As Fonterra faces questions over the sudden departure of its briefly-serving chief financial officer, the company’s farmer-owners are taking it to task over a lack of information about a recent rash of new investments and for throwing its weight around in on-farm matters.
The rebukes come in the annual reportof shareholder watchdog, the Fonterra Co-operative Council, which has also raised a red flag over further slippage of farmer confidence in Fonterra’s future according to a fresh survey.
The annual report also raises concern about Fonterra’s lower share price, saying it has fallen below what some expected with the company’s capital restructure, and “arguably by more” than they were led to believe it would decline during consultation over the capital rejig proposal.
The report calls for Fonterra to provide greater detail on how farmer capital is being allocated by region, product channel and key business units.
Fonterra on Tuesday announced CFO Neil Beaumont, in the job for eight months, would leave on Friday.
Discussing Fonterra investments, the council’s report notes in the past year to 18 months, the company has announced a raft of new investments, joint ventures and partnerships.
These included a new start-up company with Royal DSM, development of a new business-to-business wellbeing brand called Nutiani, a partnership with Nestle to develop New Zealand’s first zero carbon emissions dairy farm, a shareholding in the Centre for Climate Action joint venture and commitment of $50 million over four years, a new corporate ventures arm, the Ki Tua Fund and a US$10 million investment through that fund for a minority shareholding in nutrition science entity Pendulum.
“Management commented in the media in August 2022 that Fonterra has more than 10 partnerships in the United States. Councillors and co-op members have limited knowledge of these investments,” the report said.
“Whilst the value of capital invested (whether cash or intellectual property) may not be material in dollar value terms, these investments are in pursuit of, or support, Fonterra’s strategy. Council and members would like to see more reporting on these investments, partnerships, joint ventures and other initiatives that Fonterra announces.”
Fonterra chairman Peter McBride.
There had also been inadequate sharing of post-investment reviews.
“For example, a large amount of capital was tied up in Chile over a long period of time until the recent sale of Soprole. However, members have very little idea of what that investment returned, how it performed over time, whether it was a good investment overall or what it contributed to our co-op.”
Fonterra this year returned $800 million of capital, or 50c per share, to shareholders following the Soprole sale.
On the council’s view of Fonterra’s performance, the report said the strong FY23 financial result exceeded both near-term and long-term targets set out by New Zealand’s biggest business.
“This notable achievement was in part due to the very abnormal price relativities between reference and non-reference products. We will monitor with interest how performance tracks against the Long Term Aspirations as price relativities revert to more normal levels.”
Reference products are commodity milk powders that determine the season’s farmgate milk price. Non-reference products include higher-value products such as cheese.
The council said it had challenged the Fonterra board over its milk price forecasting this year - notably, the shock drop in the 2022-23 season forecast milk price ranges announced in April, and the drops in the 2023-24 season forecast milk price range announced in August.
It was “comfortable” with the board’s response but re-iterated that forecast volatility was unsettling for shareholders trying to manage their own businesses.
“The lower share price is a significant problem for many existing members due to the impact on their balance sheets. Following the move to our flexible shareholding structure (this year’s capital restructure) the share price has fallen below what some expected and arguably by more than the restricted market discount estimated during the capital structure review consultation period,” the report said.
“However, we recognise the share price is established by Fonterra shareholders themselves. Fonterra’s auditors commented to us that our unique capital structure explains the difference between Fonterra’s market capitalisation of $5.1 billion (at July 31, 2023) and the externally obtained equity valuation of $10.3 - $11.5 billion. Our overall assessment is that while there is no finish line in the drive for performance, Fonterra’s current performance is compatible with members’ expectations.”
The council’s latest annual survey of farmer-shareholders had shown 54 per cent were confident in the long-term sustainable future of Fonterra. This compared to 63 per cent last year and 70 per cent in 2021.
The council’s report also faulted Fonterra for a lack of consultation with farmers about changes in critical on-farm matters.
“Members ... should not feel that requirements are being imposed upon them without due regard for them or their farming businesses. Instead, they should feel that any changes support the long-term value of their farming enterprises.”
The positive level of consultation over the capital restructure was the standard to which Fonterra leaders should aspire regarding significant on-farm requirements.
Fonterra’s annual meeting is on November 9.
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the dairy industry, agribusiness, exporting and the logistics sector and supply chains.
