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.
Tuesday, December 18, 2007
Monday, December 10, 2007
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.
Friday, November 23, 2007
Farmer control
A farmer’s ownership in Fonterra is not just part of their investment portfolio. Fonterra is an extension of their business. Without Fonterra collecting and processing their milk, and providing them with the best return possible, their milk would be worthless. It was to protect these fundamental rights of the producer from profit driven private processes that co-ops were originally set up. As the co-op is in essence part of a farmer’s business, having a good level of control over the decisions make within the co-op is critical to the long term success of each individual farmer’s business. Under the preferred option announced by the Fonterra board two weeks ago, the board is asking farmers to put all their voting rights together to become one shareholder, the farmer co-operative. What our board has conveniently brushed over is that although the co-op will be the majority shareholder, individual farmer will not get a say. The farmer control that the Board emphasizes so heavily will be exercised exclusively through the co-op’s board and not through individual farmer votes. The performance of Fonterra’s board would be monitored by the board of the co-op and if the board of Fonterra wanted to make constitutional or strategic changes they would need to get the support of the co-op’s board. This is were the devil is in the detail; the board of the co-op will be largely the board of Fonterra. This leaves the whole process without any of the usual check and balances around the governance and strategic planning the board should have. It also means that suppliers are stopped from having any direct influence over the way Fonterra chooses to operate.
Although there are many things I like and don’t like about the preferred option, having to hand all my rights as a shareholder over to the board of the new co-op affects my farming business too much and is a deal breaker as far as I am concerned. I was told that within Fonterra there is a saying, “Co-ops are always a dollar too short and a day too late.” Implying that co-ops never have enough money because capital is linked to milk supply and it takes too long to make any decision because of the high level of consultation required in dealing with so many supplying shareholders. With board members upholding a culture that encourages opinions like this to justify underperformance, this whole capital structure review smacks, at least in part, of a move by the board to get around the issue of shareholder consultation. I would suggest that a lack of freedom for the board to make decisions is not the root of Fonterra’s problems, but is rather a result of a Board and Chairman lacking in strong leadership and hands on governance. Farmers are not idiots and know when they are being played. As my husband said when he initially heard the preferred option, ‘It sounds too good to be true.” Perhaps there is some truth in the saying, “All that glitters is not gold.”
Although there are many things I like and don’t like about the preferred option, having to hand all my rights as a shareholder over to the board of the new co-op affects my farming business too much and is a deal breaker as far as I am concerned. I was told that within Fonterra there is a saying, “Co-ops are always a dollar too short and a day too late.” Implying that co-ops never have enough money because capital is linked to milk supply and it takes too long to make any decision because of the high level of consultation required in dealing with so many supplying shareholders. With board members upholding a culture that encourages opinions like this to justify underperformance, this whole capital structure review smacks, at least in part, of a move by the board to get around the issue of shareholder consultation. I would suggest that a lack of freedom for the board to make decisions is not the root of Fonterra’s problems, but is rather a result of a Board and Chairman lacking in strong leadership and hands on governance. Farmers are not idiots and know when they are being played. As my husband said when he initially heard the preferred option, ‘It sounds too good to be true.” Perhaps there is some truth in the saying, “All that glitters is not gold.”
Wednesday, November 21, 2007
Fonterra Capital structure
My two main issues with the Fonterra capital structure proposal as it stands are as follows:
1. The pre-conditions. Although the pre-conditions set by the board are a good idea, most of the pre-conditions are very subjective and are widely open for interpretation. I would prefer to see the board come out with some clearer guidelines on how these pre-conditions will be met because although I think it is a valuable tool, the success of the final product is dependant on the quality of the tools they are using.
