Our view on the Interim Results - Farm Source
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March 2021
Our view on the Interim Results
Council views the interim results announced yesterday to be
encouraging.
It’s a positive step to return to an interim dividend, reflecting good
performance. Over the first half of FY21 the mid-point of the forecast milk
price range has also increased, reinforcing the benefit of our co-operative
ownership structure and our Milk Price Manual.
Performance over the first half has enabled the Board to report that the business is largely
on track to meet the targets that it set for FY21 in its Statement of Intentions (see page 6
below).
Improvements from Q1 to Q2 include:
• farmer sentiment, with the Net Promoter Score metric moving up from 32 to 35, and
• farms with Farm Environment Plans, up from 37% to 42%.
Questions put to Board and Management
When Board and Management presented the interim results to Council our key areas of
questioning were:
• to understand more about strategy and how it’s reflected in decisions
• to understand the extent to which the results are the outcome of the implementation
of strategy versus the market and management reacting to it
• how to measure the premium that’s created for our New Zealand milk
• a progress update on the assets held for sale (DPA Brazil and China Farms) and the
sell down of the interest in Beingmate
• the performance of offshore investments, in particular Australia and Chile
• research and development - in terms of the level of investment, what’s proposed in
the future and how it compares to our competitors
• the implications of recent GDT prices on inventory levels and whether there are
signs of stock-piling in markets, and
• demand from China, recognising the current geo-political environment and the push
from the Chinese government for China to be more self-sufficient.
We have encouraged Board and Management to discuss these topics with all members.
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Independent analysis
Analysis of the interim results from our independent financial analyst Northington Partners is
set out below:
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Questions put to the Board
Below are three questions that we formally put to the Board this month, and
its responses. We deliberately asked similar questions to those we put to the
Board in Q1:
What key achievements were made during Q2 that demonstrate the implementation of
Fonterra’s strategy?
Staying on strategy and focusing on what is in our control has played a big role in the Co-op’s
performance at the halfway point of the financial year.
The strategy focuses on growth in the value of NZ milk, through strengths of innovation,
sustainability and efficiency, to deliver products which customers value.
Throughout Q1 and Q2 of FY21, as constraints across the global market-place and supply chain
have compounded, it’s clear the strategy, which sees the Co-op competing through diverse
consumption categories and partnering with others, has enabled valuable flexibility, access to
expertise and timely customer insights. This has helped minimise the impacts of COVID-19
related disruption.
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A few notable examples of implementation of strategy are:
• Through the strength of Fonterra’s scale, efficiency and the key partnership with Kotahi,
the Co-op has stayed competitive on the world stage and maintained high demand and
value for products, through the relative reliability of our supply chain versus that of others.
• Strength in innovative Foodservice products and sales techniques have been
demonstrated once again by the high performing Greater China Foodservice business. In
the first half of FY21, it saw a growth in EBIT of 64% (YoY) and an expansion into 22 new
cities, through a focus on new innovative products and continuous release of new ways of
using our products in local cuisine.
• Transition of the USA Foodservice business to a new operating model in partnership with
Land O’Lakes, provides access to Land O’Lakes’ strong distribution networks and large
customer base, at the same time as reducing the cost of operating the channel.
• In the Ingredients space, we see continued innovation and diversification of the customer
base, and a focus on higher value functional nutrition units, working to meet emerging
consumer needs in the areas of immunity and wellbeing. To support these trends, NZMP
Milk Phospholipids range for stress management has been launched.
• The demand and value placed on the Co-op’s products by customers starts with having
the best milk in the world – and is underpinned by achievements on-farm. The Co-op’s
farmers are already the most emissions efficient in the world, and the Co-op is continuing
to take steps to convert this to value. As an example, NZMP has launched its first
carbonzeroTM certified ingredient and closer to home, Anchor has launched carbonzero TM
specialty milks range.
How well is Fonterra ‘on-track’ for meeting its strategic objectives?
