Keith Woodford discusses how Fonterra’s governors become information prisoners of management and lack independent market insights

By Keith Woodford*

Fonterra’s recently appointed Chairman John Monaghan, in announcing the appointment of interim CEO Miles Hurrell, said that Fonterra wants to pause and reassess the way ahead. This could be a breath of fresh air. It needs to be a wind of change.

A starting question has to be why has Fonterra been doing so badly with its international ventures? This includes both international processing of milk and marketing of consumer-branded products. In the case of China, it also includes farming.

The so-called Fonterra Communications Division, but in reality the Fonterra Propaganda Division, has done a stalwart job over many years of painting over the cracks. But even those skilled operators have been unable to cover up some of the recent messes, particularly in China, but also elsewhere.

There are likely to be more awkward disclosures to come. More of that further down.

There is no doubt that Fonterra is a very efficient producer of commodities. Every day the milk is collected from more than 10,000 farms and converted into a range of products, led by commodity whole milk powder. It is a slick operation.

When it comes to consumer products or other international ventures, Fonterra struggles to take a trick. This is despite owning longstanding brands such as Anchor, although Fonterra did sell the European rights to even that brand. 

There is a small number of Asian countries where Fonterra does well with its stable of Anchor, Anlene and Anmum products. Fonterra Communications is very good at singing these songs of success. In contrast, failures are well hidden for as long as possible.

Fonterra has used multiple tricks to cover its poor performance. Back in 2013/14, Fonterra retained over a billion dollars that should have been milk payments to farmers so as to shore up the balance sheet. It is playing that trick again this year but only to a lesser extent.

Another trick is to focus on ‘normalised’ profits in its public utterances, which are the profits Fonterra would have made if not for the saga of ‘stuff ups’. This year’s examples include the distress at Beingmate and the $183 million compensation to Danone. Historically, losses at China Farms have also been buried this way. In fact, scrubbing up the results this way is standard fare.

If anyone thinks I am exaggerating, then they might like to think about the value of Fonterra shares which are down more than 20% this year and only marginally above their value when Fonterra was formed 17 years ago. In the meantime, other companies have prospered. 

There are many examples of international dairy companies that have been prospering but the most spectacular is The a2 Milk Company which now has a capital value greater than Fonterra’s. 

I recall back in 2008 a Fonterra director saying to me how, if need be, Fonterra could take over The a2 Milk Company (then called A2 Corporation) whenever it wanted to. Back then there was some truth to that – at that time Fonterra was worth more than 100 times the value of The a2 Milk Company. Now, Fonterra is worth less than The a2 Milk Company.

Most New Zealand farmers are very loyal to Fonterra. Accordingly, over the years I have made my share of enemies by pointing out deficiencies. So, let me make one point clear: I am a strong believer in the importance of Fonterra, but for everyone’s sake it does need to do better. 

Fonterra is the emperor of New Zealand dairying. But the emperor is down to his underwear and it is not a pretty sight. Underwear might be OK for producing commodities but it does not resonate with overseas consumers. We need to get more clothes on the emperor.

There will be some who say that Fonterra should stick to long-life commodities at which it is so good, and for which there is a unique synergy with our seasonal production systems. That argument does need to be heard. To a large extent, it may become the only realistic path forward for Fonterra, which is now capital constrained as a result of so many mistakes.

If that commodity focus and argument is to become the company mantra going forward, then there has to be more room created for dairy entrepreneurs outside the Fonterra framework.

The genesis of the current situation goes back a long way. I recall just before Fonterra was formed when the New Zealand Dairy Board was doing supposed due diligence on the purchase of struggling Australian dairy co-operative Bonlac.

 At the time, I was living in Australia and I knew something about Bonlac. In conversation with a New Zealand Dairy Board director I asked whether the Dairy Board understood that Bonlac was a ‘lemon’. The reply came back with some passion: ‘Bonlac is not a lemon; it is a dog. But we, the Dairy Board can turn it around’.