2. Protection for suppliers. As a PLC directors must treat all shareholders equitably and must work solely towards the interest of the shareholders over the suppliers, even if the suppliers are a majority shareholder. As NZ dairy farmers move away from the lowest cost producers of milk, it becomes even more important to protect the NZ milk supply. Fonterra is going overseas to capture cheaper milk and this cannot be at the expense of NZ milk. Although Henry Van der hayden noted, it will be in shareholders interest to keep stainless full so the price Fonterra pays for it's milk will have to be competitive. This argument has two flaws, the first is that there isn't any serious competition to Fonterra and at this time most farmers have no alternative but to supply Fonterra. Secondly, and more importantly is that this stainless has a limited life span and it is only in the supplier's interests to replace it in NZ. Fonterra would be better off investing new stainless overseas to better capture the cheaper milk supplies as this would be in the interests of the shareholders, and as a PLC shareholder interests must take precedent.
With this in mind I would like to see some stronger mechanisms in place to protect the price paid for the NZ milk supply before the co-op is floated.
1. The pre-conditions. Although the pre-conditions set by the board are a good idea, most of the pre-conditions are very subjective and are widely open for interpretation. I would prefer to see the board come out with some clearer guidelines on how these pre-conditions will be met because although I think it is a valuable tool, the success of the final product is dependant on the quality of the tools they are using.
2. Protection for suppliers. As a PLC directors must treat all shareholders equitably and must work solely towards the interest of the shareholders over the suppliers, even if the suppliers are a majority shareholder. As NZ dairy farmers move away from the lowest cost producers of milk, it becomes even more important to protect the NZ milk supply. Fonterra is going overseas to capture cheaper milk and this cannot be at the expense of NZ milk. Although Henry Van der hayden noted, it will be in shareholders interest to keep stainless full so the price Fonterra pays for it's milk will have to be competitive. This argument has two flaws, the first is that there isn't any serious competition to Fonterra and at this time most farmers have no alternative but to supply Fonterra. Secondly, and more importantly is that this stainless has a limited life span and it is only in the supplier's interests to replace it in NZ. Fonterra would be better off investing new stainless overseas to better capture the cheaper milk supplies as this would be in the interests of the shareholders, and as a PLC shareholder interests must take precedent.
With this in mind I would like to see some stronger mechanisms in place to protect the price paid for the NZ milk supply before the co-op is floated.
Friday, November 9, 2007
Land Prices
It amazes me how one good year and only the promise of others can cause such frantic land speculation. The prices being paid for dairy farms and the number of confirmed conversions for next season is unbelievable. Everyone is getting in on the act and pushing the price of land well above what it can reasonable expect to return. This is great of you farm for capital gain, not so good if you are starting out and what to work towards farm ownership. The recent surge in land prices is particularly worrying as you can now only buy land if you have a lot of cash behind you. This well healed buyer is often not interest in working the piece of land they have purchased, rather seeing it as an investment opportunity. The increase in this kind of buyer is leading to an increase in absent land owners who expect others to do the work. This change in farmer demographic from owner/operator to investor is worrying for the industry and could be it's down fall. Owner/operators will ride the commodity cycles because they are in it for the love of their land and stock, they will go without to keep their farm going. Investors on the other hand have no emotional connection with the land and see it as a business that must perform. This clinical view of a farm as a business only has brought some people high levels of success, but it also weakens the industry. This is because of a number of reasons:
1. Labour. It is all good and well owning 60 farms, thousands of hectares of prime dairy land and tens of thousands of cows, but who are you going to get to run the dam things. With all these new conversions going in and the increase in high-input operations, the demand for labour is going through the roof. But the problem is the more the farm becomes a factory, the less passion workers hold for the farming lifestyle. This is exacerbated by the growth of service towns around these new dairying areas and the increase in milk volumes that conversions and high-input creates. Dairy factories, tanker-drivers, stock-truck drivers, fuel-tank drivers all take their labour from the same pool as farms, however these services can pass the costs on to their customers and dairy companies get first dibs on the milk cheque so to compete in these markets farmers need to squeeze the higher labour cost out of their bottom line. Workers need to be paid their fair value regardless of the payout.
