The Board's PR Process

The Fonterra board has a very slick and proven PR process that they use. They present a highly rehearsed presentation that is high in gloss and low in detail. They present only details in a broad context of what they are explaining. In doing this there is no detail to dig around in or theories to question. Once this basic information is out in the open it is always questioned by both farmers and dairy commenters alike with many assumptions made confusing the counter arguments. Fonterra’s response is to keep repeating their basic messages, rather than to elaborate or acknowledge they have heard what is said. For example, The strategic plan: When it was questioned how behind boarders milk would add value to NZ milk the response was always the same: “Cross boarder trade only accounts for 1.2% of all dairy product traded. The biggest growth will be in fresh liquid dairy.” Often the accompanying figures would also be included. On the preferred option: Farmers expressing concern that the nature of the corporate would force them to reduce their shareholding level in the company and therefore their control, they roll out, “Any decision to go below 50.1% must be approved by shareholders with a 75% majority shareholder vote – and that could be 20 – 30 years away.” There is no elaboration on what market conditions could be present that would lead to that vote, what would happen if the vote failed, or any further explanation as to why that 50.1% level needs to be movable. (And to say we can’t legislate from the grave is not the right answer Mr. Van der Hayden.) Anyway this will go on for a while, along with the promise of more information to come. Once farmers agree they understand the information in front of them the board will shut the whole debate down from their end and nothing will be heard until the next installment of the saga, ie the milk pricing mechanism. The announcement of the milk price will be conducted as above and if any queries are raised about the float structure they will be met with, “There was general agreement amongst farmers in the last round of consultation that this was the direction they want to see Fonterra go down.” Which should actually be read as, “There was general agreement amongst farmer that they understood the information in the last round of consultation and would like more detail before deciding that this is the direction they want to see Fonterra go down.”
So my message to farmers is be aware of their PR process and demand more detail. Tell them what you already know and ask them to elaborate on risks associated with floating as well as the positive points.

Validity of Strategic Plan

I am still not convinced on the Board’s strategy. I am still unsure as to how it is going to add value to NZ milk. I can see that if management can pull it off, it would add value to Fonterra, but surely it is to maximize returns on our milk that Fonterra was originally set up. Extra ventures that Fonterra undertake should just be supporting this end. I am still to be convinced of the wisdom of throwing large amounts of money into Chinese dairy production. I know the statistics presented by the board earlier this year on the growth in demand in China are impressive and certainly warrant a second look at that opportunity. However further investigation of the statistics reveal something very interesting that was never mentioned by the board. Although there is a dramatic increase in demand across the whole of China, individual consumption levels are at around 20lts fresh milk equivalent per person per year. This does mean that there is plenty of room for increases in personal consumption, however it also means that if there is a rise in grocery prices in China, dairy products can be easily dropped out of the diet because they account for very little of it. As the Chinese currency is pegged against the USD, the cost of food in China is rising quite considerably and now the pressure is coming on that all important discretionary spending to keep dairy sales in China growing. The truth is China is not the sure bet the Board would have you believe. Perhaps we should spend more effort working on the areas of core competencies and tread carefully in these unpredictable markets. Perhaps the urgent leap into new horizons is the excuse to make the capital structure changes, rather than the driver for them. This thought is echoed by the directors in their own Capital Structure book when they say, “The current capital structure will not support Fonterra’s strategy… (and)…doing nothing would mean retreating from our current position as a dairy company with global cow-to-customer reach…(and)… Fonterra would become a regionally-focused commodity player.” I would suggest that any backwards steps by Fonterra would be more a result of short coming by the board and senior management rather than a failure to remove ownership away from the farmers, and this whole argument smacks of a threat rather than rational business reasoning.