Five challenges facing Fonterra:
• Very low prices. World dairy prices, despite a shift higher in February, have slumped since March, reflecting high production here and from the other major dairy producers, slack demand from the world's biggest dairy importer - China - and generally favourable growing conditions.
• Geopolitical unrest. Friction between Russia and the Ukraine has led to Russia's trade ban on food imports from some western countries. That has meant dairy product from Europe, normally bound for Russia in the form of cheese, is now having to be turned into powder, which is going on to world markets and further depressing prices.
• Low oil prices. Very low oil prices has meant subdued demand from the key producing countries. There is also a connection between low oil prices and feed costs, which has meant the United States has been able to increase production more cost effectively than in the past.
• Farmgate friction. There is friction between the all-important farmgate milk price, which farmers get for their milk and Fonterra's dividend, which is a reflection of the company's performance as a manufacturer and marketer of dairy product.
• Wave of milk. Under its enabling legislation, DIRA, Fonterra cannot turn away milk from any fully "shared up" farmer who wants to supply it. That has meant Fonterra has had to invest much more in stainless steel to cope with the increase - leading to higher debt levels - to cope with the big step-up in production the last few years.
The business review is not just about "headcount". It includes measures to improve profitability at Fonterra's loss-making Australian business as well as a series of additional measures to remove barriers across the organisation to enable it to unlock more value. Farmers who expected a partly compensating increase in the dividend have been disappointed, but moves announced this month are estimated to equate to around a 3c or 4c dividend improvement.
Low milk prices should, in theory, mean higher dividends because they represent a lower input cost for the manufacturing, and dividend-paying, side of Fonterra.
Executives had their work cut out explaining why that was not the case when the co-op announced a first half net profit in March of $183 million, down 16 per cent on a year earlier, and lowered its dividend forecast range to 20c to 30c from a previous range of 25c to 35c a share.
While milk prices were low in New Zealand, the same could not be said for Australia and Latin America, where it has substantial operations and where it paid high prices.
Then there was the huge decline from the previous year's record high milk price of $8.40 to the 2014/2015 period, which played havoc with the value of Fonterra's inventory in the first quarter.
On top of that, Fonterra's gearing ratio - debt to debt plus equity - jumped to 50.7 per cent from 44.6 per cent a year earlier.
That was driven mostly by higher capital expenditure, which in turn was driven by the need for more stainless steel to get product from farm to port under pressure of big increases in milk production which only now shows signs of levelling out.
It is estimated just under half Fonterra's milk is exported - close to its raw form - as wholemilk powder, so there are questions whether it is performing on the value-added side.
For farmers, the milk price is paramount, but they expect the dividend to be able to provide a degree of offset when prices are low. That hasn't happened, so farmers and investors alike will be keen to see a swift improvement in Fonterra's financial performance as the co-op's November 25 annual meeting looms.
Fonterra in focus
Tomorrow: Sharemarket blues: Why Fonterra is failing to fire on the NZX
