Fonterra tightens the reins

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Dairy giant Fonterra is imposing a "severe clampdown" on non-essential spending, freezing staff levels and planning to sell some assets and aggressively cut debt to cope with the global recession.

At Fonterra's annual meeting in Palmerston North yesterday, attended by about 300 farmers, few questions were asked about its handling of the Chinese melamine-in-the-milk scandal.

Instead, discussion time was taken up debating whether the Fonterra Shareholders Council's annual budget should be increased by $600,000 to $3.3 million.

Chief executive Andrew Ferrier said the cooperative would look to sell some assets but this was not related to bringing down debt levels.

"There are quite a few things we are prepared to sell in order to invest in other areas." he said but declined to say what might be sold.

Fonterra has a debt to debt plus equity ratio of 57 per cent but aims to reduce this to 45 per cent during the next few years.

"Although Fonterra's banking relationships are sound, the world we are in is so unpredictable, it pays to be prudent," Mr Ferrier said.

"We have a severe clampdown on non-essential spending. This includes deferrals or cancellation of capital expenditures, strict expense controls and holding headcount to current levels."

Chairman Henry van der Heyden said it was likely Fonterra would have to write off the remaining $62 million of its investment in disgraced Chinese company SanLu.

To learn from the SanLu debacle, Fonterra's board had commissioned an external legal and risk review of the issue with a view to improving its risk evaluation, monitoring and crisis management procedures, he said.

"Management is also reviewing the guidelines and procedures Fonterra adopts in joint venture arrangements [Fonterra owns 43 per cent of SanLu].

"These initiatives are a work in progress but it's appropriate that we cast a critical eye over the way we decide on investments and manage and monitor them."

There was criticism from farmers at the meeting that Fonterra's 2007-08 payout was below much smaller rivals Westland and Tatua.

"I don't like us finishing third," Mr van der Heyden replied.

The board was putting a lot of pressure on management to ensure Fonterra improved its performance relative to its rivals this season, he said.

There has been some farmer grumbling about Fonterra's recently introduced auction system used to sell product.

One farmer asked if the auction system had contributed to the recent drop in the payout forecast.

This suggestion was quashed by Mr Ferrier, who said the auction system had no impact on the payout.

"The auction system simply shows where the price is."

Directors Greg Gent and Jim van der Poel were re-elected to the board, while Earl Rattray was voted off and will be replaced by John Monaghan.

- © Fairfax NZ News