Under our three goals of Healthy People, Healthy Environment and Healthy Business targets
have been set to measure progress against the strategy.
We see this in the:
• Customer led operating model, continuing to provide timely and accurate insights into
local customer needs and market conditions.
• Strong focus on NZ milk within the business, driving demand and achieving maximum
value for this milk.
• Ongoing evidence of an agile, efficient and resilient supply chain.
• Ongoing evidence within the business of financial discipline, including realistic approach to
capital expenditure and a continued focus on debt reduction and gearing, with activities
including:
o Ongoing progress towards completion of the sale of our own China Farms, and an
announcement that the Co-op is undertaking a sales process for the JV farms in
China. Sales of our farms expected to be completed this financial year and the
sale of the JV farms to be completed this calendar year.
o Continued reduction in the shareholding in Beingmate, which, at the half year
point, sat at 3.94% and is now 2.82%.
For a detailed summary of our achievements against the targets set by the Board please refer to
the Statement of Intentions table on page 6 (below).
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Statement of Intentions – performance as at 31 January 2021
6What new and/or emerging challenges is Fonterra facing, in relation to its strategic
objectives, and how is it responding?
Fonterra continues to face volatility and uncertainty in its external operating environment.
Challenges in relation to strategic objectives include:
The day to day impacts of COVID-19: It’s important the business doesn’t become complacent
over time in terms of its response. Continued focus is required to ensure it can keep on top of
market and supply chain disruptions, as well as keeping up with the support required to ensure
the safety of its people and operations world-wide. The Group Led Incident Management
structure remains in place.
Longer term impacts of COVID-19: While confidence in dairy’s resilience has increased,
Management is mindful of various potential scenarios, such as a prolonged global recession
impacting demand, impacts of overseas government stimulus packages relating to milk
production and the impact of the pandemic on customer preferences longer-term.
Geopolitical and trade: The importance of ongoing access to circa 140 markets means the
business continues to closely monitor heightened trade tensions. Management are also mindful of
growing scrutiny around trade with certain countries and regimes.
New Zealand’s environment and sustainability goals: Work continues to respond to emerging and
rising expectations around dairy’s response to environment/sustainability, both within our
manufacturing and supply chain operations, and on-farm (through the Co-operative Difference
framework).
Reporting to the Board
In our March report to the Fonterra Board we communicated the following
sentiment and feedback from Co-op members:
• Sentiment about the direction and performance of the Co-op continues
to be largely positive, and there is general optimism about the dairy
industry.
• Members are pleased to hear Directors talking about pathways for future generations of
Fonterra suppliers.
• Commentary about the Board looking forward to 2050 was well received. Members feel it
shows the Board is making decisions for the long-term benefit of the Co-op.
• Members are comfortable with the new strategy, but would like to better understand how it
is reflected in decisions, the links between strategy and competitive advantage, and
assurance that strategic decisions reflect their appetite for risk.
• There is a lot of interest in the capital structure workstream, and members are keen to
understand the ‘problems’ with the current structure and the range of possible options to
address those problems.
• There is a lot of concern around onerous compliance requirements and increasing
regulatory pressure, especially environmental. Some believe there is a risk that
requirements will get too far ahead of farmers and/or may drive some out of the industry.
• Before the late February announcement about the Co-operative Difference, members
were keen for more detail about it. Members seek assurance that it can be administered
effectively.
• Members believe that Fonterra should be advocating more strongly for them with local and
central government, and seek greater transparency of Fonterra advocacy.
• Some members want Fonterra to do more to champion the Co-op and its farmers, and to
see more ‘good stories’ in mainstream media.
7• Members are concerned about loss of supply and are keen to understand the Co-op’s
strategy for retaining milk supply.
• Members have confidence in Fonterra’s current leadership and perceive questions are
now being more openly and honestly answered.
