Fonterra's first birthday bashing

By PHILIPPA STEVENSON

Fonterra will mark its first anniversary on Wednesday with just a few quiet drinks for head office staff.

The positively austere-sounding gathering will not come quick enough for farmer shareholders comparing their falling incomes with the seemingly more stable million-dollar incomes of top executives, who notched up first-year head office cost overruns of $64 million.

A gathering round a water cooler looks a whole lot different, too, to chief executive Craig Norgate's post-launch purchase last year.

He signed up on a $575,000 Waiheke Island property on October 17, the day after the chairmen of rivals Kiwi Dairies and New Zealand Dairy Group themselves signed up more than 13,000 farmers to a joint fate with near-monopoly Fonterra.

The appointment of Norgate, regarded as the best candidate for the job but from a limited field, remains contentious, along with his $2 million salary and the Auckland house of the same value his former company, Kiwi Dairies, helped buy.

Was he celebrating or marking the end of a long period of uncertainty when he bought the Waiheke house?

Neither, he told the Business Herald. The purchase was coincidental.

He thought the property deal was sealed in November.

And the low-key celebrations on Wednesday had more to do with the anniversary falling at an odd time for the business.

"It's easier to reflect on the financial year to May," Norgate said.

But there is no hesitancy when he sums up the $14 billion company's first year; "tough".

And its passing will be marked to give staff "a pat on the back and acknowledge the efforts of a huge number of people who worked hard under significant personal insecurity".

For the first third of the year they did not know whether the company would exist or not.

"There was relief when it finally kicked off," Norgate said in studied understatement.

In the coming year, with firm ground under its feet, Fonterra would have the luxury of being able to plan.

"We're looking forward to sailing," he said, recalling a day out on the water with America's Cup hopeful and billionaire Larry Ellison. Ellison's IT company Oracle supplies software to Fonterra.

Did he learn anything from Ellison?

Yes, said Norgate. He was impressed by Ellison's global awareness and many significant but little things too numerous to recount.

It is an apt description of Fonterra's first year. It has been tough and busy.

But any sailing has been duck-like - calm reassurance above, mad paddling below.

In a recent newspaper column, New Plymouth farm accountant David Russell rated Fonterra's first year performance a D, "or maybe a C if you want to give the new outfit some encouragement".

Record throughput and payout, and turnover figures that read like overseas telephone numbers were "simply a reflection of a good climatic season and the ongoing expansion in dairying," he said, making the inevitable comparison with the higher paying small co-ops Tatua and Westland.

Another commentator, Rod Oram, was even more damning. "Fonterra destroyed shareholder value in its first year of operation. It was a remarkable and worrying achievement. If our largest exporter can't generate a decent return when its industry has never had it so good, when will it?"

Good question. Is the answer just cross your fingers and wait and see, or are there promising signs?

Norgate suggests the latter. Completion of stage one of the joint venture in the Americas with the world's biggest food company, Nestle, was an important milestone.

He told September's annual meeting that contrary to critics' assessments the deal would be very expensive, the initial stage of the business was doing so well it would pay Fonterra more than $300 million.

Further implementation of the alliance would be done with no additional funding, and create a business with turnover of more than $3 billion - making it the market leader in every country it operated in.

Today, the company said the venture had taken another step, with Fonterra and Nestle agreeing to establish chilled and liquid milk joint ventures in Brazil, Argentina and Venezuela, and a milk powder making venture in Brazil and Argentina.

Nestle is buying Fonterra's milk powder business in Venezuela and Central America.

"The Nestle deal has set dairy farmers up for the long term," Norgate told the Business Herald.

Troubles in the company's boardroom, in which independent director Mike Smith left and inaugural chairman John Roadley resigned, were now in the hands of new, hard-headed chairman Henry van der Heyden. This month's dropping of the deputy chairman's role over the objection of the incumbent Greg Gent showed that boardroom battles were alive.

But van der Heyden's swift actions on a number of fronts demonstrated a new vigour in the large, 13 member board.

Farmers will have their faith in van der Heyden justified if the pace matches much needed initiatives.

One they will be most looking for results from is the new milk pricing working group, aptly headed by director Mark Townshend, one of the country's biggest dairy farmers.

The committee will grapple with one of shareholders' most vexing concerns, capital structure, including the fair value share, supplier share redemption rights, and most troublesome of all, peak notes.

Peak notes were designed as a capital funding mechanism to cover the cost of increasing manufacturing capacity to process farmers' milk.

The rationale is that if a farmer supplies more milk at the height of the production season the company has to install more plant so the farmer should help pay for that extra capacity by buying more peak notes.

The rules still have farmers confused and there is anger at what is seen as a fundamental inequity in the system.

North Island suppliers have a higher peak milk flow relative to their total milk production than South Island suppliers.

South Island farmers have higher production per cow and per hectare but their flush or peak production is lower than their North Island brothers, obliging North Islanders to have more peak notes than South Islanders.

But it is in the South Island, where dairying is growing rapidly, that more factories are needed.

Farmers in the Waikato or Taranaki write out cheques for more peak notes only to see factories expand in Canterbury and Southland, and bitterly resent the wealth transfer to the south.

The solution to the peak notes issue is in Fonterra's hands.

Not in its control is the outcome of the Ministry of Agriculture's Food Safety Authority investigation of the illegal Powdergate transactions - the issue that delayed the formation of Fonterra until last October 16 and clouds Norgate's tenure.

Authority spokesman Tim Knox said liaison with enforcement agencies, including police, continued, as did analysis of companies and transactions. He hoped to report developments before the year's end.

Van der Heyden said he knew nothing of the investigation's progress and had not sought assurances about staff involvement or liability.

The company may be, as Norgate hopes, sailing into its second year but even the ride to Waiheke can cut up rough.