Allan Barber wonders if Fonterra has actually captured the 'value' and 'velocity' gains from its new focus on value extraction

Allan Barber wonders if Fonterra has actually captured the 'value' and 'velocity' gains from its new focus on value extraction

By Allan Barber*

Fonterra’s conservative forecast of $4.25 for next season has surprised analysts who were generally expecting a forecast payout between $4.50 and $4.80 per kilo of Milk Solids.

In contrast Westland Milk Products has announced a budgeted payout of $4.55-$4.90 which includes an estimated 48 cents for value added product above the base price for skim milk powder.

A further contrast is that Fonterra’s forecast includes no added value component which will be announced in July and when added to the $4.25 will comprise the total available to farmer shareholders. Therefore on balance there may not be a great deal of difference between the two companies.

However as we saw during the course of the 2015/16 season, the price announced as a  forecast before the start of the season only serves as an indicator of what farmers can expect to receive as advance payments during the season. The final payout may bear very little relationship to what was forecast at the beginning of the year in response to changing circumstances.

I imagine Fonterra has taken a once (or even several times) bitten twice shy approach to this forecast, because, while there must have been a temptation to give farmers some good news, there would have been an even greater encouragement not to overestimate what was achievable.

The credibility of Chairman John Wilson and more particularly the $5 million man, CEO Theo Spierings, has taken a serious knock from the consistent failure to predict the extent of the downturn, when every observer was picking bad news from global markets. So finally Fonterra’s forecasting skills seem to have caught up with market reality and there appears to be no way they will risk getting ahead of the game. After all, nobody will blame them if they actually manage to lift the payout above the forecast; there will just be a collective sigh of relief.

In Fonterra’s media release, Spierings says the long term fundamentals for global dairy remain positive with demand expected to increase by two to three per cent a year due to the growing world population, increasing middle classes in Asia, urbanisation and favourable demographics. He goes on to say “China dairy consumption growth remains positive and its demand for imports has been steady over recent GlobalDairyTrade events. We expect these drivers to result in the globally traded market rebalancing. We will remain focused on securing the best possible returns for our farmers by converting their milk into high-value products for customers around the world.”

In contrast Westland CEO Rod Quin is more cautious, saying in a media release “Prices remain under pressure as European and US dairy stock piles are now a feature of the market. Early contracts in our sales book are in line with budgeted prices, but market volatility with price movements, both up and down that can be sudden, make forecasting difficult. Based on what we see in the market today, with a forward view of global stock levels, customer demand and milk flows, we anticipate some minor increases for whole milk powder. However, we do expect pressure on skim milk and butter prices.”

However Quin puts more flesh on the bones of Westland’s value added strategy, stating “The contribution to payout of our strategic move into value-add products – infant nutrition, EasiYo, retail butter and UHT milk and cream – is worth noting.” This statement is more reassuring than Spierings’ rather vague claim about Fonterra’s focus on securing the best possible returns by converting milk into high value products for the world’s consumers.

After all Fonterra’s strategy gives the strong impression it has found itself compelled to build enough drying capacity to convert milk volume into powder at a  time when there are signs the world is moving when and where possible to fresh milk. It is clear Fonterra has increased its proportion of value added production, but not yet obvious it has got the value and velocity aspects of its three Vs strategy right.


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*Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country. He is chairman of the Warkworth A&P Show Committee. You can contact him by email at allan@barberstrategic.co.nz or read his blog here ». This article first appeared in Farmers Weekly and is here with permission.

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5 Comments

After all the smoke and mirrors reality has finally come to the for with this payout announced the other day, very much looking like 3 or perhaps 4 years in a row of battening down the hatches from the farmers perspective. Perhaps as we go into this season the banking sentiment will harden somewhat for those who are over exposed.

Reality will come and bite when we start talking about cost structures and being a competitive force in the dairy export market.

Artificial inflation of dairy farm values, cow prices etc were a direct result of the banks creating FOMO. Fear Of Missing Out. This is the fundamental failure in businesses that expand without clearly knowing the reasons driving the growth nor the risks involved. Banks have their own agenda of lending as much money as possible, while maintaining minimum losses. This may mean that the borrower becomes locked in stalemate doomed to fail if they sell and lose their equity and instead remain in a stressed business burdened by debt that goes to the bank, barely making a living.

Absolutely, but try telling a farmer that. Just talking to a guy last week and he tells me no I don't understand, his banker is his friend, he's there for him, wants to help by offering more debt, really nice guy. Lol !

Thus the majority of farmers are still asleep at the wheel, the smart ones have sold up and avoided losing everything or still be able to get a high price for their dairy land. With dairy farms dropping 13% in the last year the downward trend is at play, something we haven't seen for a long time. The stalemate is starting and it could mean farmers face years of debt and struggle, never to fully recover.