The ongoing dairy/Fonterra fiasco

The government - John Key and his Minister of Agriculture - seem to have gone Missing-in-Action.  Not a word from them in the midst of this crisis

Fonterra expects hundreds of layoffs of support staff as part of major review

NZ Herald,

10 June, 2015

Theo Spierings fronted up to media today about Fonterra's restructure following widespread criticism over management performance at a time when global dairy prices have plummeted. Photo: Greg Bowker"

Fonterra chief executive Theo Spierings said he's determined not to allow the dairy cooperative to fall below its current 87 percent share of the New Zealand milk pool, despite increased competition for supply.

Spierings fronted up to the media this morning after widespread criticism of the dairy cooperative's management performance following a weak half-year financial result, lower forecast dairy payout, and anecdotal reports many of its 10,500 suppliers were seeking to leave and supply independents.

He said a major review underway of the business would lead to hundreds of its 1,500 head office and support function staff being laid off because it wanted to redirect more staff into sales and in market roles to help drive up returns. Fonterra currently employs 11,500 staff in New Zealand and 18,000 worldwide.

Spierings wouldn't confirm the number of layoffs until a final review is completed and approved by the board, due on August 1.

The review was started in December when it became clear the global dairy market wasn't going to recover as quickly as hoped and Spierings said "everything was in scope" to grab as much cash out of the business as possible.

"We're looking at the quality of the top line and what goods are sold and the gross margin levels and operating expenses. We're looking at what more we can do to create value," he said.

The company has slashed its farmgate milk price to $4.40 per kilogram of milk solids for the 2014/15 season and has an opening forecast of $5.25/kgMS for next season while Dairy NZ has forecast farmers need $5.70/kgMS to break even. Spierings says on-going volatility in the market means there could be a $1.50/kgMS swing either way to the 2015/16 forecast but he's confident demand will come back in the market at some point, given global milk inventories are relatively low.

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• Primary industries revenue forecast to drop 8pc

The review includes external input from McKinsey & Co providing global benchmarking on how Fonterra was performing against its peers although earlier this week the company refused to confirm the business management consultancy was even involved in the review.

Spierings defended the $22 billion-annual-turnover cooperative's underlying performance despite a disappointing half-year result that showed declining profit and revenue.

"Our return on capital has been 10-to-11 percent with what we're doing with the team. We want to move to a 13 percent return on capital which would be a very strong business," Spierings said.

Fonterra has been accused of having bloated head office management, with 17 staff earning over $1 million a year while more than a third of farmers are likely to face negative cash flow this year. However, Spierings said that figure had been reduced from 29 earning over $1 million five years ago and operating expenses had not increased "by $1" in the last few years.

Read more:
• Farmer income set to fall by $150,000
• Fonterra cuts payout forecast

When Fonterra was set up in 2001 it was owned by 11,000 dairy farmers and supplied 96 percent of the country's milk. With the rapid expansion of smaller export-orientated dairy firms, Fonterra's market share has declined to 87 percent of the growing milk pool and it is expanding at a slower pace than its smaller competitors.

There has been anecdotal talk of some of Fonterra's 10,500 suppliers voting with their feet to join other dairy processors offering payouts above its payout rate or not requiring suppliers to pay for shares based on production levels that they will struggle to afford.

Spierings said while some have indicated they will leave the cooperative in the following season, most of those are in regions where other processors have built plants. He says the MyMilk brand, where farmers can join as suppliers without having to buy shares immediately, has won at least 20 suppliers back for the next season and overall supplier numbers have stayed stable.

A recent Dairy NZ report indicated farmer returns have not increased despite their production growing. Spierings said the review was aimed at driving more value back to farmers and volume growth was an important part of its global strategy.

"We have to drive the top line and that is volume and value. If we just focus on value-add we will lose a ticket to the game," he said.

KPMG global head of agribusiness Ian Proudfoot said the biggest problem facing the dairy industry was the cooperative structure, where farmers were focused on getting the maximum cash payout rather than the investment required to drive the value-add rather side of the business.

Spierings said the current structure was working in a tough environment but long-term there were questions over where the money required for value-add investment would come from.

"I agree we need to look at how we will fund the strategy and growth strategy around the world. That's the question on the table and we don't want to have to go back to the whole structure of Fonterra again."

Units of the Fonterra Shareholders' Fund, which are entitled to Fonterra's dividend payments, rose 0.4 percent to $4.72 on the NZX and have fallen 22 percent this year.

Record cattle cull after low payouts

More than 52,000 dairy cows have been slaughtered in a week - the highest rate ever recorded.

And the number sent to the meatworks is tipped to reach more than 1 million this season for the first time as the low milk solids payout starts to bite.

The record-breaking number were culled in the week to May 16 - up from just over 50,000 a week at the start of the month and a weekly rate of about 45,000 for the same time last year. To date, 22 per cent more cows, or 155,000, have been killed than last season.

Largest livestock shipment ever remains shrouded in mystery

An aerial view of the livestock carrier Nada docked at the Timaru Port.

The largest shipment of livestock ever to leave New Zealand remains shrouded in mystery.

While a livestock carrier arrived off Timaru on Tuesday, PrimePort Timaru, livestock brokers and shipping agents refused to discuss the shipment.