisted public company. It is controlled by its shareholders who for present purposes are the farmers. MG is no longer the same cooperative structure it was before July 2015.

o    Shareholders with more than 5% of votes can call a meeting or ask the company to call one.

o    They can sack the board and appoint alternatives by ordinary resolution.

o    There is a 2-month notice requirement for certain resolutions, for example, sacking board members.

o    The Company (under new management) may even be able to bring a claim against former Directors for not satisfying their director’s duties.

Mr Burstyner is keen to hear from farmers who would like to be kept updated on these three types of potential legal action (in the short term an injunction or challenging management, or the long term solution of a class action to recover financial loss and bring about systemic changes).

You can register your interest at http://www.adleyburstyner.com.au/farmers-farm-gate-milk-price-action.

Mr Burstyner stressed that he has no interest in any legal strategies if farmers don’t want them. Without interest from significant numbers of farmers, Adley Burstyner and Harwood Andrews will close their file.

Important: this post is general commentary only, please seek legal advice before considering any action.

 

 

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What the Fonterra Friday 13 announcement means in plain English

This plain English explanation is for anyone as confused as I was on Friday following Fonterra’s second announcement.

The May and June milk price is still slashed to $1.91kgMS
The prices outlined in the original announcement still apply. Friday’s announcement concerns milk to be supplied in 2016/17 but the amount you receive hinges partly on how much milk you supply in May and June 2016. Baffled? Stay with me for a minute.

Loans are still available in the same format
Nothing has changed in terms of the loans announced on May 5.

Why the latest announcement?
Although nobody came out of the May 5 announcement a winner, if your peak milk production was in May and June, you suffered far heavier losses than farmers whose herds peak in Spring.

Fonterra’s Friday May 13 announcement is designed to even out the impact.

July and August milk now attracts extra for the volumes you supplied in May and June
Fonterra will pay $2.50 kgMS extra for July and August milk in 16/17 but only for up to the same volume of milk you supplied in May and June.

Here’s an example: if Old Macdonald supplies Fonterra 10,000 kgMS in May and 10,000 kgMS in June but 15,000 in July and 15,000 kgMS more in August, she will be paid the extra $2.50 on 20,000kgMS rather than on 30,000 kgMS.

The remaining 10,000kgMS will be paid at the normal July and August rates (that’s base price + quality + production + seasonal incentives). So, Old Macdonald would find $2.50 x 10000 = $25,000 extra in each of the milk cheques that arrive on August 15 and September 15.

If, on the other hand, Old Macdonald supplies Fonterra a total of 20,000 kgMS for May and June but only 15,000 kgMS for July and August, she will still be paid the extra $2.50 kgMS on 20,000 kgMS.

The money is coming from the rest of the year
The milk price Fonterra pays farmers is made up of four components:

  • A base price paid at the same rate every month of the year for fat and protein (fat + protein = milk solids)
  • Quality incentives
  • Production payments
  • Seasonal incentives – which are apply in the “off-season” months of January to July.

To pay for the extra money announced on Friday, Fonterra will lower the base component of the milk price by 19 cents per kgMS. In other words, you may receive extra money in your August and September milk cheques but money will also be deducted every month for the whole of 16/17.

About this post and me: Milk Maid Marian supplies milk to Fonterra and this post was checked by Fonterra Australia for accuracy.

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Fonterra’s Judith Swales explains Theo’s thoughts on Aussie dairy farmers

Theo Spierings Fonterra chief executive Theo Spierings. Photo: Pat Scala, Sydney Morning Herald

Fonterra is one of the world’s biggest dairy companies with a glittering history. A cooperative in New Zealand, Fonterra is also Australia’s second-largest processor.

Just last year, Fonterra delivered a stellar Kiwi farmgate price far better than anything ever enjoyed by Aussie dairy farmers. Analysts enjoyed debating why Australia could not emulate its success. Today, the co-op is under intense scrutiny from its shareholders.

As I mentioned in the previous post, farmers in New Zealand are doing it very tough this year and Fonterra Australia chalked up losses last year.

Then, last week, Fonterra’s chief executive Theo Spierings​, was quoted in the Sydney Morning Herald  in a story headlined Aussie farmers being overpaid amid global dairy rout, says Fonterra boss.

