Board director Scott St John said the dairy co-operative has enormous opportunities but also faces profound challenges. Photo / File
Board director Scott St John said the dairy co-operative has enormous opportunities but also faces profound challenges. Photo / File
New Zealand's biggest exporter, Fonterra, is facing some "profound" challenges, board director Scott St John said over the weekend.
Early this month, high debt and tight margins forced the dairy giant to pare back its farmgate milk price for the season just ended, and ditch plans for a second-half dividendin a bid to shore up its balance sheet.
In recent weeks, it has appointed a new chairman in John Monaghan and has installed an interim chief executive, Miles Hurrell, to replace the outgoing Theo Spierings who finishes next month.
St John, answering questions after delivering a presentation to the New Zealand Shareholders Association on Saturday, said Fonterra was an "extraordinary" company.
"It has some profound opportunities but also some profound challenges," St John - a former chief executive of brokers First NZ Capital - said.
Fonterra appointed long-time employee Miles Hurrell as its interim boss. Photo / Supplied
"Too much of our asset portfolio has not been performing as we need it to be. We need to do much better with our capital," he said.
"I also believe that for the first time, Fonterra's cost of goods into our export markets is ahead of our key competitor market, which is Europe," he said.
"Inevitably there are some legacy issues, but deal with them we must - and we are - so there is clearly some change taking place," he said.
St John, noted the personnel changes at the top and Monaghan's comment that the co-op needed to take stock and "breathe some fresh air into the business and determine any changes that are needed".
"It sounds benign, but it's not," St John said.
Milk is Fonterra's biggest input cost.
Fonterra has decided to clip 5c per kg off the milk price in order to support Fonterra's earnings - a measure that has only occurred once before - in 2014 - when milk prices were at record highs.
"The high milk price has put pressure on the co-operative's earnings in a year that has also proven difficult with the Danone payment and the impairment of the Beingmate investment," he said.
But St John said the milk price cut was the right call to make "and I would do it again today".
He acknowledged that the co-op faced capital constraints but the way ahead was more likely to be in the form of capital-light joint ventures such as the one just announced with India's Future Consumer.
Despite its capital issues, Fonterra would remain in farmer ownership.
"It is a co-operative - changing the ownership structure away from the farmers is just not the table," he said.
"But we need to think carefully and innovatively about how we fund projects that we enter into and I think if we look at the most recent India initiative, that's probably more likely be the sort of thing that you see us doing," he said.
