Fonterra's new strategy assumes a static milk pool in its forecasts. Left to rignt: CFO Marc Rivers, Chairman John Monaghan and CEO Miles Hurrell. Photo/Will Trafford
Fonterra's new strategy assumes a static milk pool in its forecasts. Left to rignt: CFO Marc Rivers, Chairman John Monaghan and CEO Miles Hurrell. Photo/Will Trafford
A dwindling domestic dairy herd will play into Fonterra Cooperative Group's plan to extract greater value from New Zealand milk by introducing scarcity to the market, chief executive Miles Hurrell says.
The growing environmental regulatory burden was firmly on a number of farmers' minds at yesterday's annual meeting in Invercargill, and both Hurrell and chair John Monaghan were quick to reassure them the cooperative was working with policymakers, securing some wins and bearing some losses.
However, Monaghan said that challenge wasn't unique to New Zealand, with all the world's major cooperatives facing similar pressures from growing environmental concerns. He reiterated that the new strategy assumed a static local milk pool in its forecasts.
Hurrell said that gave Fonterra's sales teams more leverage when demanding a premium from customers who wanted New Zealand's grass-fed dairy products.
When he was overseas selling Fonterra products, he said it was hard to get a good price when you knew you had more supply coming through.
"If we recognise a flat or declining milk pool it cements our position even further. Scarcity creates value," he said.
When questioned whether that would strand Fonterra's stainless steel assets and lead to further write-downs, Hurrell said he wouldn't expect a hit to the balance sheet.
"At this point in time, we don't foresee the need to close any plants based on our milk forecast. That said, some plants that were inherited through the formation of Fonterra are very old, and fully depreciated," he said. "If we had to close plants due to milk capacity, I don't see any immediate need to have a hit on the balance sheet."
Shareholder Gareth van der Heyden, son of former cooperative chair Henry van der Heyden, urged his fellow shareholders to be more positive, likening the tone of some of their comments to a eulogy.
He pointed to the inter-generational shareholder base of the cooperative and urged older farmers to engage more positively with the younger ones, saying talk of surplus stainless steel and milk supply drifting to rivals should encourage them to explain the importance of an industry champion such as Fonterra.
Gareth van der Heyden, son of former cooperative chair Henry van der Heyden, urged his fellow shareholders to be more positive. Photo: Linkedin
"We need more engagement from younger shareholders as we need to focus on the future, not the past," van der Heyden said. "It would be good to see more oxygen at these meetings by the younger generation. They do have something to offer."
Speaking after the meeting, Monaghan told reporters that the roadshow after the annual earnings showed good support for the new strategy, which he described as a fundamental change.
"I've never been more confident about the strategy or the level of support. Having said that, I recognise the pain that's been felt by the shareholder base, especially the drop in the share price and what that's done to farmer equity and their balance sheets."
A dwindling domestic dairy herd will play into Fonterra's plan, CEO Miles Hurrell said.
Monaghan said he was pleased to see the recent recovery in the price of shares and fund units and that if Fonterra can deliver on its strategy, he would expect further appreciation.
Hurrell told the meeting that Fonterra was still focused on getting its own balance sheet in order, with a target to cut debt by another $500-$700 million by lifting earnings, stripping out capital spending, and selling some more assets. That would leave it with net debt of $4.4-$4.6 billion by the end of the 2020 financial year.
As part of the new strategy, Fonterra has also set up a sub-committee to review its capital structure, although Monaghan said there's no timeframe for its completion.
He told reporters it was led by an independent director and consisted of five directors and three or four executives, but was still very much in a formative stage.
