Farmers rate NZ Milk business 'mediocre'

By LIAM DANN primary industries editor

The Fonterra Shareholders Council has published a cutting critique of the dairy giant's performance.

Fonterra has failed to add economic value for shareholders and parts of its business last year were "mediocre", the farmer watchdog group says in its annual report, released today.

The council, which represents 12,600 farmer shareholders, provides a detailed review of Fonterra's latest results in the report. It concludes that, while some things have improved since last year, the company needs to lift its game further.

"Overall performance can best be described as varied," said chairman Tony O'Boyle.

"A spectacular drop in payout and failure to achieve economic profit seems, from a farmer perspective, to be at odds with the 53c increase in the Fair Value Share and the 16.7 per cent increase in shareholder return."

Shareholders needed to see some evidence of a short to medium-term plan for lifting farmer payouts, O'Boyle said.

There seemed to be a gap between the long-term strategies Fonterra was pursuing on the global stage and the immediate prospect of further low payouts to suppliers, he said.

"We are hoping for at least a $1 per kilogram improvement in the short term."

Farmers were paid just $3.60 per kilogram of milk solids this year, down from $5.30 the year before.

The council recognised that falling commodity prices had cut returns but said Fonterra still failed to add economic value for shareholders.

Copping the harshest criticism was Fonterra's fast-moving consumer goods operation, New Zealand Milk.

That business, which is expected to play a vital role lifting Fonterra's profits, had not performed well, O'Boyle said.

Benchmarked against other similar companies it fell well short.

"While New Zealand Milk met budgeted profit, council believes this was a mediocre performance," the report says.

Low commodity prices should have enabled the business to significantly increase both its gross margin and profit, it says.

Instead its contribution to farmer payouts was just 1c higher than last year.

The council criticised Fonterra management for failing to adopt Economic Value Added (EVA) principles, which it had recommended last year.

EVA is an unforgiving technique that gets behind the facade of profit announcements. It requires all of a company's investments, including goodwill and intangible assets such as brands and R&D, to be put on the balance sheet, not written off, to emphasise the fact that they have to make a return.

EVA would provide a measure which the council could use to benchmark Fonterra against its competitors, O'Boyle said.

Management was also criticised for the way it communicated with shareholders about new environmental regulations.

The approach had been "almost dictatorial", O'Boyle said.

On the plus side, the report notes a marked improvement in Fonterra's ingredients operation. Fonterra has also continued to make efficiency gains, with merger benefits well ahead of budget.

A Fonterra official said it was the company's policy not to comment on the annual shareholders' report.

O'Boyle said he did not expect management to agree with everything in the report.

The council's relationship with management was "typified by a constructive tension", he said. "And that's how it should be."