The evolution of Fonterra

[This is the first of a series of five articles on Fonterra that I have been writing for the Fairfax NZ Sunday Star Times. This one was published on 1 February 2015.]

It is now a little more than 13 years since Fonterra was formed. In that time, all of the foundation directors have moved on. There have also been three Chief Executive officers (CEOs) and at least four Chief Financial Officers. None of the current top level management team that reports to the CEO were there at the start.

Fonterra itself is a very different company to those early days. It started off as a traditional co-operative, in which members owned shares in proportion to their production. These shares were purchased directly from the co-operative at a price which the co-operative determined. If a farmer ceased production, then the shares were sold back to the co-operative at the current buy/sell price as determined by Fonterra. Given that production and ownership were aligned, any apportionment between what was paid for the milk and what was paid as a dividend on invested capital, was of no material consequence.

Now at the start of 2015 Fonterra looks very different. Shares are now traded between farmers on the open market , and non-farmer investors can buy dividend-earning units. The price at which farmers buy and sell shares is effectively controlled by non-farmer investors, including some large Australian fund management companies.

The journey from traditional co-operative to modern corporate is ongoing. One thing for sure is that Fonterra’s structure will continue to evolve, and by 2020 it will almost certainly look different again.

In later articles I will document in more detail the transition over the last thirteen years, and also look at the structural instabilities which will influence Fonterra’s future. But in this article I want to look back to the debates and fights at the time that Fonterra was being formed. In doing so, I have drawn at times on Clive Lind’s 2013 book ‘Till the Cows came Home: inside the battles that built Fonterra”.

The formation of Fonterra did indeed involve big debates and big fights. During the 1980s and 1990s the various dairy co-operatives were gradually coming together to form larger co-operatives that could achieve economies of scale. The logic of amalgamation was irrefutable, but the internal politics were challenging, with farmer leaders having to travel a fine line between economic logic and the provincial parochialism of some of their members.

By the late 1990s, there was the large Waikato based co-operative called New Zealand Dairy Group (NZDG) which had swallowed up the Bay of Plenty Dairy Co-operative. There was also the somewhat smaller but more entrepreneurial Kiwi Co-operative based in Taranaki, led by the very young Craig Norgate, which had itself swallowed up Tui from the Manawatu. Other companies included the Northland Dairy Co-operative, which also then joined with Kiwi, and the rapidly growing South Island Dairy Co-operative (SIDC), formed by the amalgamation of the Canterbury (Alpine) and Southland Co-operatives under the leadership of John Roadley.

John Roadley then took SIDC to join with NZDG, in a carefully considered move, despite a superior offer from Kiwi. Roadley was playing the long game of a national co-operative. He felt that was more likely to be achieved if the South islanders joined the Waikato group to make a clear size difference between NZDG and Kiwi. Otherwise the two co-operatives were more likely to engage in a head to head fight for dominance, and Roadley thought this would be a distraction to the bigger national objective.

Forming Fontera not only required the two big co-operatives to come together. It also required a solution to the Dairy Board issue.

Prior to Fonterra, the Dairy Board marketed all of New Zealand’s dairy products. Historically this made a lot of sense. International dairy trade was bedeviled by international food politics and so the Government did need to be involved. Even more important, the Dairy Board structure created a strong seller with market power. However, times had changed and by the turn of the century our international markets were increasingly critical of what they saw as a Government monopoly. Also, the co-operatives themselves were fretting at the constraints imposed by the Board structure.

So although there was indeed lots of infighting between the co-operatives, and also competing perspectives within Government, the chosen structure of one mega co-operative, with both processing and marketing responsibilities, was the logical outcome.

From a farmer perspective, the key issue was that farmers had to be in control. The key aim in those early years was to maximise the milk price back to farmers. Given the lack of farm gate competition between alternative processors, farmers knew that this control was the one non-negotiable aspect.

There were two small farmer groups that chose to stay outside the new mega co-operative. They were the value-add focused Tatua farmers in the Waikato, and the independent minded West Coast dairy farmers in the South Island. For Tatua farmers, that was clearly a good decision which has led to superior farm gate returns. Whether the West Coasters got it right could still be debated, as the Westland co-operative has tended to underperform relative to Fonterra.

Looking back, there was a considerable number of people who played key roles in getting Fonterra established. However, in my opinion there was one key person who really made a difference which others might not have made in his absence. That person was John Roadley.

A former Northland farmer who then became one of the pioneers of irrigated dairying in Canterbury, Roadley pursued the vision of a national co-operative for more than ten years. In the process he trod on some toes and made some enemies – in the dairy industry one makes little progress without doing that. But he never lost the vision and he did make thing happen. His final industry contribution was as Fonterra’s foundation chairman, before retiring to his new vineyard in Marlborough.

For those who want to read more about the battles that built Fonterra,  Clive Lind’s book is a good place to start.

About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
This entry was posted in Agribusiness, Dairy, Fonterra, The Fairfax SST Articles. Bookmark the permalink.

5 Responses to The evolution of Fonterra

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