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.