For Canterbury dairy farmer Tom Mason the conclusion is stark: Fonterra should be split into two because it has destroyed so much shareholder value.
He’s done the sums and it’s simple. Over the last year his Fonterra shares have fallen in value by $666,000, whereas if he had exchanged those for Synlait shares he would have gained $3.6 million.
It’s not quite that simple though. Mason’s four family farms of 3700 cows have spread their risk by supplying both processors, 60 per cent to Synlait and 40 per cent to Fonterra.
Mason has to buy Fonterra shares or the dairy giant will not collect his milk, unlike with Synlait.
“Had we purchased 600,000 Synlait shares 12 months ago the gain in value would have been over $3.6m.
“It has cost us over $4m in the last 12 months to supply milk to, and own shares in Fonterra, compared with if those farms supplied milk to and owned shares in Synlait,” Mason says.
Mason’s views are echoed by many other farmers who have seen their investment eroded.
Manawatu dairy farmer and consultant Greg Maughan says Fonterra has underperformed on farmer expectation since when it was set up in 2001.
“This is especially in the delivery of increasing farmer wealth but more importantly in the vision of building an iconic company that farmers and the whole country could be proud of.”
NZ First leader Winston Peters is not a Fonterra fan, noting its losses.
“When you see a performance of the type Fonterra recently delivered, somebody a long time should have been asking some serious questions. The loss of $1.3 billion has to have people asking questions,” Peters says.
Earlier this year Fonterra wrote down its investment into Chinese company Beingmate by $405m. In March 2015 it paid out $750m for an 18.8 per cent stake in the company.
Late last year the co-operative had to fork out $183 million in damages to French company Danone after its precautionary recall of whey protein in August 2013.
A recent report by TDB Advisory on the state of the New Zealand dairy market showed over the last three years, niche processor Tatua achieved the highest adjusted return on assets of 18 per cent, followed by Open Country Dairy (11 per cent), Synlait (9 per cent) and Fonterra (7 per cent).
Like Mason, TDB also asks whether an improved return could be achieved by separating Fonterra’s different trading arms into a transparent business that has to compete for its farmer shareholders’ capital rather than be protected within the processing co-operative company.
Even the traditionally unassertive Shareholders’ Council has come out swinging, with chairman Duncan Coull describing Fonterra’s recent financial moves as “unacceptable”.
“While Council acknowledges that part of governance is managing risk, another key responsibility is to create long term value for shareholders. The question is ‘how effectively is this being done?’. Shareholders and all New Zealanders have valid expectations that Fonterra delivers,” Coull says.
The turmoil comes as the dairy landscape is in the midst of rapid change.
In 2001 Fonterra collected 96 per cent of the milk in the country but that has now fallen to 82 per cent. TDB estimates its share will fall further to around 78 per cent by 2020.
The Government has set up a review of the Dairy Industry Restructuring Act (DIRA), which ushered in the creation of Fonterra and regulates the industry.
One of the most contentious issues in the Act was that Fonterra had to accept all milk from new suppliers. The co-operative has said this part of the legislation is no longer needed because the dairy industry has become highly competitive in the past five years.
It has meant tanker drivers going long distances to pick up milk and a consequent drag on the balance sheet.
Fonterra has also been forced to supply competitors such as Singaporean and Hong Kong-owned Goodman Fielder with raw milk for its Meadow Fresh and Puhoi brands, some of which is exported.
Mason and Maughan say there is too much focus on the milk price farmers receive from Fonterra, and not enough on the dividend return.
Fonterra management crowed that last season’s milk price was the third best in a decade, but Maughan says non payment of the dividend this coming October would have the net effect of a 15-20c/kg drop.
Mason believes Fonterra has shown a lack of respect for the mechanism which sets prices.
“They’ve said ‘we’re just going to take a bit of money out of milk price to put it into earnings’. They did it in 2014, that was a one-off, now we’ve got another one-off. It just means investors lose confidence in the whole structure and discount the share price accordingly.”
“The board can do that in exceptional circumstances, but there was nothing exceptional this season except they paid a dividend in April when they shouldn’t have, on the back of a huge six-month loss.
“Now they’ve got to the end of the season and an ‘Oh s..t’ moment and they’re scrambling around trying to repair the damage,” Mason says.
Much has been made of the fact Fonterra produces mainly low value commodities. In 2017, 83 per cent of the product it shipped overseas was whole milk or skim milk powder.
But TDB points out Open Country Dairy is also only in the commodity market, yet is successful.
The best performers in the commodities, value-added ingredients and consumer products segments are Open Country Dairy, Synlait and The a2 Milk Company respectively.
“[This] suggests Fonterra’s global ‘volume into value’ strategy has not resulted in additional shareholder value beyond what could have been expected from a NZ-based commodity and ingredients processor,” TDB says.
Mason wants to see Fonterra split in two.
“The part of Fonterra that’s of real value to farmers is collecting the milk and paying us a fair price on the 20th of the month. That’s a commodity business, and that’s where the co-op is of value to farmers.”
“Beyond that it’s an investment and it’s been a really poor one. If Fonterra can’t add value beyond the farm gate they should stop doing it and let someone else do it.
“Then it’s up to each individual whether they invest in Fonterra or A2 or Synlait. We’ve got two shining examples of dairy companies that have created a hell of a lot of shareholder value in the last 12 months, at the same time Fonterra’s been destroying it,” Mason says.
Will new management usher in a change? Critics charge that both chairman John Monaghan and interim chief executive Miles Hurrell are part of the status quo as they both have lengthy histories with Fonterra.
Monaghan has sounded a note of wanting to heed the widespread concerns.
“We always need to deliver to all our stakeholders and that includes farmers and unit holders.”
Regarding splitting up Fonterra, Monagahan says: “We’ve been talking to farmers for some time about further flexibility, any business needs to keep adapting to set itself for the next 10-15 years so we’re out there doing a lot of listening.”
Mason says the forces for change might not have the patience to wait too long, and Fonterra might find decisions are made for it.