It really is only in the last two years that this Australian dog, owned and fed for 17 years since 2001 by Fonterra, has started to wag its tail. Even then, the historic purchase only ‘came right’ because Murray Goulburn, Australia’s one remaining dairy co-operative and the largest Australian dairy company, shot itself in both feet, so that even limping along became impossible. Many of the Murray Goulburn farmers fled to Fonterra.

Now that Canadian-owned Saputo has taken over Murray Goulburn, we can expect to see renewed competition for milk supply in Australia. Life for Fonterra in Australia will get more challenging again.

Fonterra’s other big overseas enterprise has been the Soprole/Prolesur conglomerate in Chile. In the last nine years, under Fonterra’s ownership, it has declined from the premier dairy company in Chile with 25% market share to becoming Number 2 with 19% share and still dropping. In the market, it is being seriously outperformed by local co-operative Colun.

The word is that Fonterra’s farmer-suppliers in Chile, including both locally-owned farms and two very large New Zealand-owned operations, are not happy. These suppliers are looking at their options.

So far, there has not been a whisper from Fonterra back to its New Zealand farmers about the Chilean issues. It will be an interesting test case for the new Fonterra Chairman and his new CEO.

Why is it that with a Board of highly qualified people, both farmer-elected and internally-appointed, that Fonterra keeps making so many mistakes in the international marketplace?

I have asked myself this same question many times. The key answer I come up with is that these directors, although well qualified, do not have outside information as to what is happening in the markets. Rather, they have to rely on the internal communications machine which polishes everything up before they receive it. 

Yes, the directors do travel internationally, and indeed most of them spent several weeks travelling internationally just last month. I agree that this travel is important. I hear that they came back impressed with many good things Fonterra is doing.

The problem is that they lack sufficient networks external to Fonterra to find out what else is happening in these countries. And if you are a Fonterra employee, you sure don’t want to be the bearer of bad news. So, the cycle continues.


*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. He can be contacted at kbwoodford@gmail.com

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26 Comments

As far as China is concerned, Fonterra should assume that corruption and fraud is present in every deal. And it should put in place strategies to back out at the Chinese partners expense if/when the fraud comes to light.

I nominate Uninterested for Fonterra board of directors. If they are so well qualified, how do they fall for the same scam multiple times? Does anyone have their email addresses, I have an uncle in Nigeria who has a business proposition for them?

If they knew as much about International marketing as they know about farming they may have had reason to question the reports.
Im sure the meat industry is much the same.

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16

Look at the consistant stream of examples of NZ corporations doing the same thing. Telecom under Gattung $1billion plus for AAPT, a disaster for shareholders. Fletchers under Ling, Formica, Crane and worse. These seemingly competent businesses make very bad decisions using profits that arguably are arrived at from near monopoly positions at home. So perhaps thats the factor, easy profits from a captive local market so the temptation to go long and large abroad isn't tempered by the risk of going out of business because the captive NZ market can just be gouged a bit more...

Couldn't agree more.
Add Air NZ and Ansett to the list.

Oh yeah, who could forget that debacle!

Empirically, few NZ and Australian companies do well offshore. So I see these failures as principally poor governance. Where is the downside for a CEO and Exec team on $2m to $10m and a big pay-off if it doesnt work out? You cannot expect rank and file to challenge a CEO's strategy, it is the Boards role. CEO's are notoriously ego driven with Panglossian outlooks and most are over-promoted anyway. It is the Boards role to ensure strategy is watertight with attractive risk/reward

For arguments sake, I wonder if better representation of rank and file at board level would help ameliorate this bad governance? There are many international examples of large corporations that have done well out of this style of sustainable collaboration.

How does the saying go ... you are always promoted to your highest level of incompetance?

The_4th_Estate,

I can't disagree,but it's only fair to point out some exceptions like EBOS,now a major player in Australia. F&P Healthcare and Zero spring to mind,as does Mainfreight. Air NZ has transformed itself into a highly regarded and profitable international airline.

I think your third para has the key sentence, Keith.

Burnishing coprolites into pearls is a significant industry, both in large corporates and in Gubmint.

It cannot be a coincidence that googilizing the the Chile saga comes up with Colon as a 'did you mean....'

Yes the lack of accountability from those at the top of Fonterra is startling.

