Strong half-year result unlikely to quell criticism of the co-operative’s performance.

New Zealand's largest company will unveil a strong half-year financial result on Wednesday.

But this will not mute the criticism that has emerged since the lengthy dairy commodities slump exposed weaknesses in Fonterra at both strategic and operational level.

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The company is NZ's largest single exporter - a strong Fonterra is in all our interests.


But it's time to pose some critical questions.

1. Has Fonterra got the right leadership?

It's a brutal question given the stress the company has been under in the past 18 months. Fonterra's senior leadership have re-engineered operations, slashed staff and sold sufficient assets to ensure the January 31 result will be credible.

But still farmer shareholder critics are squealing.

Chairman John Wilson and chief executive Theo Spierings have been in the thick of it for months now.

But the see-sawing forecast milk payouts for farmers has undermined the credibility of the leadership.

A more politically aware leadership would have imposed salary cuts on the executive leadership team and taken a haircut at directorate level.

20 Mar, 2016 12:00am
4 minutes to read

It would not have got itself offside with John Key by imposing cuts on some suppliers and lengthening payment terms.

This company has hugely benefited from governmental assistance on a range of fronts.

It needs to act like a local NZ company, not a European behemoth.

2. Is Fonterra's structure 'fit for purpose'?

John Wilson has put the issue of Fonterra's governance on the table for further discussion in May. The Fonterra board is stacked with farmer shareholder representatives as befits its co-operative ownership. But a 13-strong board is way outside the norm for sharp decision-making. Big names within Fonterra's shareholders want change.

There are inevitably competing shareholder interests which Wilson and Henry van der Heyden (before him) have endeavoured to unify through strong chairmanship.

But the more pressing issue is Fonterra's overall structure.

If Fonterra is to evolve as a "Nestle" style major branded foods producer it could spin off a majority-controlled listed vehicle which can access capital markets and fund development instead of having to rely on farmer equity and debt.

But it can't get such a structure over the line.

This is where the Government should step in to facilitate major changes to both Fonterra's structure and the regulatory environment which requires it to accept supply from all farmers. It just doesn't make sense commercially.

3. Can Fonterra keep its shareholders' loyal?

It's a relatively complex process to disengage from the cooperative.

But Fonterra's farmer shareholders have the option of cashing up and taking their supply elsewhere.

Wilson and Spierings need to ensure their farmer shareholders believe the company's strategy is the right one.

Problem is when farmer incomes are depressed during a lengthy dairy commodity slump and bankers are pressing debt to be reduced all options start to be assessed. Fonterra has huge sunk capital in plant to process raw milk into powder. It it can't keep it shareholders tight it will have a problem.

4. Numbers or spin?

The big question in front of farmer shareholders; those invested in Fonterra's fund and analysts is what's the underlying position of the financial results. Paradoxically profit (in part) will be up because Fonterra has reduced its farmgate milk price.

Hence Fonterra's cost structure has reduced.

Fonterra should also quantify the impact of moving some of its services suppliers to new payment terms of up to 90 days.

Suppliers are ropable that Fonterra is using them as a bank instead of accessing its own overdraft facilities.'

Wilson and Spierings should also quantify the one-off impact on Fonterra's half year expense line from pushing out the payment terms.

5. Can Fonterra win back its privileged position in China?

Fonterra will inevitably be represented on John Key's upcoming mission to China.

Its exports to China have taken a pounding since that country's inventories expanded. Fonterra and NZ dairy have occupied a privileged position in the Chinese market. But it is has become much more competitive with rival players from Europe and the US muscling in.

This is a question for Key and Fonterra's top brass.