Why Fonterra accepted defeat in the dairy aisle
OPINION: Fonterra's sale of its consumer dairy business to Lactalis is a clear sign of the co-operative’s failure to compete in the branded consumer market.
Twelve months ago, Fonterra shares plummeted to $2 on the New Zealand Stock Exchange.
Compare that to seven years ago, when it was hovering around $6.50. Last week, shares were trading around $4.50. In the last financial year, Fonterra’s market capitalisation is up $4.3 billion to $7.7 billion.
The shift in share price reflects performance, and the returning confidence farmers have in Fonterra. And credit for this must go to Fonterra’s management team and staff.
It’s been a tough few years for the co-op’s farmer shareholders. Rising costs, interest rates and below par milk price have been taken a toll on dairy farming.
Thankfully, on-farm costs are easing and a potential $10 milk price on the cards this season means many farmers will be either breaking even or making a profit after a tough period. For these farmers, a rejuvenated co-op with a healthy share price puts the icing on the cake.
At Fonterra’s annual general meeting this month, the board and management expressed confidence in its revised strategy and the potential to create further value for shareholders.
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Fonterra trims board size
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Eroding share of milk worries Fonterra shareholders
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Returns 'not good enough'
The co-op has lifted its target average return on capital to 10-12%, up from 9-10%. There’s also a commitment to return more of the co-op’s earnings to shareholders, with an enhanced dividend policy of 60-80% of earnings, up from 40-60%. And the co-op is committed to maintaining the highest sustainable farmgate milk price.
With the co-op in a healthy state and the farmgate milk price heading towards $10, there’s renewed confidence among farmer shareholders. They can say Fonterra is in a strong position today and has a strong future.