How they can keep a straight face is beyond me.

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11

Why is FONTERRA so bad at international ventures ?

BECAUSE THEY DONT HAVE A MONOPOLY ( as they have here in NZ ) and cannot control the end price of the commodity they sell .

The retail price of milk in New Zealand is scandalous , and disgraceful .

Fonterra sells its milk cheaper ( branded Clover ) in South Africa that it does right here to us Kiwis

They are price extortionists and what they do here would lead to criminal prosecution in other countries , they simply would not get away with it

Another perspective on that thought is that having a monopoly leads to lassitude and a lack of motivation, drive and creativity. Rule of thumb, get beyond 40 % of a market and you are entering dangerous territory. You will get soft and a bit lazy, will be vulnerable to being eclipsed by smaller, leaner more hungry competitor in future.

Interesting point.
If we look at cellular there are two players of about equal size. At one time one was completely dominant.
Using this as a guide Fonterra has a long way to slide or it could be split into two parts to provide competition.
I think we have been here before with the Telcos.

Pay peanuts and we will get underperforming monkeys we were told, so we paid the CEO $8million and other board members huge salaries and bonuses for the company to perform well..

I think I would prefer monkeys!!

Perhaps a small piece of legislation would help to make directors responsible for losses...in civil law of course..

Fonterra has got to be the most screwed up mess of a Company in the whole country .

The farmers who own the Company get up at un-Godly hours like 4.00 am to produce milk for Fonterra

The Head Office management at Fonterra produce nothing at all , just huge expenses and massive losses .

The only thing its fancy new Head Office on the waterfront produces is a stream of seriously expensive Company motor vehicles out of its basement at 4.00 pm every day.

Paid for by the farmer who milked those cows at 4.00 am

Its a shambolic entity , which has internal conflicts because its profitiability in value added products is in direct conflict with the owners ( farmers ) getting a better price for raw milk .

The executive is also out of touch with the owners............ when last did a Fonterra executive even put a pair of gumboots on or smell steaming fresh cowshit on a freezing winters morning ?

Fonterra should be the peak of commercial and reputational competence in NZ, there are no excuses. However their, and the dairy industry's, reputation seems to be in tatters - commercial ineptitude from management, polluted water ways and some of the highest domestic milk prices on the planet. When was the last time anyone read a positive article about them?

Boatman,

As someone with no connection to farming,why don't the 'owners' do something about it? They may get up at 4am,but many don't seem very bright.

linklater01 - There are a lot of farmers who employ staff to run the place day to day but there's also a hell of a lot that are still working at the coalface, and when you don't know what day it is, it's hard to put your mind to anything but work and sleep.

Two seasons ago, 4am starts, 5 weeks into calving, 0 days off I was coming home late morning after milking and feeding out to see my in-laws car at our house, I thought the worst had happened because it was a Thursday.

Turned out it was Saturday.

Days, weeks, months blur

What makes you think that it is just foreign operations that they are so poor at? Even their NZ near monopoly is being whittled away. If you can't manage a near monopoly situation well, what can you run well?
As for dealing with Chinese, anybody who thinks that they can deal with Chinese companies in their own market and not get absolutely screwed is kidding themselves. One of my previous employers had a very firm rule. Never deal with Chinese companies. They simply cannot be trusted.

Did anyone see the Fonterra's China webinar tonight with Fonterra President of Greater China,Christina Zhu and Alibaba's Director of Business Development John O'Loghlen?

Been watching netball, admiring the culture of the Steel Organisation.

Mbovis MPI website now reporting 4940 forward contact farms. They added 180 farms in 4 days. This is a joke. Mbovis in the space of 4 days possibly just infected another 180 farms. Yet those farms will not be under movement controls yet and they can and will move stock. Onward the possibilities march. This eradication attempt is being blown out of the water by NZ farmers business model of frequent trucker miles for cattle. When will the bureaucrats in charge acknowledge this.

"Rather, they have to rely on the internal communications machine which polishes everything up before they receive it".

Sadly this is the norm in bigger companies. Big intimidating personalities at the top who only like to hear good news so those on the lower rungs, for self preservation, only give good news.