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Fonterra on the right track

Fonterra on the right track

Opinion: Craig Hickman

In the wake of Fonterra announcing their record $1.6 billion profit, I was asked why the media and public seemed to celebrate such an achievement from the dairy processor yet condemn similar sized profits from the banking sector.

I got the feeling the person asking the question thought the different treatment was unfair, but I think the answer is quite simple.

First and foremost, Fonterra’s profit is almost entirely earned from overseas markets, not from households struggling to pay the bills after their mortgage payments have been ratcheted up yet again. Unlike with banks, New Zealanders themselves contribute very little towards Fonterra’s bottom line as over 95% of Fonterra’s product is exported out of the country.

Secondly, Fonterra is a cooperative owned by New Zealand farmers and any profit made by Fonterra are disbursed to shareholders as dividends.

Farmers then use this money to pay their bills, be it their grazier, electrician, vet and others.

While Fonterra’s profit remains in the country, for a vast majority of our banks their profits are sent offshore to their overseas investors.

While Fonterra brings profits into the country, banks tend to send theirs in the opposite direction.

Quite apart from the last season’s profit and this season’s falling farmgate milk price grabbing the headlines, two things happened behind the scenes in early 2023. These two things cemented my view that Fonterra are on the right track and have the right people calling the shots.

Firstly, whole milk powder (WMP) began a dramatic slide from its historic high and other products began to follow suit.

Then, inexplicably as WMP continued its slide, proteins like cheese shot up in value and the margin between the two products widened dramatically.

Normally the margins between various products remains remarkably consistent and there was no simple explanation for this divergence.

Fonterra’s product optimisation team saw it coming and diverted as much milk as they could away from WMP and into the higher margin streams, contributing heavily to the record profit.

At the same time as the world market was acting out in a crazy fashion, our weather did much the same thing as Cyclone Gabrielle hit and devasted the east coast of the North Island.

We’ve all seen the footage of roads and bridges washed away; animals, buildings and livelihoods left in ruins with isolated communities left to pick up the pieces as best they could.

At a recent Fonterra meeting discussing the cooperative’s financial performance, CEO Miles Hurrell explained that amongst rising costs of fuel, wages and packaging, along with customers paying less for the product, there was another issue that made a contribution.

It was the cost of milk that was not collected or processed, but still paid for.

The cooperative made the decision to continuing paying their cyclone affected suppliers for the milk that they would have produced for the rest of the season, had they been able to keep milking and had tankers been able to collect it.

That single act was a huge relief at a time of great stress for affected dairy farmers. One less thing to worry about and a steady source of income while they went about restoring their farms and homes.

That right there shows the strength of a cooperative, the brains and flexibility to take advantage of a fast-changing market and the heart to look after your members while you are doing it.

by Craig Hickman