2. New entrants into the industry. With the prospect of farm ownership, and now even owning your own herd a near impossible feat for most people starting out in the industry, it can be very difficult to retain enthusiastic, motivated people within it. Why would someone with any ambition slog it out for years in the pouring rain or someone else's cow shed if they can never get anywhere? Stuff that, why not take your ambition and drive and apply it somewhere you can make money, develop equity and have every weekend off as well. (and not have to live in a shitty, small, cold 1940's house).
3. Intensification. Apart from the labour issues this creates, intensifying your farming operation to produce more MS per hectare leaves NZ dairy industry in jeopardy. The higher cost of importing feed, fert, fuel and soon, carbon credits erodes NZ's place as the lowest cost producer of milk even further. Don't even get me started on the issue of skyrocketing import costs as the world's supply of feed and fuel dwindle into non-existence and how much longer before those who have built their cost structures around intensified production to "grow" their business crap out because they either can't afford or just can't get them.
Good luck to you if you see farming as only a business investment to grow your personal wealth, and not as a treasured lifestyle to promote the growth of people, families, animals and plants. I hope the price you play will all be worth it in the end and that the rest of us in the industry wont have to pay as well.
1. Labour. It is all good and well owning 60 farms, thousands of hectares of prime dairy land and tens of thousands of cows, but who are you going to get to run the dam things. With all these new conversions going in and the increase in high-input operations, the demand for labour is going through the roof. But the problem is the more the farm becomes a factory, the less passion workers hold for the farming lifestyle. This is exacerbated by the growth of service towns around these new dairying areas and the increase in milk volumes that conversions and high-input creates. Dairy factories, tanker-drivers, stock-truck drivers, fuel-tank drivers all take their labour from the same pool as farms, however these services can pass the costs on to their customers and dairy companies get first dibs on the milk cheque so to compete in these markets farmers need to squeeze the higher labour cost out of their bottom line. Workers need to be paid their fair value regardless of the payout.
2. New entrants into the industry. With the prospect of farm ownership, and now even owning your own herd a near impossible feat for most people starting out in the industry, it can be very difficult to retain enthusiastic, motivated people within it. Why would someone with any ambition slog it out for years in the pouring rain or someone else's cow shed if they can never get anywhere? Stuff that, why not take your ambition and drive and apply it somewhere you can make money, develop equity and have every weekend off as well. (and not have to live in a shitty, small, cold 1940's house).
3. Intensification. Apart from the labour issues this creates, intensifying your farming operation to produce more MS per hectare leaves NZ dairy industry in jeopardy. The higher cost of importing feed, fert, fuel and soon, carbon credits erodes NZ's place as the lowest cost producer of milk even further. Don't even get me started on the issue of skyrocketing import costs as the world's supply of feed and fuel dwindle into non-existence and how much longer before those who have built their cost structures around intensified production to "grow" their business crap out because they either can't afford or just can't get them.
Good luck to you if you see farming as only a business investment to grow your personal wealth, and not as a treasured lifestyle to promote the growth of people, families, animals and plants. I hope the price you play will all be worth it in the end and that the rest of us in the industry wont have to pay as well.
Thursday, November 8, 2007
Riparian Planting
Any farmer that thinks they are not responsible for fencing and planting riparian margins along significant waterways on their farm is dreaming. I have heard some farmers say that because they do not own the waterway, they should not have to pay for or carry out riparian margin plantings, believing it to be the responsibility of their Regional Council to cough-up. Although farmers do not own the waterway, their farming business, even in the most organic or carefully managed of situations, has the potential to discharge nutrient run-off into it. It is the farmer's responsibility to ensure that they reduce this risk of nutrient run-off from their business into the public waterways surrounding their farming operation. Well maintained riparian margins are proven as the best way to absorb nutrient run-off before it can enter the waterways. It is a selfish and ignorant opinion not to plant. Spare a though for the rest of the farming community who want to retain pristine waterways for the future generations.