Fonterra about to slim down into meaner, leaner operation

Henry van der Heyden says it's business as usual. Picture / Greg Bowker

Though tactfully worded, the memo from Fonterra chief executive Andrew Ferrier leaves staff in no doubt about the urgency of the situation.

"Our budgeting process for the new year beginning in June will take a fresh approach ... to ensure our costs are as lean as possible. We will budget from zero upwards rather than using last year's expenditures as the starting point."

A team led by high-powered new chief financial officer Guy Cowan has been established to review every part of Fonterra's $12 billion business.

"Nothing's sacred - we have to assess all our activities, from our basic business models to everyday things like the amount and cost of travel and the way we contract services," the Ferrier memo says.

"There has been a lot of change at Fonterra but change is the only way you move forward, including making tough decisions if they are needed."

The source of the increased focus on cost- cutting this year is no secret. It is short and simple - the number four. Four dollars is the bottom-line payout farmers say they are prepared to accept from their company.

"We've made it quite clear we don't mind a three in the payout but we don't want it at the beginning," says Fonterra shareholders council chairman John Monaghan.

The forecast payout of $4 a kilogram of milk solids is already 59c down on last year's, and the pressures of the high dollar and easing commodity prices are making it a tough ask to deliver.

Although the dollar started to fall this week and was around 64.55USc yesterday, Fonterra's currency needs for the season are already locked in at 67USc - the highest the co-operative has had to deal with.

Its 15-month hedging policy has buffered the exporter from the worst effects of the rising dollar until now, but this is crunch year, with recent falls coming too late for this season's results.

Monaghan - whose organisation is the official farmer watchdog for Fonterra management - is unapologetic about the stress the tough farmer stance on pay-out might cause within the company.

"That's the pressure that is on. It's just about economic reality down on the farm. We're a large organisation and we demand nothing less than to keep gaining those efficiencies," he says.

"As owners and as a co-operative we are quite unique in that we have an active interest in the running of the business."

Ferrier doesn't talk redundancies in his memo. But staff seem to be in little doubt about what is coming. Talk of executive job cuts has been leaking from all quarters.

"There will be a major white-collar clearout. It will make Air New Zealand look like a kid's party," said one panicky-sounding email received by the Herald.

Other high-placed sources have talked about job-cutting targets of 30 per cent.

Management denies there are any such targets, saying it is far too early to prejudge the results of the review.

Fonterra is a giant in the New Zealand economy. It has 12,000 local staff and generates 20 per cent of export earnings. It is difficult for it to make any moves without people noticing.

The shift in thinking has certainly been a talking point in the recruitment industry, where Fonterra has dramatically scaled back its job-hunting - in some cases wasting weeks of work by the recruiters.

And the head office review is just one part of a wider focus on costs. Another review - dubbed Operations Journey - is focused on manufacturing costs.

It has already led to the announcement that 300 cheese-making jobs are likely to go this year as part of a consolidation of those operations.

Nobody said it was easy working in the dairy industry. The politics and the pressures are nothing new. But after three

years of record dairy prices, Fonterra is facing its first really tough year since the 2001/02 season, when it started.

The slump in commodity prices that occurred in 2001 caused the payout to drop from $5.45 to $3.69 in the 2002/03 season.

Only one member of the top tier management team that delivered that result is still working with Fonterra. For Ferrier, who was unavailable to comment for this article, it is the first tough year (he started in 2003).

Fonterra chairman Henry van der Heyden - a skilled and charismatic politician - argues that it is still business as usual.

He says the point is that constant change, cost-cutting and drive for efficiency are par for the course at Fonterra.

There is no question that the high currency has added pressure to the business. And there is "some nervousness because the commodity prices have started to come off".

But, he says, the fundamentals are extremely sound.

Despite a few supplier defections, Fonterra continues to grow its milk supply, the global market for dairy continues to grow at about 2 per cent a year and the value of dairy farms continues to rise.

"And hey, if you had asked farmers five years ago if - at a 67USc to 70USc exchange rate - would they be happy with $4/kg of milk solids they would have been patting you on the back."

Having said that, Van der Heyden - himself a Waikato dairy farmer - knows exactly what it costs to run a farm.

"At the end of the day, we understand that with the cost structures on farms now, and where farm prices have gone, it makes it difficult for farmers to make ends meet at $4/kg," he says. "We'll pursue whatever we can to achieve that but there aren't any guarantees."

One thing Van der Heyden can count on is that his job - and those of his fellow directors - will be on the line if he doesn't deliver.

Dairy farmer politics can make the Wellington version look pretty tame, and the co-operative has a policy of forcing two directors to stand for re-election every year.

He won't deny that there might be job cuts this year, but what he can't understand is why anyone should be surprised by job losses.

This is a company that has shed about 2000 staff since it was formed nearly five years ago, he says.

"This not some reaction. It's actually part of our DNA."

Fonterra was less than five years old and still evolving fast.

"When we started the focus was on merger benefits. We achieved those. Then we launched Project Jedi - that was about getting systems in place so we had a seamless supply chain. Then we started Operational Journey with a focus on manufacturing."

There were still a lot more gains to be made. "There is no end to that. You've got to just keep on being more and more efficient. Last week, the board met with Microsoft. We've got to learn to do things even smarter. There are new technologies that will keep making our supply chain more and more efficient."

Van der Heyden cites the new private Dairy Investment Fund, launched this week, as an example of the confidence there is in the sector.

The fund is offering farmers cash in return for the rights to the future value-growth of their Fonterra shares.

"I think that is quite positive. It signals that there are private investors out there that have a lot of confidence in the dairy industry and a lot of confidence in Fonterra."

Dairy Workers Union secretary James Ritchie finds it hard to share all of Van der Heyden's positivity about the future.

He says there is no doubt his membership of 7000 dairy workers has noticed a new aggression in Fonterra's attitude to cost-cutting.

"Since the first year - which was difficult - since that time, there've been good years and the company is building well," he says. "Our concern is that a lot of that good will could be put in jeopardy if they cost cut too much this year. If they panic, then that can be very destructive."

Ritchie says the workers have no problem with the continual search for efficiencies.

Ultimately though, when the board of directors next meets to approve management's budget plans, it will be the questions that farmers are asking that will be ringing loudest in their ears.