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.
The new word for such ingredients is ‘complementary’, rather than ‘synthetic’, but the Motif investment is yet more money going offshore into a business not core to New Zealand farmers and with no immediate prospect of returns.
This expenditure of an undisclosed sum for a stake in Motif coincides with ongoing concerns about Fonterra’s budget, the attempted selling of Tip Top and a downgrading in credit rating by Fitch from a ‘stable’ outlook on Fonterra’s ‘A’ long-term issuer default rating to ‘negative’. Fitch commented in early March that Fonterra’s “asset sale programme will be critical in getting debt under control”. The Motif investment was announced at the end of February.
Motif is a spin-off from Ginko Bioworks. Its focus is the development and commercialisation of bio-engineered (read genetic technologies) animal and food ingredients. Fonterra justifies its buy-in as putting it at the forefront of providing people with choice, but the co-op says consumers will always want “natural, grass-fed dairy as a premium source of nutrition”.
The new investment will help Fonterra be part of the “emerging next-generation fermentation-produced nutrition sector”. The big question for farmer shareholders is whether the investment will result in increased money for them.
Since Fonterra launched on the share market, with a dividend linked to the value-add part of the business (e.g. food ingredients) the returns have been small. Although the share price lifted in early March (from $4.20 to $4.53) it dipped again after Fitch’s announcement and after the interim results.
The big story, however, is the longer-term change: a year ago the share price was $5.95; five years ago it was $6.18. The reference price at launch in 2012 was $5.50 ($5.89 in today’s prices).
The overall decrease in share price suggests that the added-value strategy is not generating confidence in the market.
Farmer shareholders are feeling it and have asked repeatedly for information on which of the overseas investments are generating income, but to no avail. They want to have vibrant businesses that they can enjoy, pass on or sell, but real estate information indicates that the market for dairy farms is far from hot.
New chief executive Miles Hurrell has acepted a troubled company in ‘interesting times’. Although he has had the role for only a few weeks, he has been in senior management for a while, so he must have known about the Motif investment, shareholders’ concerns about investments overseas and the likelihood of a downgrading in credit ratings.
The next question being asked by shareholders is how he is going to turn the Fonterra ‘ship’ around, and what key performance indicators (KPIs) have been set by the board. Past chief executives have had the milk price as a significant KPI attached to their remuneration.
Milk price is important because it determines the bulk of the farmer income. When it has gone up the chief executive has been rewarded with bonuses; but when it has gone down, bonuses have still been paid and shareholders have been told that the milk price is outside Fonterra’s control.
In addition, statements have been made that some remuneration is attached to ‘added-value’ and that the strategy will pay dividends in the future.
Fonterra has not declared the sum invested has not been declared, but it is known that it will not have a seat on the Motif board. None of these factors is likely to inspire the confidence that is needed.
It is time for the board to build trust by involving shareholders, ensuring fairness in payouts and dividends, and increasing transparency in governance. Then the signals will be clear and positive.
• Dr Jacqueline Rowarth CNZM CRSNZ HFNZIAHS is a Fonterra shareholder.
