Wednesday, June 10, 2015

While Farmer Suppliers Borrow to Buy Groceries,

Fonterra sails in troubled waters.

The Captain of the Costa Concordia sailed too close to rocks off Tuscany and came to grief when the vessel grounded and overturned. The Captain of that ill-fated cruise liner now languishes in the pokey for dereliction of duty when it was discovered he made it ashore before the last passengers and crew disembarked, to be found located safe in a nice comfy  hotel suite.

The Herald reports that the Dairy Behemoth, Fonterra formed some decade and a half ago is reviewing the employment of hundreds as the conglomerate watches its Payouts dive into the toilet while many suppliers face the prospect of increasing debt levels just to buy groceries.
The growing disillusionment has many reviewing who they will supply, as Fonterra's predicted payouts for this and next year are revealed to be somewhat tarnished when compared to the  offers of independents..

According to the NZ Herald Fonterra employs nearly two people to process and market the product from each of  its over ten thousand suppliers and with around a dozen of those gifts to the industry taking over a million smakeroos pa each, it is of no surprise that the share of the total suppliers has fallen from the mid nineties when NZ Dairy,  based in the Waikato and Taranaki based Tui  consumated their civil union in  the new millennium c2001.

As with many such marriages, stresses are growing and with small companies such as the micro geographical based Tatua in the Waikato heartland, Westland Dairy with the SI Southern Alps as a geographic boundary who both  chose to stay out of the commerce commission consented grand alliance  and now  Synlait,  newly created in the guts of the massive  expanding South Island dairying,  based in Mid Canterbury and others, offering better returns and supply conditions, the giant has watched its share of supply fall from  96%  c 2001 to around 87% today and threatened to go lower.

Now while the NZ dairy industry seems impressive here in Little old NZ with its sheer size and dominance as a large global  trader in dairy product,  with so much product produced, processed and consumed within national borders, that dominance pales into relative insignificance when measured as a proportion of international production.
NZ dairy exports account for over 30% of world dairy trade but when measured against total global dairy production, the NZ share drops to single figures and there the ability to dominate starts to be diluted to the point we are at today, being consigned to victimhood by others who are better able to dominate  eg Nestle (Market value north of 300 billion US), and state entities eg China.
NZ exports nearly 98% of its milk product.

The Fonterra international player has further muddied the waters by investing in overseas activities, for instance Australia, where they purchased Nestle assets and some comparisons around supply offers there that  were seen as more generous than those proposed for NZ suppliers.
Fonterra has also developed joint ventures in markets eg,  China, Chile and Saudi Arabia and others that do not always add to the clean green images that underpin the international dairy trade that Fonterra would like to be seen as positive for its identity. 
Toss in the bungled botulism contamination scare in stored whey powder at a small cog plant,  the Malamine contamination affair, and "the state of Denmark may have decay  if not something  rotten".

While the NZ supply price is very open and transparent as opposed to the price meat companies pay to farmer suppliers with covert contracts and inducements to ensure supply levels are evened out, such transparency does not always deliver the best outcomes, sometimes feet of clay can threaten.
What some see as graphic comparisons, has the dominant processor looking over their shoulder as competition erodes what was originally intended to be a single desk set up.
Tatua and Westland staying outside the Civil Union is now seen as a measure of the performance of Fonterra and other new entities such as Synlait are also revealing,  leaving suppliers under increasing financial pressures also looking elsewhere.


Anonymous said...

Just one correction.

The old Waikato Dairy Company was called NZ Dairies.

The old Taranaki Dairy Company was called Kiwi Dairies.

Tui Dairy Company was the result in the 80's of the amalgamation of a number of coops around Manawatu and Pahiatua.

Kiwi and NZ Dairies hated each other and always tried to outdo each other with payout announcements etc.

I can't remember further back than that.


pdm said...

I have just been listening to Leighton Smith and if his information is correct Fonterra could drop at least 1,000 staff on salaries of $100,000 plus and not notice - like Government and Councils it has obviously become a bloated bureaucracy that urgently needs purging.

Anonymous said...


Tom Hunter said ...

And this is starting to impact on a wider scale. It's now June 11 and I still cannot download the PDF form of my Fonterra income statement for May 2015. These are usually available no later than 5-6 days after the end of the month.

Furthermore, when I called the contact number just now I got a nice young women who said that "everybody was in a meeting" and they would take my phone number and call me back.

Both events are unprecedented in dealing with Fonterra.

Paulus said...

For many years even prior to the creation of Fonterra Nestles have continually and successfully undermined the NZ Dairy industry.
Having worked for the Swiss some years ago they are like a praying mantis slowly waiting to catch their prey. After all they have so much other dead people's money.
A Swiss business can borrow at an inconceivable interest rate undermining anybody else when they want. It is a very hierarchical society.
They would swallow Fonterra tomorrow if the could - and will do so one day.
Like all things Swiss sectional domination is paramount - see cement, and much of the world's prepared foods in the supermarkets - down to Milo even.