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Ferrier's problem ­ which way to go?

By Nick Stride

Friday 4th July 2003

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When Fonterra's new boss Andrew Ferrier takes up his job in September he will collide with the basic issue the dairy industry has struggled with for many years. Which fork to take?

Present and former Fonterra insiders ­ none care to go on the record about the politically fraught giant ­ say critics who maintain Fonterra is stuck in a price-taker's commodity trap are way off mark.

In 2001, for instance, Fonterra exported 1.3 million tonnes of dairy product, but half of ebit (earnings before interest and tax) came from the 300,000 tonnes of value-added products made by the consumer products division, New Zealand Milk.

Because of the lack of detail in Fonterra's published accounts and its poor communications, it's hard to establish how that value-added component is growing.

For the full 2001/2002 year, for instance, Fonterra disclosed NZ Milk contributed 40% of total revenue of $13.9 billion. The division's ebit was $302 million but Fonterra didn't disclose group ebit.

The presentation for the November half-year results said NZ Milk's ebit had risen 78% but didn't disclose from or to what. Equally hard for its stakeholders to fathom is the efficacy with which the board and management are allocating capital, the crucial factor in achieving real rising payouts.

The record $5.33 a kilogram of milksolids paid out in 2001/2002, on the back of high prices and a low dollar, fell to $3.60 this year. Fonterra's supporters say farmers are well enough off at anything above $3. But the IES report said the real payout price fell by a co mpound 1.65% between 1950 and 2000.

A study reported in The National Business Review last week, by Integrated Economic Services, warned Fonterra's farmer shareholders appeared to be on a "productivity treadmill" whereby a fall in prices prompts producers to increase production, leading to further price falls.

The announcement of Mr Ferrier's appointment came with emphasis on his experience and skills in the politics of international trade.

Fonterra exports 95% of its production and is the world's largest dairy products exporter, accounting for one third of all product traded across borders.

But in a world where the average duty rate on industrial products is 4%, the average rate on dairy products is 35-40%.

"In dairy trading there is no such thing as the free market," one former director said.

Critics assert Fonterra has failed to set a clear course. Its choices, they say, are to become an international dairy foods power in the mould of Kraft or Nestle, or to concentrate on niche market segments where competitors can't match its products.

But to take the first path will require massive capital investment in international ventures and acquisitions, which Fonterra's farmer shareholders are unlikely to be willing or able to supply.

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