Shareholders tell Fonterra to shape up

Fonterra's shareholders council has put the company on notice that it must markedly improve its financial performance this season and warns poor payouts may threaten the very existence of the co-op.

In hard-hitting annual report comments released today, council chairman John Monaghan strongly criticises Fonterra's payout and value-added performance last season and says it must deliver on projections of a much better showing this year.

The report reveals that last season the council declined - for the first time - to endorse the Fonterra board's statement of intentions because its targets were too low and did not indicate a significant lift in business performance.

While the payout ended up being better than initially forecast, at $4.10/kg of milk solids, it was still the worst since 2002-03.

"The impact of poor payout will extend well past farm profitability and may challenge the very existence of the co-operative," the report says. "A lean payout could encourage suppliers to look for alternatives and may not encourage farmers to increase production."

Meanwhile, the contribution to payout from value-added activities - under the council's historical commodity milk price (HCMP) measure - was also up on initial projections. But at 25c/kg it was lower than in Fonterra's first two full seasons, a fact at odds with sustained increases in Fonterra's share price.

Increasing value-added earnings was a core rationale for forming Fonterra but "meaningful" earnings of this type have continued to elude the co-op, the council says.

Also, Fonterra's total shareholder returns for last season put it only 14th out of 25 benchmark companies.

Monaghan said he would have expected the co-op to be delivering superior performance by now.

"Fonterra has too often appeared slow and reactive and growth opportunities have been lost. One can't help feeling that our co-operative has lost some of the innovation, energy and entrepreneurial spirit that drove the merger."

Asked if farmers might vote with their feet and leave the co-op if it failed to deliver, Monaghan said the report reflected the mood of farmers and the current season was a "watershed" period for the co-op.

"Fonterra was not formed to be average. It's a changed landscape out there. We're seeing competition evolve."

The report noted that last season's $4.10/kg payout compared unfavourably with the Tatua and Westland co-ops.

"The easiest way to retain supplier loyalty is through superior performance," said Monaghan.

However, the council has endorsed the current season's statement of intentions and Monaghan was encouraged by Fonterra's target of much higher value-added returns at 45c/kg under HCMP this season. However, the payout is now forecast to dip to $4.05/kg despite this.

Monaghan said the council's concerns had been raised regularly with Fonterra last season.

Fonterra - clearly keen to avoid a public scrap - declined an interview on the council's comments.

But a statement from chairman Henry van der Heyden said the board was confident it had the right strategies and action plans to address the issues raised by the council.

Farmers had made it very clear they expected Fonterra to pick up the pace, he said.

"These strategies - which include a significant step up in the returns from Fonterra's value-add businesses - are currently being implemented by management."