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Liam Dann 's Opinion

Business editor of the NZ Herald

Liam Dann: Fonterra, horror year? Yeah right

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Calls to put more focus on tech sector have been misconstrued as anti-agriculture and this has been divisive.

Fonterra does $260 million worth of business in Sri Lanka so it will be keeping a close eye on protests there.    Photo / AP
Fonterra does $260 million worth of business in Sri Lanka so it will be keeping a close eye on protests there. Photo / AP

After Fonterra's Sri Lankan stand-off at the weekend it is tempting to say the company is having a shocker of a year - DCD, botulism and now it finds itself in the thick of some overly enthusiastic nationalist posturing in one of its valuable emerging markets. Fonterra has $260 million worth of sales in in Sri Lanka so shutting shop is not to be done lightly.

The trouble with saying that Fonterra is having a terrible year is that it is not, at least not from a financial perspective.

It's probably safe to say the senior management and communications team haven't been having a barrel of laughs these past few month but over in the accounts department things have never looked better.

On Friday, before the Sri Lankan news, Fonterra put out a press release to remind everyone of this fact.

Fonterra confirmed it achieved its highest monthly revenue through the dairy auction in August, selling 109,664 metric tonnes of product, worth $685 million.

Its sales volume was up 27 per cent on the same time last year, and revenue more than doubled, up 107 per cent.

Fonterra, as predicted, has sailed through the botulism crisis and with the likely exception of a few big one-off costs is likely to avoid much of a hit on its bottom line.

It remains on track to deliver farmers a near record milk price payout of $7.50/kg. That's a price that will add $3.4 billion to the economy.

Meanwhile, it is increasingly clear that many small New Zealand exporters of dairy goods are having their products held up at the Chinese borders. They are facing costs and barriers around the world that are disproportionately large given the relative size of their revenue.

These businesses are typically unable to speak out publicly because it does not help their cause with Chinese officials if their complaints are translated in the local press.

That Fonterra's actions have a far greater impact on the New Zealand brand than they do on Fonterra's bottom line is a point that doesn't need to be laboured again.

We have four inquiries under way into the botulism issue but these seem quite technical and relatively narrow in their focus.

The point that does seem worth making again is that the events of this year should be a wake-up call to the nation with regards to our reliance on a single product like dairy.

It would be a great thing if 2013 was to be written in New Zealand's economic history as a turning point, the year the nation really woke up to the need to change - or at least to accelerate the change that had already begun.

In the past few weeks calls to put more focus on developing New Zealand's tech sector have been misconstrued as somehow anti-agriculture and this has been divisive.

In reality much of New Zealand's science and technology sector has grown out of the agriculture sector and the overlap between agriculture and tech is still huge.

For example, scientists have transformed our sheep flock and cow herd with world-class genetics and breeding. And there are numerous large exporting companies, such as Tru-test and Gallagher, that have grown out of the sector.

It is often pretty unsexy stuff. In fact it can be downright ugly. Take a look at a local manufacturing company such as Adept which has transformed the meat processing industry around the world (although if you're squeamish you might want to skip the next paragraph).

The Adept clip, invented in New Zealand in 1977, prevents the ingested stomach contents spilling out of a freshly slaughtered animal's neck.

It sounds horrible but it is a device that dramatically reduces the ecoli bacteria contamination in the finished product. The company has sold more than one billion of the clips and built a broader manufacturing business around its success in innovation.

Backing the tech sector isn't just about throwing grants at geeks and their cloud-based software applications.

Okay, as it turns out we have some world-class geeks worthy of support, but broadly, efforts to grow the tech sector are about leveraging the successful industries we have.

The goal should be to encourage more focus and more investment in research and development to put innovation at the forefront of New Zealand business thinking.

There is plenty going on already. The trick is to co-ordinate the efforts, invest efficiently and protect the intellectual property so companies can maximise the earning potential of their innovation.

It is scary how quickly a company such as NZX-listed Rakon has seen an amazing product like its crystals for GPS commoditised, forcing the company to cuts costs and pull back on its expansion.

Meanwhile, back to Fonterra which is one of the nation's leaders in food science and technology.

It has scientists in Palmerston North developing new milk proteins and high-value nutriceutical health products and plenty of other exciting things.

The potential is there for it to lead the way. And there are signs that things are happening.

At the bottom of that press release on Friday, beneath the trumpeting of the big dollars milk powder has brought in, were a couple of promising lines that showed some intent from chief executive Theo Spierings.

Commenting on Fonterra's forecast for a 15 per cent decline in its product volumes on GlobalDairyTrade over the next 12 months, Mr Spierings said "this reflects Fonterra's strategy of moving from being commodities-driven to a more value-added, higher-margin products business".

The balance is shifting at Fonterra, albeit slowly. And as it shifts so too will the motivation to get itright in its consumer markets. When that happens it will bring wider benefits to New Zealand above and beyond the extra revenue the shift may bring to Fonterra.

On Twitter: @liamdann

- NZ Herald

Liam Dann

Business editor of the NZ Herald

Liam Dann is the Business editor of the New Zealand Herald, overseeing all our business content in print and online. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy.

Read more by Liam Dann

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