After quoting Mr Spierings as saying the current price of $5.60kg MS could not be supported, the Sydney Morning Herald reported:

Mr Spierings said the method on how Australian farmers were paid needed to change so it wasn’t based just on the farm-gate price and matched other processors.

“It’s loyalty and skin in the game that can lead to an upside. You can call it a dividend, or whatever, a bonus per kilogram milk solids,” he said.

“But we need to have the conversation now about what the endgame looks like. What is the value being created – what’s the size of the cake? Then we need to have a good debate with farmers … about how are we going to share – how are we going to cut the cake?

The comments raised a lot of questions for a Fonterra Australia supplier like me, especially in respect to the “Bonlac Agreement”, which extends until 2019 and commits Fonterra to paying its Australian suppliers a price that equals or betters the dominant processor.

I put some of those questions to Fonterra Australia and am grateful to managing director, Judith Swales, for answering them.

Judith Swales, Fonterra Australia managing director. Pic source: Australian Dairy Farmer

MMM: Why has Theo chosen to telegraph a change in Fonterra’s dealings with Australian farmers via the media rather than by opening a conversation with farmers?
JS: Theo was commenting on the global dairy situation and its impacts for Australia. He was putting a voice to issues that many in the industry are well aware of. These are difficult issues and shouldn’t be shied away from, and as an industry we need to address them.

MMM: Are there any inaccuracies in the article you would like to correct?
JS: The headline was unfortunate. The main issue to point out is that the problem is not around Australians dairy farmers being overpaid – as stated in the headline – but rather the impact global volatility is having on the sustainability of current dairy pricing in Australia. What’s important, is that we’re sending the right price signals to our farmers to avoid any surprises and so that they can budget for various scenarios.

MMM: Theo appears to cast doubt on the Bonlac agreement that ensures farmgate prices match or better the dominant competitor. Will Fonterra honour that agreement this year?
JS: We remain fully committed to honouring the Bonlac agreement. We are focussed on giving our farmers line of sight to the price we can pay this year as quickly and accurately as we can. The price we pay this year must be sustainable. We do not want to sacrifice investment in our long term strategy, which aims to deliver returns above the Benchmark price, in response to short term, tactical pricing pressures.

MMM: Does Fonterra remain committed to the Bonlac agreement in the medium to long term?
JS: We view the BSC Milk Supply Agreement as a baseline. We always strive to aspire to more – whether it be with our SupportCrew services, price risk management tools or our suppliers receiving the highest milk price (as found in an independent report by Ian Gibb for the 2013/14 season). We expect our relationship with our suppliers to continue to evolve over time.

MMM: “It’s loyalty and skin in the game that can lead to an upside. You can call it a dividend, or whatever, a bonus per kilogram milk solids,” says Theo. Does this mean special pricing that favours long-term contracts and large farms?
JS: Achieving a mechanism for determining milk price that drives behaviours that support the success of Fonterra’s strategy for all suppliers is our aim. This work is always evolving and we will continue work with BSC on this.

MMM: Farmers who supply milk to Fonterra Australia are suppliers rather than shareholders. What does Theo mean by “sharing the cake”?
JS: We have always said that the best dairy industry model is the one where everyone can get a sustainable return. Farmers need to be able to make money, processors need to make money and so do customers, like retailers. And that’s what he means by sharing the cake.

MMM: Does Fonterra continue to have a long term commitment to Australia?

JS: Absolutely we are committed long term to Australia; and our Board continues to voice this commitment. Australia is one of our four key strategic markets for Fonterra. It is a key plank to our global multi-hub strategy, which complements our Retail and Foodservice business. We continue to invest: we are progressing our Beingmate partnership; we have plans to rebuild our cheese plant in Stanhope; and only this week we commissioned a multi-million dollar Beverages plant in Cobden.

Thank you very much, Judith Swales!

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How much listening to farmers is okay?

"Fonterra on Twitter" by Digital Jungle

Excerpt from “Fonterra on Twitter” by Digital Jungle

I don’t need to tell you how much of a stir a report tracing Twitter conversations surrounding Fonterra made when it was tweeted by farmer Shelby Anderson (@cupslinga) yesterday. The extensive 54-page document monitored just one week of Twitter conversations and looked to be a sample of what the social monitoring service could provide rather than a commissioned routine report. Still, as Shelby tweeted, it was a veeeerrry interesting report all the same. Continue reading

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