Agricultural GDP leaves out more than it includes

Agricultural GDP catches well under one quarter of the agribusiness system. As such it fails to capture the importance of agribusiness to the economy.

One of the problems facing New Zealand’s agriculture is a widespread urban perspective that agriculture is not important to the New Zealand economy. To a large extent, this perspective is built around the fact that agricultural GDP, as officially measured, is only between four and five percent of GDP.

What few people understand is that the definition of agricultural GDP depends on historical notions of what a farm was and is. The notion goes back to the days when agricultural output was largely the output of what the farmer himself did. And in those days, it really was a ‘him’ who relied on his own muscle power and that of his horse.

To cut to the chase, agricultural GDP excludes all farm inputs as intermediate goods. Those exclusions include, for example, all animal health inputs including veterinary services, plus the value of fertiliser inputs.

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Fonterra’s new strategy

Fonterra’s annual report contains no big surprises. The strategy is one of stepping back from consumer brands and global milk pools. This has been driven by necessity. As such, it is a move towards a little Fonterra and away from the vision of a big global Fonterra.

There is an old saying about cutting the cloth to suit the purse. That is where Fonterra sits right now.

There is no indication that Fonterra plans to retain money from milk-price payments in this coming year. However, it is clear that Fonterra does plan to hold back more funds from future profits than it has in the past. That is all very well, as long as profits can first be generated.

Fonterra’s company culture lies at the heart of the matter

In my last article I wrote about Fonterra’s capital structure, how it operates, and how it is no longer fit for purpose. This article here explores aspects of how Fonterra got into its structural dilemma.

The starting point is to acknowledge that Fonterra made a fundamental flaw in thinking it could solve its redemption risks by setting up the Fonterra Shareholders Fund, hereafter called the ‘Fund’. Despite the name, this was actually a fund for non-farmer investors to buy units in Fonterra that have economic rights the same as shares, but no voting rights. 

Fonterra’s capital structure is no longer fit for purpose

Fonterra’s delay in announcing its results, driven by Fonterra’s need for discussions with its auditors about appropriate asset values, provides an opportunity to reflect on Fonterra’s capital structure and whether it is still fit for purpose. The simple answer is that it is not.

The value destruction that has occurred and which is now coming to light means that inherent conflicts between the interests of farmer shareholders and investor unitholders have become too great to be papered over. Co-operatives do not survive long-term unless everyone’s interests align.

Fonterra has milked dry its Chilean cash cow

With Fonterra announcing big write-downs on its asset values in China, Brazil, Venezuela and New Zealand, it is a fair question to ask what other assets elsewhere in the world might also need to be written down? Have we heard all the bad news?

The two biggest questions relate to Australia and Chile. These are Fonterra’s biggest overseas milk pools, which no longer fit clearly within the new emerging Fonterra strategy.

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.

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.