Is there a future for Oz Fonterra as Fonterra’s finances unravel?

Fonterra’s announcement that it expects a loss of around $600 million or more for the year ended 31 July 2019 has big ramifications for Oz Fonterra.  With overseas-milk pools now lying outside the central focus of Fonterra’s new strategy, and with Fonterra seriously short of capital, the Australian-milk pool and associated processing assets look increasingly burdensome.

If Fonterra were to divest its Australian operations, then it would demonstrate that Fonterra really is retreating to be a New Zealand producer of New Zealand dairy ingredients. It would also reinforce the notion that consumer-branded products are now largely beyond its reach.

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Fonterra’s losses provide more questions than answers

The forthcoming asset write downs of more than $800 million announced on 12 August by Chairman John Monaghan are clearly damaging to Fonterra’s balance sheet. It also means that Fonterra will now make a loss for the year of around $600 million. However, the implications go much further than that.

Forestry decisions need to be made now

New Zealand’s forestry policy is in a mess. We have drifted into a situation where the big decisions are made outside of New Zealand. Governmental forestry policy is like steering a dog by the tail. And this particular dog has a mind of its own.

Let there be no doubt that forestry has been and will be of great importance to New Zealand. The problem is that key decisions affecting forestry and hence New Zealand land-use are being made outside of New Zealand. The key decisions are being made by international investors who are figuring ways of making money in a new global environment where there is lots of capital looking for a home.

New A2 milk research provides digestive and cognitive evidence in young children

A new paper relating to A2 milk has been published this month in the Journal of Pediatric Gastroenterology and Nutrition (JPGN). The paper provides strong evidence from a clinical trial with pre-school children in China that A1 beta-casein relative to A2 beta-casein has negative effects on both digestion and cognitive performance.

The evidence is sufficiently strong that those who have argued until now that A2 milk is just a marketing gimmick will find it increasingly difficult to sustain that argument.  This has major implications for the mainstream dairy industry which continues to downplay the A1 versus A2 issue.

For those new to the debate, A2 milk comes from A2 cows, with these cows naturally producing milk free of A1 beta-casein. As background, there is no A1 beta-casein in human milk or goat milk or sheep milk. Cows are the only species that produce A1 beta-casein, and it is found in a high proportion of cows of European origin.

It’s time for a stocktake on Mycoplasma bovis

It is now two years since Mycoplasma bovis was first identified in New Zealand. In those two years there have been 178 farms with confirmed infections.  In the last six months the cumulative number of confirmed infections has doubled.

The big question is whether eradication is still feasible.

It is now clear that the number of infected properties is going to rise beyond the Government’s estimates prepared back in May 2018. At that time, the Government committed to a heavyweight eradication campaign. At that same time, the expected total number of infected properties was estimated at 192, extending out over five to ten years.

Uncertainty plus unique ownership structure drive Fonterra share volatility

Fonterra’s shares have been on a steady downward slide for the last 18 months. In January 2018 they were selling at $6.60 dropping to $3.86 at closing on 30 June 2019.

Then this last week things suddenly turned volatile, dropping at one point on 4 July a further 10 percent to $3.45, before rising by six percent to $3.69 at close of trade on 5 July.

The causes of the long-term drop are well understood. Very simply, Fonterra made a loss of $196 million in financial year 2018 largely because of write-down on assets. Fonterra is also now in asset-selling mode to strengthen its balance sheet. Non-farmer investors are coming to understand that, with family silver having to be sold as well as some rubbish disposal, any turnaround is likely to be long-term rather than short-term.

However, the recent increase in volatility is due to more than these issues. There is emerging concern that perhaps some of the asset sales are not going as well as hoped. Tip Top was easy; some of the others are taking longer. Markets hate uncertainty.

Decision time at Westland for Yili bid

The time has come when Westland’s dairy farmers must make their decision. Do they want to take the money and go with Chinese mega-company Yili, or do they wish to struggle on as a co-operative?  We will know the answer after the July 4 vote.

If farmers vote to take the money, it will then be up to the Government to agree or refuse to accept Yili as the new owner. I will be surprised if they disallow the sale under the relevant OIO provisions. The ramifications of that would be severe.

Also important is whether or not the approval from Government is quick or drawn out. It is in no-one’s interest that it be drawn out, but OIO approvals can be remarkably slow.  Yili could step away if approval is not forthcoming by 31 October.