Nation biting hand that feeds it, says Fonterra chairman

The way the economy is being run is hurting the export sector, meaning the country "is biting the very hand that feeds it", says Fonterra chairman Henry van der Heyden.

Again warning the strength of the dollar could cut forecast payouts to dairy farmers, van der Heyden complained at yesterday's Fonterra AGM in Invercargill of an uncompetitive exchange rate, high interest rates and high inflation.

"We need the Government to set policy and manage its spending in ways that support rather than work against the productive sector."

Asked afterwards what specific suggestions he had for the Government, van der Heyden said he wanted to see a better balance between the currency, interest rates and inflation.

"From our perspective that balance isn't right now."

Fellow director Ralph Waters told the meeting the political system did not enable tough economic decisions to be made to address issues such as the high current account deficit.

"Someone has to make the hard decisions. If it gets bad enough then the medicine will have to be taken," he said.

Most of Fonterra's earnings are in US dollars and van der Heyden noted the current payout forecast of $4.05/kg of milk solids was based on a spot rate for the season of US61c, compared with around US66c now.

While there was some hedging in place, not all the forex returns could be covered.

Fonterra had grown commodity market share and focused on improving performance in value-added businesses such as branded consumer products.

But this was being negated by the dollar's strength, and an inflation rate higher than many of New Zealand's trading partners.

He took a swipe at the way property investment and consumer spending made things difficult for the export sector by their upward pressure on inflation, interest rates and the dollar.

"In my book it's our efforts that ultimately all New Zealanders are dependent on to provide a decent standard of living and a future for our families," Waters said.

He could not overstate Fonterra's concern about the dollar, and CEO Andrew Ferrier said: "We're going to be fighting like hell to ... get decent returns ... in this environment."

Ferrier said Fonterra was getting the message that if farmers did not get good enough returns they wouldn't want to grow their businesses.

Meanwhile, van der Heyden acknowledged the speed of progress in the co-op's Fonterra Brands division was slower than shareholders wanted. But after restructuring, Brands had set aggressive growth targets. "They are under no illusions about the need to pick up the pace."

Ferrier said the overall value-added return was targeted to grow by $240 million this season.

He acknowledged Fonterra's performance in Australia was not satisfactory.

"The industry has too much capacity chasing too little supply and that's meant some very aggressive prices being paid for milk.

"The $1 billion we have invested in Australia is currently targeting about an 8 per cent return and we expect that to improve over time."

It was hoped that in the next 12 months the return on investment in Australia would lift above Fonterra's "minimum threshold".

Ferrier said in the past year Fonterra had spent about $900 million on investments and aimed to bed them in and strengthen their performance.


Dairy squeeze

* Fonterra chairman Henry van der Heyden says the way the economy is run is placing "undue pressure" on the export sector.

* Van der Heyden wants the Government to set policy and manage its spending to support the productive sector.

* Fonterra is again warning that the strong dollar could cut the dairy farmer payout forecast of $4.05/kg of milk solids, a move that would hurt the rural sector and the wider economy.