August 20, 2018   

                                                                
Fonterra still "extraordinary" despite recent challenges, says board director
 

Fonterra, New Zealand's embattled dairy co-operative, might not be out of the woods soon, even as it recently announced the appointment of an interim CEO.

Its board director, Scott St John, said Fonterra is facing "profound" challenges. The co-operative had to cut down its farmgate milk price for the season just ended due to high debt and tight margins. In addition, the co-operative had cancelled plans for a second-half dividend as part of  an effort to shore up its balance sheet, Newstalk ZB reported.  

Nevertheless, St John remarked that Fonterra was an "extraordinary" company after he delivered a presentation to the New Zealand Shareholders Association.

"It has some profound opportunities but also some profound challenges," the former chief executive of First NZ Capital, added. "Too much of our asset portfolio has not been performing as we need it to be. We need to do much better with our capital."

St John also claimed that Fonterra's cost of goods into its export markets is, "for the first time", ahead of Europe, its main competitor market.

In addition, he noted the personnel changes at the top and new chairman John Monaghan's comment that the co-op needed to take stock and "breathe some fresh air into the business and determine any changes that are needed."

"It sounds benign, but it's not," St John said.

Fonterra has recently decided to clip five cents per kg off the milk price in order to support its earnings - a measure that has only occurred once before - in 2014 - when milk prices were at record highs.

"The high milk price has put pressure on the co-operative's earnings in a year that has also proven difficult with the Danone payment and the impairment of the Beingmate investment," St John explained. However, he insisted the milk price cut was the right call to make "and I would do it again today."

He also acknowledged that Fonterra faced capital constraints but the way ahead was more likely to be in the form of capital-light joint ventures such as the one just announced with India's Future Consumer.

Despite its capital issues, Fonterra would remain in farmer ownership.

"It is a co-operative - changing the ownership structure away from the farmers is just not the table," he said.

"But we need to think carefully and innovatively about how we fund projects that we enter into and I think if we look at the most recent India initiative, that's probably more likely be the sort of thing that you see us doing."

- Newstalk ZB