Job cuts won't solve Fonterra's problems

Fonterra factory at Te Rapa, Hamilton. 12 March 2015 New Zealand Herald photograph by Christine Cornege.

So Fonterra has cut 523 jobs to save $55 million to $60 million from its bottom line. It's prudent business management and politically sensible of them. But let's be honest - it won't solve their problems.

This dairy slump is bigger than that. It is costing farmers and this country billions.

Based on the latest economist pay out predictions - Fonterra's 10,500 shareholder farmers will collectively earn as much as $9 billion less this year than they did in the at the peak of the commodity cycle.

What's unsettling is that it are no signs that this has bottomed out yet.

The world has woken up to dairy demand and global production is in full swing. Even this country is producing more dairy than ever. That's part of the problem for Fonterra.

They can't turn milk away from their shareholders. So they can't cut back on the costly production end of the business.

Neither can they cut back on their investment in new business ventures which will add value to their milk and grow their presence in consumer markets.

They have to diversify the business and generate more earnings which aren't at the mercy of commodity markets.

Fonterra's investment in Chinese infant formula company Beingmate is a case in point. It may well be exactly where Fonterra needs to be long term.

But the stock market slump in China has wiped hundreds of millions of dollars off its value.

Fonterra's business is all about big, big numbers.

Each one of those 523 jobs is huge for those employees affected. And targeted at white collar, head-office employees, the cuts will also start to send waves of economic discontent through urban centres.

Reassuring farmers that their burden is be shared has to play a part in this.

But in the grand scheme of Fonterra's mission to turn more than 22 billion litres of milk a year into revenue - they are just a drop in the bucket.