WITHOUT DOUBT last week was a bad one for Fonterra and its shareholders.
The cooperative, New Zealand’s largest company, was savaged by an independent inquiry into the handling of its infamous WPC80 false botulism scare last year.
In its 103-page report, the inquiry team, led by Miriam Dean, QC, confirmed what most people knew from August 2, 2014 – Fonterra’s response to the WPC80 case was woeful at best.
Also, last week the co-op’s directors announced a 60c/kgMS drop in this season’s forecast payout to its 10,500 farmers.
Normally, what 10,500 farmers get paid for their milk is irrelevant to townies. The 60c drop means a $6 billion reduction in potential earnings from the dairy industry this season, compared to last season’s record $8.30/kgMS payout; huge implications for the national economy.
So, how did Fonterra find itself on the ropes last week?
No one can point the finger at the co-op for the millions of litres of extra milk produced by happy farmers in the US and the EU. The extra milk is suppressing global milk prices. The question Fonterra farmers will ask is why the co-op’s management and board did not see the warning signs earlier.
The season started with an opening forecast payout of $7/kgMS, announced in May this year; slashing $2.30/kgMS from the payout within six months raises serious questions about the co-op’s forecasting ability.
The co-op says farmers expected and understand the sharp drop in prices; the writing has been on the wall for some time, but did Fonterra have to take its farmers on a roller coaster milk price ride this season?
The co-op says it will trim costs and defer capital expenditure, where possible, to generate more cash for farmers. Will it now defer major investment in global milk pools – championed by chief executive Theo Spierings – and touted as being crucial to Fonterra’s future? Short term payout pain for long term milk volume gain may not be every Fonterra farmer’s cup of tea.
What is most important to Fonterra’s future as a global player is getting its food safety credentials right.
The co-op says at the time of the recall of WPC80, it did “what was right based on the evidence we had”; Fonterra could use the same excuse for explaining how it got this season’s forecast payout so wrong.
However, the WPC80 inquiry report finds its response was far from satisfactory. Many farmers would come to the same conclusion as they milk cows over the festive season and rue the $6 billion they will never see.