Fonterra fails to impress farmers

By PHILIPPA STEVENSON agricutlture editor

Fonterra shareholders have rated the $14 billion dairy co-operative well below its goal of being the country's flagship company.

A report on Fonterra's performance yesterday found the company had not added economic value in its first year.

The Shareholders Council, representing 13,000 supplying farmers, said disappointing factors included a weaker than forecast balance sheet, overly high corporate overheads, insufficient focus on minimising costs and return on invested funds, and inadequate management information systems.

Fonterra reported a loss of $50 million in the year to May after paying farmers $5.8 billion for their milk, or $5.30 a kilogram of milksolids.

The actual return on milk was $5.06/kg, or 39c short of a performance measure, the commodity milk price (CMP), a theoretical measure of what an efficient commodity producer could afford to pay for milk and still make an adequate return on capital.

Council deputy chairman Graeme Edwards said farmers expected to see that gap narrow.

Key problems were the company carrying too much inventory and "too many bells and whistles repeated in various factories".

Corporate overheads of $149.7 million were $64.1 million over budget and $34 million more than a business case established when the company was set up.

Setting up an Auckland corporate office had not been matched by a reduction in provincial offices.

Council chairman Tony O'Boyle said preparing the report had been difficult because of a lack of timeliness of reports from the board.

The report said the company's interest bearing debt was $4.752 billion compared with the business case forecast of $3.849 billion, and rating agency Standard & Poor's had estimated Fonterra had $2.389 billion excess capital employed for this financial year.

Subsidiary NZMP reported a net profit before tax of $131.6 million, substantially below budget. The main contributor was an 8 per cent decline in sales revenue and gross margins, despite milk supply 3 per cent up.

Its performance was disappointing, other than in manufacturing cost control, and the council was concerned products "not fit for purpose" were 76 per cent over budget.

The cost of product that failed to meet customer requirements was $16 million above the budget of $21.2 million.

Changes in depreciation and amortisation policy boosted NZ Milk's net profit before tax by $47.3 million. Lower interest costs and reduced payments to minority interests further boosted it to $199 million.

NZ Milk was achieving a lower profit margin and return on funds invested when benchmarked against other comparable companies.

Outgoing Fonterra chairman John Roadley said that although the council had concerns it had acknowledged the significance of successfully completing a complex merger.

"Clearly working capital was higher than budgeted. This reflects the requirement to fund higher than expected inventories in the latter part of the year - this is a problem being experienced by the dairy industry globally."