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Fonterra's biggest challenge is to change law

Fonterra's Monaghan says biggest challenge is to change law forcing it to accept milk and sell to rivals

By Tina Morrison

Aug. 14 (BusinessDesk) - Fonterra Cooperative Group's new chair John Monaghan says the dairy giant's biggest challenge is to change the law which forces it to accept milk from any farmer and sell it to rivals at a subsidised price, according to a report in Dairy News.

Monaghan stepped into the role chairing the country's largest dairy processor just over a fortnight ago after John Wilson stood down due to ill health. He told Dairy News the need to secure changes to the Dairy Industry Restructuring Act, which enabled the 2001 creation of Fonterra, is the biggest challenge facing the cooperative. The legislation is currently being reviewed and the government expects to receive a report early next year with legislation tabled in parliament in 2019.

Under the current DIRA provisions, Fonterra has to accept milk from all-comers and must supply raw milk to rivals at a regulated price.

"We will push to get rid of the open-entry and open-exit provisions of DIRA; it’s well past the use-by-date," Monaghan told Dairy News.

He said the main purpose of DIRA was to promote competition and to give farmers and Kiwis choices, but today New Zealand farmers can choose from about 10 independent processors, only five of which are New Zealand-owned, according to the report.

“Competition is a good thing for Fonterra and we believe competition is here to stay," he told Dairy News, noting Fonterra’s milk share had dropped to 82 percent from 91 percent due to increased rivalry. If the open-entry provision is left in place it will “wipe out the progress that’s been made," he said.

“Once you have a few processors who’ve made inefficient investment decisions that only stack up with open entry, it has the potential to lead to significant excess manufacturing capacity in the industry," Monaghan told the publication. “This creates a risk of a downward spiral of low-margin competition that will hold back moves up the value chain and ultimately result in business failures.”

Under the current rules, Fonterra can't refuse a farmer joining the cooperative even though it may have concerns about a farm's animal welfare or environmental issues, and chief operator Miles Hurrell has recently spoken out about the cooperative's strong preference for no further expansion in the Mackenzie Basin in the South Island due to concerns about the negative impact on the region's sensitive environment.

Last week, Fonterra said it is facing weaker margins and won't pay a final dividend for its 2018 financial year and will trim its 2017/18 forecast farmgate milk price in an effort to bolster its balance sheet after paying Danone over the 2013 botulism scare and writing down its Beingmate Baby & Child Food investment. The company and its outgoing chief executive Theo Spierings are facing criticism due to the cooperative's poor performance and lacklustre earnings growth.

Spierings plans to leave the position in the course of this year, and Monaghan told Dairy News the cooperative has "strong external and internal candidates" and a decision on the new chief executive will be made by the end of this year.

Units in the Fonterra Shareholders' Fund, which give investors exposure to Fonterra's earnings, slipped 1.6 percent to a three-year low of $4.88, and have dropped 21 percent over the past year.



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