Trust

Golbaldairytrade is Fonterra’s new on-line milk powder trading platform. It was launched in 2008 as part of the Board’s strategy to offer greater transparency around the true value of milk and so shareholders could more accurately measure the price of milk in their final payout. Since its launch, world commodity prices have plummeted. Critics of Fonterra have been quick place responsibility, perhaps not so much for the decline in commodity prices, but for more the speed and levels to which they are falling at the feet of globaldairytrade., So concerned, the Chairman of the Independent Milk Processors Association, Wyatt Creech, wrote an open letter to Fonterra farmers calling for them to demand a review to the Board’s decision to introduce this new and untested auction system at this time in the commodity cycle. So is there cause for concern?

When I ask farmers how they think Globaldairytrade.com is performing, the message I get is that they don’t really understand how it works, or how its success could be measured. Interestingly, when I have asked industry analysts the same question, I get the same response. This leads me to ask three questions. Why is there not more information available on the objectives of Globaldairytrade? How does it actually work to achieve these objectives? And finally, if the success of the online auction is so hard to measure, how has the Board developed meaningful risk management and key performance indicators for them to assess its ability to meet their objectives and adding value to the cooperative?

To me, the only clear objective of globaldiarytrade is to offer greater transparency around the true value of milk. In their own discussion document to Fonterra Networkers, the Board argues that as the price generated by globaldairytrade is a function of supply and demand, “shareholders can be confident of Fonterra getting the best prices at each trading event.” It is not clear on how they reach this conclusion. Firstly no-one outside Fonterra is entirely sure how many buyers are eligible to trade on-line, or how many of these eligible buyers are participating in each event. Being able to measure this would add confidence to this argument. In the same discussion document Fonterra say, “it simply provides a means by which all our customers are gathered in one spot to compete for product.” Yet a Fonterra Director has conceded to me that bidding at each trading event is optional. This means that even if buyers are signed up, they can just watch others bid for the basic commodities, then when the event is finished, use the price achieve at auction as the starting price for contract negotiations. Whether the ability for customers to do this was part of the design or has happened by default is not clear. A review would clarify this issue, and answer questions around who the transplant prices benefit most and, whether a transparent milk price is in fact the true value of milk.

When it comes to the governance of the auction platform, shareholders can only trust that the Board’s performance criteria and risk management assigned to globaldairytrade is robust. But herein lies the problem. Trust. The introduction of globaldairytrade comes at the end of a rocky year for the cooperative members. They have felt devalued by the Board following the capital structure review. Betrayed by the Board’s initial embracing of contract milk supply as a solution for inaccessibility to shared membership for some suppliers, then shocked to discover that the board’s risk management policies lacked adequate robustness as the San Lu disaster unraveled. When trust is gone, you have nothing. For the sake of the cooperative I hope the Board can rally and begin to repair some of the damage that has been done to credibility over the last 18 months. Open and honest dialogue with cooperative members to ensure they understand the objectives of globaldairytrade, and all the identified risks and benefits they could expect would go a long way towards making this happen.

The Board is a servant of the cooperative who in turn is a servant of its members. Globaldairytrade is a tool created by the board to assist them with their job. The members need to trust that their directors have the right tools to do their job, and the humility to honestly review the caliber of the tools and adjust the tool kit accordingly. In turn, the directors need to trust that the members have the capacity to understand and offer valuable feed-back on them to support the Board’s performance. If the cooperative’s leaders can’t make this happen then some dramatic steps need to be taken by shareholders to ensure trust is restored; for the sake of confidence in the cooperative’s performance, principles and future. Federated Farmers has asked for a review of the GlobalDairytrade, without that review, we farmers cannot begin to repair that confidence.