A lot on Fonterra's plate

Last updated 08:45 13/01/2014

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Fonterra needs a different approach if it wants to ensure success, writes John Lancashire.

If Fonterra wants to fulfil its potential and, at the same time, become more environmentally sustainable it needs to start acting more like a food company. It also needs to work on its image.

With the avalanche of articles, reports and interviews after the melamine and botulism "incidents" involving the dairy company, it would be expected that measures would have been taken to stop repeats.

The so-called "independent" internal report on the botulism crisis by Fonterra and chaired by an independent member of its board, presented 33 recommendations largely about the time it took to pick up the seriousness of the situation, and the need to develop a social media strategy and improve communications.

Action had already been taken with the appointment of new communications chief Kerry Underhill. Perhaps one of his first tasks could be to unravel the unseemly media exposure of the split between Fonterra and AgResearch over who was responsible for the wrong interpretation on the presence/ absence of the botulism organism.

The report also criticised the "Fortress Fonterra" philosophy, again highlighting inadequate communication planning and skills.

A separate report on food safety aspects of the" incidents" has reassured Food Safety Minister Nikki Kaye that we have a world- leading system, which she rather simplistically suggests just needs a few tweaks to deal with some new trading relationships.

We live in hope one final report from the Ministry of Primary Industry will throw more light on what actually went wrong, so that such a shambles will not reoccur.

The recent cancelling of a supply contract with Fonterra by the huge French food corporation Danone and their claim of hundreds of millions of dollars - which could be over half of Fonterra's earnings last year and will, according to one economist, cost individual dairy farmers $43,000 - shows the botulism issue is not going to go away quickly.

However, that is only part of the problem. In a series of recent addresses, Fonterra chief executive officer Theo Spierings has talked more about sustainability and the environment, than the food industry.

Despite being fairly critical of the report from the parliamentary Commissioner for the Environment, Jan Wright, on "water quality in New Zealand", which he called "in the past and looking backwards", Spierings did admit Fonterra was 8 to 10 years behind the Europeans in tackling these issues.

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Despite expecting a 2.5 to 3 per cent growth this year, he admitted "we can't keep growing in this way before hitting a wall in terms of sustainability and the environment".

Nevertheless, our biggest company with more than 90 per cent of the nation's milk supply and 25 per cent of our merchandise exports has clearly a huge role to play in assisting the Government to achieve its goal of doubling primary exports by 2025.

It was news to many to hear Fonterra had presented a 10- year growth plan to the Government, and it would be interesting to see how this is going to be achieved given the constraints identified above by the CEO.

Although Fonterra seems fairly gung-ho about future growth prospects , there is an increasing opinion from Rabobank and KPMG among others that dairy prices are going to take a hit this year largely as a result of big increases in United States production and changes in the European Union support mechanisms.

New Zealand has also lost its place as the world's lowest cost producer of milk. There are a number of reasons for this, including the fact that the alternative feeds which used to comprise 10 per cent of farm expenses 20 years ago now make up 25 per cent of costs.

Interest costs have risen because of the huge debt carried by the dairy sector, probably up to $35-40 billion, and the Reserve Bank has flagged substantial increases in interest rates next year.

However, the real problem with Fonterra, as illustrated by the melamine and botulism scandals, is that they are in the food business but they do not "think" food.

This is not surprising as 50 per cent of its directors are farmers, with a number of others having outside interests in farming.

The shareholders council also represents the interests of farmers. That makes it inevitable that Fonterra is really just a big farmer with an outstanding manufacturing capability tacked on.

It, therefore, comes as a surprise that Fonterra's chief executive officer claims their business model is 20 years ahead of the rest of the world.

If it was that good, then why haven't they recognised that becoming a true food company would add value to their product, instead of the current emphasis on cheap commodities.

It would reduce pressure on the environment as there would be less need for more cows to produce more low-value milk.

This is not a new idea but maybe its time has come. As Jan Wright puts it, if we carry on increasing cow numbers we may just hold the line on environmental sustainability. Wouldn't it be nice to have a better target than that?

John Lancashire is a former president of the NZ Institute of Agricultural and Horticultural Science.

- © Fairfax NZ News

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