We also noted that the following topics are frequently raised with us:
• milk price and dividend
• Fonterra’s gearing ratio and debt levels
• the Climate Change Commission’s draft report, and
• zero carbon milk and offsetting carbon emissions by purchasing carbon credits from
overseas.
Key activities
Since our last update we have:
• Represented your views to the Board at its March meeting.
(See below for more detail.)
• Met with members of the Board and Management to receive and discuss
the FY21 interim results, and reviewed and analysed those results with our independent
financial analyst Northington Partners. (See above.)
• Commenced, together with the Board, a review of the Governance and Representation
changes that were implemented in 2016.
• Started work on a Letter of Members’ Expectations, which was one of the
recommendations from the 2020 review of Council’s representation function.
This letter, to be delivered each year to the Board, will set out members’ expectations for
their Co-op. To ensure that the letter is based on robust research and that a
representative view of the Co-op’s members is presented, Council is working with UMR
Research.
UMR will convene small focus group discussions amongst Co-op members, which
guarantees a research process that is driven from the grassroots up rather than a top-
down approach. The output from this stage will then be used to design an online survey to
measure what percentage of Co-op members hold a particular view and to give absolute
clarity on the issues that are most important across the wider co-operative base, and
where there are any differences of view across that base.
The survey output will then be used to inform the Letter of Expectations, which Council will
consult with members on. We are aiming to finalise the letter by the end of June 2021.
We also had our first full Council meeting for the year in March. Key agenda items (in addition to
the interim results presentation, analysis and discussions) were:
• presentations on Fonterra’s Risk Management Framework, Fonterra’s water policy and
the Skills Matrix for Director candidates
• our quarterly consultation on the limits in Fonterra’s Fund Size Risk Management Policy
• the Letter of Expectations, and
• meeting with all the New Zealand based members of the Fonterra Board, during which we
discussed purpose, culture and strategy.
8Other Council activities
• Council Chairman James Barron has met regularly with Fonterra Chairman Peter
McBride. James conveys farmer feedback and Peter and James inform each other on the
progress of Council and Board workstreams.
• We received a briefing from Management on the Co-operative Difference Milk Payment
Parameter to build our understanding of the framework, the requirements to achieve and
how the payments will work.
• In February, 19 participants attended their third and final Governance Development
Programme workshop. Fourteen participants have started the 2021 programme.
• Four Councillors represented farmer views and perspectives on matters relating to New
Zealand milk supply at the February meeting of the Board’s Co-operative Relations
Committee.
Key activities in the coming quarter
• Work on the Letter of Expectations will continue. During March and April, market research
company UMR will undertake a series of focus groups and an online survey, asking
randomly selected members for their views. So that the Letter accurately reflects the
collective views of our members, you are encouraged to participate both in this research, if
you are contacted, and in the consultation on the draft letter which will follow.
• We’re committed to engaging with our members more regularly, with planned meetings
held in all our Wards at least twice a year. Councillors have started to schedule meetings
in April and May, and invite all members (including shareholders, sharemilkers, MyMilk
suppliers and contract milkers) to attend. Look out for emailed invitations in due course.
• We will continue to progress this year’s review of the Governance and Representation
changes that were implemented in 2016. Look out for your opportunity to share your
views.
• Council has Understanding Your Co-operative Programme events scheduled for April and
June. All members are welcome.
• Council will next meet in person on 12 May after the MyConnect Conference in Auckland.
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The information and opinions expressed in this report are those of the Fonterra Co-operative Council and
not of Fonterra Co-operative Group Limited (‘Fonterra Co-operative’). The Fonterra Co-operative Council
forms its opinions independently of Fonterra Co-operative. Fonterra Co-operative has not provided any input
into the content of this report and provides no warranty or assurance as to the accuracy, adequacy or
completeness of the information in it. Fonterra Co-operative does not accept or assume any duty,
responsibility or liability to any party (including, without limitation, in negligence) in connection with this
report.
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