The first statement that concerned me was that the current dairy payout is the lowest (in real terms) since 1991. This made me question what focus has been put on high margin value-added products compared to the often-stated proclamation of Fonterra being the "world's largest exporter of raw milk products," a market share estimated at around 30%. It is my understanding that the payout to farmers is based not on Fonterra profit but more so on the milk sold per kilo price which can and has varied significantly over the last ten or so years.
The second statement that concerned me was that around 10% of farmers accounted for half of the estimated $33 billion dairy sector debt and that these farmers might struggle to meet interest payments if payouts remained low and went even lower.
But why do either of the above statements matter to this author? Fonterra is large internationally but a giant domestically and as a result, any good or bad from this company ultimately flows to our domestic economy and onto our society.
The cliché "teach an elephant to dance" resonates here. What is to stop China turning up their domestic milk supply having learnt best practice from the world dairy champions, us New Zealand? What is to stop other countries ramping up their own domestic production levels? It is essential that Fonterra thinks smart and big, nimble and strong and from "blue-sky down" and "future-back." I know that Fonterra means "spring from the land" but maybe the thinking and vision needs to come from a different angle and far loftier height.
In 2008, the Finnish communication company Nokia has a smartphone market share in excess of 40% compared to just over 30% for Samsung and around 15% for Apple. Boy, how things have changed. In 2016, Nokia as a business no longer exists; a dramatic collapse within 10 years. It is argued by many that Nokia was a great hardware company but less great on the software side and this contributed much to their rapid demise.
It can also be argued that pre the smartphone era, Nokia had such dominance in the market place and for so long, that hubris and a need for genuine innovation no longer genuinely existed within their ranks. Whatever the reasons a company with vast R & D resources and market share became owned by Microsoft.
Rick Starr from the University of Auckland and marketing expert once provided a great analogy to why New Zealand is not as worth as it should be. To paraphrase Rick, we spend 15-20 years growing a tree which we then sell as raw material to Asia for let's say $100. Within a year, the same material is back on our shores as furniture but now subsequent to value-added, the tree is now worth $300.
Is it conceivable that Fonterra's extraordinary dominance in global dairy might ultimately be its Achilles' Heel? The bigger a company gets particularly in the face of no or limited competition, it is not surprising that the mood becomes one less of innovation and determination. As in sport, it's a lot tougher to stay on top than it is to get there in the first place.
If Fonterra was better known for its innovation, size and as a significant value-added proposition, it would bode well not only for the company but also New Zealand and its citizens.
Fonterra, please be big but think big and think smart! The sky might be a good place to start.