Commodities and cost savings drive Fonterra’s performance

Fonterra’s 2017 financial performance was a solid result, despite profits dropping 11 percent to $745 million. The main cause of the drop was the higher farm-gate price of milk supplied by its farmers, which is a cost to corporate Fonterra.

This farm-gate price is based on commodity returns and is largely beyond the control of Fonterra. The decline in profit would have been much greater if it were not for a six percent reduction in operating costs.

It is these operating cost savings which have fuelled the more than $5 million bonus payments this year to CEO Theo Spierings. These savings can be directly attributed to the so-called V3 strategy which was Spierings’ baby.

The V3 strategy caused stress and heartburn amongst many Fonterra employees, including considerable numbers of staff who were made redundant back in 2015. But this year the results thereof have come through into the bottom line.

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The wheat and chaff of synthetic food

It has become fashionable for agri-food commentators to talk of disruptive change. In particular, in recent months there has been much talk about industry disruption that will supposedly occur from synthetic food, with much of that grown in a laboratory.

Until now, I have steered clear of discussing synthetic food, despite often being asked my opinion. But now, I have decided to venture forth.

Composting barns can be a dairy solution

There is increasing recognition that 24/7 paddock wintering of cows is not the way forward for New Zealand dairy. The challenge is to find solutions. These solutions need to achieve good environmental management, they need to be animal friendly, and they also need to make economic sense.

Over recent months I have been on a personal journey of learning about composting barns. That journey is ongoing and I have more to learn. But I am now at a point where I am confident that composting barns can be a major part of the strategic solution for New Zealand dairy. They can be win-win-win for the environment, for animals, and for profitability.

A2 Milk outperforms once again

The a2 Milk Company (ATM) took a big step forward with its 2016/17 results which were released on 23 August. Sales were up 56 percent from the previous year to $549 million, and post-tax profits tripled to $NZ90 million. The market was impressed.

Everyone knew that a strong result was in the offing, and so the shares had already risen 50 percent over the preceding three months, and almost trebled in value on a 12-month basis. The share price then rose another 15 percent over the following three days to close at $5.74 at week’s end.

The most important messages within the annual report were not about the present but the future. The picture drawn by CEO Geoff Babidge was of a fast-growing company with no debt and lots of free cash in the bank to fund ongoing developments.

The realities of Mycoplasma bovis

The recent outbreak of Mycoplasma bovis in South Canterbury has come as a shock to all dairy farmers. It is a disease that most New Zealand farmers had never heard of.

Regardless of whether or not the current outbreak can be contained, and the disease then eradicated, the ongoing risks from Mycoplasma bovis are going to have a big effect on the New Zealand dairy industry.

Dairy with ‘pasture-plus’

A key and consistent message over many years from DairyNZ to its 12,000 farmer members has been the importance of optimising the use of grass. Aligned to this, has been an ongoing negativity to non-pasture supplementation.

I know of no-one who disputes the ongoing importance of grass to the New Zealand dairy industry. However, there are many who would argue – and I am one of them – that DairyNZ has become blinkered to the opportunities that can arise from ‘pasture-plus’ dairy systems.

Ironically, despite the DairyNZ focus, there has been a steady drift by farmers to increasing use of supplement since the turn of the century, typically by matching stocking rate to peak pasture production and then feeding supplements in the shoulder seasons.

the coming dairy revolution

The attached article NZH_Agribusiness_July2017_4 was commissioned by The New Zealand Herald and published 20 July 2017 within their annual Agribusiness Supplement.

The NZ Herald is the main Auckland newspaper. Accordingly, the article was written for a largely urban audience.