Sector News

Fonterra to Trim Sails in Stormy Conditions

June 10, 2015
Food & Drink
With the global dairy market in a funk, giant Fonterra Co-Operative Group Ltd. is undertaking a major review of its business in a bid to drive up returns.
 
“We are in stormy conditions, stormy weather,” Chief Executive Theo Spierings said in an interview with The Wall Street Journal. Everything from procurement to capital expenditure is under scrutiny, he said, and there will be job cuts.
 
The review is set to be completed by Aug. 1. It started in December, after Fonterra concluded that the global dairy market wasn’t on a path to swift recovery. The price of milk at the latest auction on GlobalDairyTrade, an Internet platform, was $2,412 a metric ton, down from $5,000 in early 2014.
 
Mr. Spierings wouldn’t confirm any specific measures before the completion of the review, though he told local radio that hundreds of head-office and support-function jobs could go. The goal would be to redirect resources into sales and marketing roles. Fonterra, the world’s largest dairy exporter, employs more than 18,000 people in 40 countries.
 
Mr. Spierings underscored, however, that the review isn’t all about cutting overhead costs. The aim is to bring the co-op up to global best practice in everything from shipping to how factories are run.
 
“If you run a business that has a 10% to 11% return on capital, that’s not good enough,” he said. “That needs to go up. I am looking at more than 13%.”
 
In March, Fonterra reported a 14% drop in first-half revenue from a year earlier and said it would cut its dividend. It also recently slashed its forecast payout to its 10,600 farmer shareholders for the season ending May 31 to 4.40 New Zealand dollars a kilo of milk solids (US$3.14), stripping more than NZ$6 billion out of farmers’ incomes compared with the prior season. The payout for the coming season beginning June 1 is forecast at NZ$5.25—still below dairy farmers’ average break-even price, according to John Janssen, BNZ’S head of agribusiness.
 
The Reserve Bank of New Zealand, the country’s central bank, has flagged the dairy sector as a major risk to financial stability. About 25% of farmers have negative cash flow for the current season, it said, and “financial stress in the dairy could rise markedly if low global milk prices persist beyond the current season.”
 
Some farmers have been highly critical of Fonterra, calling on it to invest less offshore and more in helping its farmers weather the volatility.
 
Mr. Spierings said he is confident farmers aren’t jumping ship and that Fonterra continues to collect 87% of New Zealand’s milk despite increased competition. He said numbers for the season ended May 31 are still being crunched, but “farmers come into the co-op and leave the co-op each year.”
 
“It’s better than last season,” he said. “We have more win-backs.”
 
By Rebecca Howard
 

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