News / Blog

Fonterra Under Fire Facing Demands For Assurance
March 11, 2016

Fonterra, under fire from all sides for its falling milk price and financial management, is now facing demands for assurance it has halted further development of its loss-making China farms as promised.

Struggling to absorb the reality of a new downgraded milk price forecast of $3.90kg milksolids – Fonterra’s third price change in eight weeks – farmers have contacted the company’s watchdog, the Fonterra Shareholders Council, and NZ Farmer concerned about sector talk that heifer calves are still being prepared for export to the China farms and that work is under way on cow barns there.

Fonterra’s written response to NZ Farmer: “We are continuing to develop our Chinese farming operations that have previously been announced to the market.”

Chief executive Theo Spierings told November’s annual meeting that no more development for fresh milk production in China would be undertaken at that point. The farms posted a $44 million loss before interest costs and tax in the 2015 financial year on an investment of $364m in farm development and livestock purchases.

As at November last year Fonterra had two farming hubs comprising seven farms. Its original announced strategy was to develop five farming hubs in China. Its latest market announcement regarding China farming development was in July last year, when it said it had signed a joint venture agreement with US pharmaceuticals giant Abbott to develop a farm hub milking more than 16,000 cows.

Council chairman Duncan Coull said the council had “put the question” about China farm work and was awaiting an answer.

However, he understood any activity underway in China was finishing existing farms. It is understood the council has formally requested an update from the company on the China farms.

Fonterra and Spierings have been under attack from several quarters since the latest forecast downgrade, with criticism of the farmer-owned co-operative’s forecasting abilities, changeable forecasts, million-dollar-plus executive salaries, increased debt gearing of 49.7 per cent, and demand for discounts and 90-day payment terms from contractors and service suppliers.

In Parliament on Thursday Labour finance spokesman Grant Robertson called on Prime Minister John Key to say whether farmers should be satisfied with the performance of Spierings, whose annual salary is in a $4.9 million band.

Labour’s Primary Industries spokesman Damien O’Connor said it was up to the Fonterra board to make the decision about salaries.

“But the way chief executives handle industry realities is the measure of their performance.  “The board should make the call and they should consider multiple factors including shareholders returns, suppliers’ welfare plus the fact Fonterra is a co-operative.  “Being part of a co-op means there should be a sense of collective responsibility.”

National MP Chester Borrows: “Farmers and those with farming-related businesses take a dim view of increased salaries borne out of the same sector that’s paying lower and lower returns.”

He did not accept the view that people had to be paid high salaries for good results.

“The ‘paying peanuts and you just get monkeys’ argument is just a justification for paying more,” Borrows said.

Coull said senior executive salaries were a matter between the Fonterra board and management. While there was a “fair bit of emotion and rightly so” among farmers after the latest payout downgrade, cutting pay when times got hard was not a simple response.  He said farmers were also employers.
“I’m not being flippant, but I can’t expect my staff to take a pay cut (because times are tough).  “Rural Contractors NZ has criticised Fonterra’s move to extend the time it takes to pay contractors as part of an efficiency drive.

The organization, which represents agricultural contractors, said it was not the sort of action an industry leader should be taking.

“It sends a terrible message to farmers. That it is ok to delay paying suppliers and that is not on,” president Steve Levet said.  He said rural contractors were hurting just as much as dairy farmers.  “The last thing we need is for people to delay paying us or trying to dictate pricing. We all have to live.”

Commentators have been raising the issue of Fonterra’s borrowings, noting again that ratings agencies last year lowered the company’s credit ratings.

Fonterra chief financial officer, Lukas Paravicini told a conference call after this week’s forecast downgrade from $4.15 to $3.90 that the co-operative was “absolutely sound”.

“We have invested in the future to create more capacity in the home base in New Zealand last year. Since then we have committed to not increasing our debt,” Paravicini said.

The company is expected to give an update on its debt status and make an announcement on possible farmer support measures on March 23 in its financial results for the first half of the year.

Fonterra began developing its first China farm nine years ago under a strategy to produce one billion litres of milk in China by 2018.

Spierings told the November annual meeting the two hubs were at the time producing 400 million litres of milk a year.

“We will not do any more steps for fresh milk at this point in time unless it fits with our ingredients customers’ desires or our food service business,” he said in response to a shareholder’s question as to whether the venture was worthwhile long term.

After the annual meeting when NZ Farmer asked for more information on the decision, the Fonterra response was the same written one-liner as this month’s.

In September last year Spierings said Fonterra had decided it was no longer “strategically important” to own its own farms in China outright.

By: Andrea Fox


Spring 2018