Fonterra chairman Peter McBride says there are plenty of challenges ahead of New Zealand's biggest company this year. Photo / File
Fonterra directors will shift their focus back to global markets now pandemic restrictions have eased and the dairy giant’s capital restructure has reached implementation stage, says chairman Peter McBride.
“As part of that, and our focus on R&D, the board will be travelling to the US this year and I will be travelling to China in March,” he told the Herald.
Chief executive Miles Hurrell had recently visited China, the largest export market for New Zealand’s biggest business.
McBride said for Fonterra, a farmer-owned co-operative, this year was “about building resilience”.
One of its biggest challenges would be inflation.
“In our business, rising energy costs are a big watch-out for us. On-farm inflation is up 16 per cent which is out of step with the rest of the world, and an issue for individual farming profitability.”
McBride said building resilience started with Fonterra’s financial performance.
“A strong milk price is a key part of supporting our farmers as they face rising input costs and look to build resilience into their own businesses.
“A strong balance sheet gives Miles (Hurrell) and the team optionality and the ability to take opportunities and make strategic decisions that set the co-operative up for the long term.”
McBride said the company’s capital restructure would be implemented in the first half of the year, after being voted in by its 8000 farmer-shareholders and receiving the green light from Parliament.
Fonterra, the world’s third largest milk processor by volume behind Dairy Farmers of America and Lactalis, is subject to dairy industry legislation, having been created under specially-passed law in 2001 from an industry mega-merger.
The capital restructure was “a big shift” for the company and its farmers, McBride said. Management would take the lead now it was at implementation stage.
Another focus for the board this year was Fonterra’s sustainability commitments and the timeline for achieving them.
“We will be out talking to farmers about Scope 3 emissions in the first half of the calendar year. Scope 3 is a challenge for all of the industry, we are no different.”
Scope 3 carbon emissions are the result of activities from assets not owned or controlled by a company, but where the organisation indirectly affects the value chain.
The company would also look at its service offering this year. Its “co-operative difference” programme was central to this. The programme provides for a farm’s milk payment to be influenced by their achievement of key practices on-farm that are important to Fonterra’s future.
Operationally, Fonterra this year would still be managing the long-term impacts of the Covid response, McBride said.
“Supply chains are improving overall, but in special instances there are still shortages and delays.”
McBride said the board anticipated another year of significant change within the $19 billion export dairy industry, especially around sustainability and within the broader context of a potential economic downturn.
New Zealand exports around 90 per cent of its dairy production. Fonterra collects just under 80 per cent of the country’s raw milk production.
“The opportunity for us is to get closer to farmers at one end of the supply chain, creating new tools and resources to support them and their individual businesses, and at the other end ... focus on the end customer and be responsive to what they want, where and when.”
Declining New Zealand milk volume created an opportunity for Fonterra to simplify and take costs out of the business through stock-keeping unit (SKU) reduction, refining its product mix and focusing on value creation, McBride said.
There would be a big push on shareholder communications and farmer engagement this year to support them through the changes that will come with a capital restructure, Scope 3 carbon emissions and pan-agriculture industry emissions policy.
On his outlook for the economy this year, McBride said “uncertainty” sprang to mind.
“We are seeing demand for some hard commodities come off quite quickly - but that can easily change.
“Volatility has always been a feature of global dairy markets. It’s something every Fonterra board has been cognisant of, and we have solid risk management frameworks and other systems to try to manage it.
“Given our scale, we look at all our key international markets individually, and against the US, as the recessionary pressures are different,” he added.
China demand still a guessing game
“We are cautiously optimistic about demand coming out of China as it has a more rapid reopening (from Covid restrictions) than anticipated. It’s early days but we are seeing some green shoots of demand at the GDT (Global Dairy Trade) auctions.”
McBride said a mild European winter resulted in lower energy demand and less constraint on industrial production, with some forecasters there now suggesting the region may avoid a recession.
Asked what actions Fonterra leadership might take if the global and domestic economy turned ugly, McBride said because New Zealand exported around 90 per cent of its dairy products, it was more exposed to the world economy.
“There’s a lot of uncertainty globally - not just economic but social and political unrest. And there’s still the Covid hangover in a lot of regions.
“China may have some potential upside as they come out of lockdown, it’s hard to say. But the fundamentals for dairy market development in China are strong [with] a rising size of the middle class and disposable income, enhanced health awareness post-Covid and the Government’s push for daily dairy intake to 300-500g.
“Our response is to focus on what is within our control - to be flexible and quick to respond to the market. Getting closer to our customers is part of that.”
McBride, chief executive of farming company Trinity Lands and a former chair of global kiwifruit marketer Zespri, joined the Fonterra board in 2018 and was appointed chair in 2020.
Asked if the job had changed much given the whirlwind of global and domestic events since 2020, McBride said fundamentally it hadn’t, and given Fonterra’s international scale, the company had always had to manage risk and extreme events.
“It’s part and parcel of the job.
“What is changing for directors is that their personal liability has greatly increased. Risk has always been a key part of governance but it seems like the time spent governing risk and compliance increases every year.”
On his biggest concerns for Fonterra’s reputation this year, given dairying is not popular with all New Zealanders, McBride said: “The way I look at it is, if we focus on delivery of strategy, performance and the broader ESG (environmental, social and governance) commitments we have made, then the reputation aspects largely take care of themselves.
“Our licence to operate in New Zealand is not something we take for granted. Our hope is that the conversations around that are based on science and facts and there is a recognition on both sides that while there’s more to do, progress is being made.”
McBride said processing competition in New Zealand had increased in the past few months and he expected that to ramp up further.
Demand from China would have a big impact on competition - in New Zealand and other markets - as exporters chased value, he said.
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