Tough man for dairy farmers' tough job

John Monaghan publicly scolded Fonterra's board over inadequate profits. Picture / Dannevirke News

John Monaghan suspects if he had a blood test it would return "positive for dairy politics".

The chairman of Fonterra's shareholders council says his late father Jack chaired at least five co-operatives in the Wairarapa, in the days when dozens of dairy co-ops were sprinkled around the country.

Today, he's chief watchdog of the performance of the super-co-op Fonterra - the country's biggest company and the world's biggest dairy exporter - and is so committed to helping make a risky experiment a success he cares little how unpopular he becomes in the process.

Created five years ago from a controversial, huge industry merger, Fonterra is a near-monopoly and the only buyer of milk available to most New Zealand farmers.

Monaghan is the man who this month publicly took a whip to the co-operative's board for failing to make the company more profitable. He says a "competitive" performance is just not good enough.

Monaghan says dairy farmers and the economy expect a "superior" performance from the farmer-owned export juggernaut.

Fonterra this year delivered $400 million less to the economy through its farmers' pockets than the previous year - even though revenues were up by $700 million.

Farmers received a milk payout of $4.10 a kilogram of milksolids compared to $5.33 in Fonterra's first year. Returns from value-added products, promoted by dairy leaders in 2001 as a compelling reason to create Fonterra and lessen our reliance on dairy commodities contributed just 25c per kilogram to the payout.

Monaghan says 70 per cent of Fonterra's 11,000 shareholders did not make an operating profit in the 2005-06 season. That means the economy was also squeezed, given dairying is its biggest single cornerstone.

Monaghan, 51, who farms near Eketahuna, left no one in doubt the performance was unacceptable, caning New Zealand's only truly global company in the pages of the council's recent annual report.

Then he told Fonterra's annual meeting that this was a "watershed year" for the company. He won't elaborate, other than to say the council will hold the board to the "statement of intentions" agreed between the two parties for this year.

It is not the first time the Fonterra shareholder council has growled over payout level in its five-year life, but it is the first time it has shown its teeth.

Most of its monitoring of Fonterra's performance is done behind closed doors. As Monaghan says, when you own the business there is a fine balance between being a constructive critic and a destructive one.

"The easiest thing in my job is to make a headline, the really hard job is to influence change."

Monaghan accepts the continuing strength of the Kiwi dollar is a "very real" problem for the company, which trades mainly in US currency - but there are "expectations", he says, his grim tone giving the word a capital E.

The council's job is twofold: it has constitutional duties to represent Fonterra's shareholders and to closely monitor the board's performance.

Monaghan is the council's third chairman and by dint of his public observations, the most high profile. He is also its most effective, according to insiders.

He is on call 24/7 and received a $75,000 honorarium last year. The 35-member council has a shareholder-approved budget of close to $2.5 million this financial year.

Fonterra chairman Henry van der Heyden says Monaghan's criticism was not unexpected.

But clearly it stung.

"I find he acts with a lot of integrity. He's got a very strong personality and character - but he's still got a lot to learn about the business, too."

Van der Heyden implies that "underlying" improvements in the business are not understood by people other than Fonterra leaders. The exchange-rate issue continued to "mask" progress. It's a line taken by senior management too.

Monaghan is unconvinced.

"Because of the role we perform, we are going to be patronised.

"But the board and other stakeholders need to be very clear. We understand this business very well, but our understanding may not always reflect what the board wants to hear.

"Coming out with a report like we did represents the level of frustration within the council and the shareholder base.

"When we come out and make public comment it is with the full knowledge of all the facts and it is our considered opinion. We are prepared to stand behind it."

As an elected leader of virtually all the country's dairy farmers, and of a council which can require the board to call a special shareholders meeting (providing 75 per cent of councillors agree), Monaghan is a powerful voice in the $13 billion-plus dairy industry.

He doesn't think of himself that way, he says.

"I based my leadership around reasoned judgment, independence of thought, and not being captured. I have a very strong sense of making decisions based on the right reasons even if that means enduring some short-term unpopularity.

"A strong, constructive and courageous council will make a defining difference for this co-operative. That's about having the courage to hold firm in our views, not bowing under pressure, but also to have the courage to take the leadership role back to our regions [with a message] that may not always be popular with our farmers."

Until this year, many shareholders suspected their council was more of a lapdog for Fonterra's masters than a watchdog. So why bite now?

"Our farmers are under economic pressure. Fonterra's been in five years, and we are hard taskmasters as dairy farmers and we have high expectations for this co-operative. We are fiercely proud of it and want it to perform.

"We are in a unique position as shareholders. We supply the raw products but we also supply the capital, so we have a real vested interest in this co-operative performing. For many farmers this is their only investment."

And it's a big investment. To supply Fonterra, farmers have to buy one share for every kilogram of milksolids. This year the share price is $6.50 - meaning the average production farmer has $650,000 invested in the company.

Payouts of around $4 just don't cut the mustard - particularly when farmers supplying the comparatively tiny Westland Milk co-operative pay $1.50 a share and this year got a $4.07 payout, just 3c a kilogram less than Fonterra farmers.

Council insiders say Monaghan is a formidable force in dealings with directors - "very direct, very blunt". But he's also a team player who is supportive of his councillors and quick to tap their skills if he is weak in an area.

"I think I have uncompromising expectations, and they start with myself," Monaghan says.

"I expect frank dialogue with the board and management and I operate on a culture of absolutely no surprises.

"I don't have time for those who are not prepared to put a view on the table but then want to talk about it over coffee. I expect people to be totally upfront."

Monaghan says he is "encouraged" by Fonterra's financial targets for the 2006-07 year. He won't discuss them; they're confidential. Nor will he nominate the minimum payout the council will tolerate this season.

But if directors don't pull it out of the forecast $4.05 rut it's currently stuck in, or if, as the company has hinted, the payout might be even lower because of forex and commodity price pressures, Monaghan's next annual report will probably be incendiary.

John Monaghan
Chairman of the 35-member Fonterra shareholders council.
Eketahuna dairy farmer.
Age: 51.
Interests: Rugby and dairy farming.