Fonterra: Co-op charts a course through the crises of Covid and climate

The dairy co-op is recovering from a financial hit and tightening up its operations

When looking at the unpredictable fortunes, volatile markets and wide-ranging pressures – from ethical to financial – affecting the dairy co-op sector, Fonterra makes for a useful study.

Formed in 2001 from the merger of New Zealand Dairy Group and Kiwi
Cooperative Dairies, it is owned by 10,500 New Zealand farmers, and
accounts for 30% of the world’s dairy exports. It is New Zealand’s largest businesses with annual revenues beating the NZ$17bn mark.

It has weathered financial storms which have claimed other key players in the sector – notably Murray Goulburn, the Australian dairy giant which was
demutualised and sold to a private firm in 2018. But it has not been plain sailing for Fonterra: last year it posted a loss of NZ$605m (£310m) and was warned by Fitch to control its balance sheet to avoid a credit downgrade. 

CEO Miles Hurrell had already put a three-point plan in place to protect the business: take stock of the business, get basics right and ensure more accurate forecasts – and these efforts were stepped up in response to the co-op’s troubles.

Changes were made to the co-op’s board and management, loss-making overseas ventures were disposed of and other operations were rationalised. 

These tough measures seem to be paying off: last month Fonterra posted
$815m earnings before interest and tax for the nine months to 30 April – up $301m on the previous year, despite the disruption brought by the Covid-19 pandemic.

Related: How dairy co-ops are weathering the Covid storm

With its Chinese market recovering, it increased its farmgate milk price last month. And it has announced a new Co-operative Difference Payment for farmer members who meet its on-farm sustainability and value targets. Farmers will receive up to 10 cents per kilo of milk solids (kgMS) under the scheme, which comes into effect next June as part of the co-op’s sustainability efforts.

Global markets may be tricky but they have given Fonterra experience in adapting to meet volatile conditions – which is very useful when facing a pandemic. 

Announcing the latest figures, Mr Hurrell said Fonterra’s global supply chain, diverse produce and wide customer base have all helped during
the Covid-19 crisis, which “has affected virtually every country, market and industry … the global dairy market is volatile and the outlook is uncertain.

“The work done over the last year to strengthen our balance sheet, and the co-op’s ability to respond quickly, has helped us manage the situation. ”

Fonterra exports 95% of its goods, said Mr Hurrell, and “many of our
markets have always been prone to sudden shocks; this can impact where, when and what we sell. However, the global nature of Covid-19 is like nothing we’ve experienced. We will feel the impact of Covid-19 and its flow-on effects but how and to what extent is still uncertain. We are drawing on all our experience in managing market volatility.”

Fonterra was helped because it had already contracted much of its milk supply before the pandemic hit. “In China,” said Mr Hurrell, “the food service sector started its recovery relatively quickly, although it is still not at 100%. 

“We saw our sales in China fall in February, but they bounced back to more normal levels in March and this continued in April. We are now seeing the impact of Covid-19 across our food- service businesses in Oceania, South East Asia and Latin America. We expect this impact to also show up in our fourth quarter results.

“While the consumer business benefited from a spike in sales as people stockpiled and bought food to cook at home, this was not sustained through the Covid-19 lockdowns.”

Fonterra says the latest figures give it a strong cashflow and balance sheet and it is reducing its debt. 

But the co-op is continuing to look at ways to strengthen its governance and performance: it has a steering group in place to conduct a review of its Shareholders Council, which has received than 1,400 responses from farmers and share- milkers before the survey closed in May.

The survey was launched in response to concerns raised at the co-op’s AGM last year. Some shareholders have even called for the council to be scrapped in favour of leaner – and cheaper – body.

The nine-member steering group will now review the feedback – which
committee chairman James Buwalda says has come from “all regions, from different sized farms, as well as people who have been supplying Fonterra for different lengths of time”.

The steering group has shareholder representatives, two Fonterra directors and two councillors. It hopes to deliver a final report to shareholders in August.

The market volatility described by Mr Hurrell is hard for small rural producers to deal with – and so it has driven consolidation around the world in the dairy sector with conditions favouring bigger players like Fonterra.

But a report by the Institute for Agriculture and Trade Policy – Milking The Planet: How Big Dairy is Heating up the Planet and Hollowing Rural Communities – argues that these large entities with their global operations come with a large environmental price tag.

And it argues that the export-led model has contributed to Fonterra’s financial woes of 2019 and cost its farmers.

“Fonterra’s decade long corporate expansion into China, Latin America and Australia, for instance, resulted in one-third of its suppliers unable to pay their bank debts,” says the report. “Its nearly 10,000 farmer shareholders incurred huge losses last year, calling into question Fonterra’s corporate structure and investment strategy.”

Financial pressures like this make it harder for organisations to drive green change,” the report notes.

And it warns: “Half of New Zealand’s emissions come from the livestock sector, its agricultural emissions having risen by 12% since 1990.

“The government attributes this rise to a doubling of its dairy herd and a 600% increase in fertiliser use.”

Fonterra has indicated support for the tough new climate targets announced by the New Zealand government and continues to develop sustainability initiatives. But it also warns that reaching the 10% methane reduction target by 2030 and the minimum 24% target by 2050 is “very ambitious” and will require further research and development.

New technology – such as methane inhibitors in cattle feed – will be costly, it adds.

The IATP report has prompted campaign groups like Greenpeace to call for more farming innovation to curb greenhouse emissions – such as a move away  from synthetic fertiliser use and intensive farming in favour of plant-based regenerative practices.

But in its reply to the IATP, Fonterra said the report overstated the scale of its farmers’ climate emissions. The carbon footprint of New Zealand’s on-farm milk supply is less than one-third of the global average and up to 30% lower than those in Europe and North America, it adds.