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Fonterra's Hand-Break

Greetings Readers

The importance of this year’s Fonterra director elections has been emphasised but Fonterra’s condition appears to be way past the point where the election of three new directors, irrespective of their qualities will have much impact on the policies of the board in the short run.

Policy change right now is in the hands of shareholders forcefully articulating their concerns and pressing for action by the Co-op on the issues currently being raised. It is not sufficient to make comparisons of say payouts with Tatua or Westland and hope that payout improvement will result without review and assessment of the fundamental reasons for the difference.

Candidate Malcolm Bailey has identified a major burden that has been imposed by the industry restructuring act on the major co-op. Fonterra, he claims, is disadvantaged by the requirement to sell a proportion of its supply to competing processors

Fonterra is unable to “lockup’ its raw material supply and leverage market power for the benefit of its own suppliers. This disadvantage is being highlighted by last years and now this years payouts being eclipsed by its two smaller competitors. Competitors, who for historic or geographic reasons, have retained, clearly defined boundaries which are barriers to the “leaking” of their market advantage in the short term.

In addition the arbitrary nature of the valuation of assets, milk pricing formulas, guide prices and performance measurement imposed on Fonterra by the facilitating legislation seems to be a major component of the underlying cause for supplier dissatisfaction with Fonterra’s current performance. The perception that Tatua and Westland were handsomely rewarded for their share of the NZDB is reinforced by Westland’s continuing payout premium from its range commodity products.

This seemingly divine trust placed in accountants to get the equity of the dairy industries transactions and values correctly partitioned is perhaps a little naive. It should be remembered that many accountants come from the same school of management and philosophy that created then destroyed the supposed wealth of companies like Enron.

Much play is made of the politics of the dairy industry limiting Fonterra’s performance. But as the new structure settles down it is becoming clear that it is the hand-break of national politics is a primary limiting factor Fonterra’s performance. Legislation enabling the merger is proving a disadvantage to those who were expecting better.

The pastoral industry of NZ has a lot riding on Fonterra’s success. Who will lead the fight for a more equitable playing field for Fonterra?

Good Farming

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