KEY POINTS:
Despite the poisonous milk powder scandal embroiling Fonterra's 43 per cent owned Chinese dairy company San Lu, the world's biggest dairy exporter says it remains committed to China and its strategy for global growth.
Before the latest revelations about alleged attempts by San Lu to cover up the
scandal, chief executive Andrew Ferrier said he did not regret moving into the country.
"China is the largest growing dairy market in the world, the consumers need healthy products and we have the skills to bring those healthy products to Chinese customers and consumers," he said.
Chairman Henry van der Heyden said the key question farmers were going to ask would relate to Fonterra's global growth strategy, including investing behind borders.
"Have they got confidence around our strategy?" van der Heyden said. "That's why it was very important for the board [on Tuesday] to put its weight and its approval to the strategy, particularly to our Chinese strategy."
The global aspiration may remain but the game plan will likely change - more control, less trust.
The lesson was about having absolute confidence in the supply chain, van der Heyden said.
Milk and dairy products have enjoyed a wholesome, natural image - farmed and harvested rather than processed and packed.
What effect the crisis in China will have on consumer demand for dairy products remains to be seen.
Fonterra says the San Lu board was told about melamine poisoning on August 2 and that there had been complaints about sick babies since March, although tests at that time showed no quality problems.
But reports of an investigation by the Chinese State Council found San Lu had received complaints since December and actually discovered melamine contamination in June.
"Boards rely on good accurate information ... now I would be absolutely disgusted and appalled if information was actually held back," van der Heyden said.
This crisis is going to be a lesson for Fonterra and many other companies doing business in China.
Fonterra had one Mandarin speaker in San Lu and arguably too much trust in its local partner and management. Businesses moving overseas need to employ local staff to keep them in close touch with what their investments are actually doing and help attune company thinking to foreign cultures and rules.
Fonterra debated hard the risks of moving into China, van der Heyden said.
"We went at lengths around milk quality, but if people carry out a criminal act how can you prevent that?"
What has happened is shocking and yet the actions and events on the ground do not appear to be a great surprise to some experts on China.
China is an authoritarian state, not a democracy, with a cultural tradition of saving face ingrained for thousands of years.
If there is a problem people want to save face and sort it out privately, not in public.
In a communist authoritarian state with a death penalty, who would want to put their hand up and admit to a mistake?
The exuberant raw capitalism of China may be blinding international companies to the pitfalls as they rush forward to break into a market of 1.3 billion people.
The lesson is to tread carefully and carry your own torch.
FARMER REACTION
The Fonterra annual meeting is coming up in November and farmers will want to know how the co-operative is going to ensure it does not blunder into another catastrophe elsewhere in the world.
Last November Fonterra launched plans for a capital restructure of the co-operative to ensure funds for global growth.
The process stalled in February, with farmers unlikely to support the board's preferred model, which involved giving up some ownership and setting up a new asset-holding company listed on the stock market.
The restructure issue is still ticking over in the background but any attempt to re-fire a full debate will be more complex as a result of the San Lu debacle.
Fonterra directors Greg Gent, Earl Rattray and Jim van der Poel are due to retire by rotation and could find themselves the barometer of farmers' reaction to the crisis.
Van der Heyden said it was too early to say whether farmers want heads to roll. We'll know soon enough.
LEAN ON ME
At Fonterra's annual result press conference last week van der Heyden made his first appearance on the San Lu crisis.
Ferrier had cut a somewhat isolated figure at an earlier conference, sitting alone to face a barrage of media questions, which were understandably hard and sometimes confrontational.
Ferrier's emotion has been on show, his cool composure cracking.
But where was van der Heyden?
Water-cooler speculation wondered if Ferrier was being pushed forward for a potential fall in case events got worse.
However, on Wednesday van der Heyden came out padded up and ready to bat.
"[On Tuesday] the board unanimously supported management through their actions through this sad event," he said.
"Andrew and I, we had many discussions ... and we had made decisions who was going to front, when we were going to front."
For his part Ferrier said he was surprised by the speculation about his chairman's absence from the fray.
The chief executive was the right person to front the issue.
"In the management of the business, the buck stops with the chief executive," he said.
"I was shocked when I read that people were pointing fingers at the chairman, that's not the way companies work, the CEO's gotta take this one."
Maybe so, but this is an exceptional situation and van der Heyden's earlier absence was far more notable than his appearance would have been.
Either way, Ferrier appeared more comfortable with his chairman up front and by his side.
DOWN NOT OUT
Fonterra is predicting a significant drop in payout this season but whether that is bad news depends on your stance.
It has confirmed the final payout for last season at a record 7.90 a kg of milksolids, although it retained 24c a kg to protect the balance sheet at a time of currency, commodity and financial market uncertainty.
That means the world's biggest dairy exporter will return $9.1 billion to farmers for the year.
The current season's forecast was dropped from $7 to $6.60, with dairy prices dropping back, dampened demand and increased production from exporting regions.
Federated Farmers Dairy chairman Lachlan McKenzie said compared with a $7.66 actual distribution, the new season would suck $1.2 billion out of the economy.
"That said, if we were looking at a forecast of $6.60 a kg of milksolids even three years ago, dairy farmers would have been celebrating," McKenzie said.
"The difference from three years ago is the New Zealand economy is now in recession, with farmers facing increased year-on-year working costs of 10 per cent. With large on-farm debt levels this reduced payout forecast will have a major economic impact."
Westpac economist Doug Steel is forecasting $6.90 payout by the end of the season.
"While there's still a lot of time between now and the end of the season we're still cautiously optimistic ... that the payout might just pick back up again if conditions overseas improve, especially on the credit situation and the flow-on effects to demand that's likely to have."
How you view the forecast depends on where you stand.
"If you compare it to $7.90 last season it's bad," Steel said.
"If you compare prior to the record last season, the previous five-year average is $4.21, so $6.60 looks glowingly good."
Production of milksolids could be up 9 per cent this year and the amount of revenue coming into the country would still be substantially greater than in the past, outside of last season, he said.
There was very little reaction in the money markets, the New Zealand dollar barely blinked and debt markets were basically unchanged.
"The market pretty much took it in its stride," Steel said.
"At the moment I think markets are focused on other things, credit concerns in the US being front of brain."
