The only saving grace is the milk price is still good but that’s also problematic. More on that later.
There’s been no end of speculation on what the latest drip-feed of information from Fonterra will mean for the firm’s future.
That might be part of the problem. Fonterra seems to have been releasing information through gritted teeth only when it has to.
It made it quite clear the public admission it couldn’t sell its Beingmate stake and would flog it off bit by bit on the Shenzen stock exchange was made only because the rules required it to do so.
Farmers could well be forgiven for thinking the board and management have a policy of telling people as little as possible for as long as possible in the hope all their troubles will magically disappear or someone will come up with a miracle solution.
But it ain’t happening.
Now, understandably jumpy farmers, having watch Westland being hocked off, are holding their breath waiting for the big reveal next month when Fonterra outlines it’s strategy.
It better be something with a lot of meat on the bones and contain detailed specifics rather than the generalised platitudes about being strong at heart and having confidence in the future that have been the fare so far. Anything else might bring lynching back into fashion.
But what can it do.
What it has signalled so far is that its overseas adventures have been less than delightful. Now pretty much all the overseas investments are on the block at marked down prices but, as Beingmate shows, finding takers might not be that easy.
And it can go only so far in flogging off assets before it impairs its earning capacity. It also needs assets against which to borrow desperately needed capital.
The logical progression is that if its overseas assets go and it pulls back from value-add products then it will turn itself back into what the Dairy Board used to be. That’s not what farmers were promised when Fonterra was set up.
Another option, which could follow on from the above, is that it splits in two. The co-operative is owned by farmers and supplies the milk to the other half, a company it wholly or partly owns. If it does that it would be sensible to get the non-farmer unit investors out of the co-op and into the second company.
That would be easier than buying back shares from unit holders if it simply wanted to return to being a true co-operative where only the suppliers are shareholders. But it is unlikely to have the money to buy back all those shares, even if they are worth only a fraction of what they should be.
Issuing them was a case of Fonterra and farmers, they voted for it, remember, wanting to have their cake and eat it. It was designed to remove the redemption risk and free up capital and make Fonterra more attractive to lenders. It would also allow farmers to access cash.
Those same farmers who voted for it are now bemoaning what the market has done to the value of their shares, which many of them will have borrowed money against.
But Fonterra has, to put it mildly, treated those investors shabbily. It is not paying a dividend this year and has demonstrated it will readily rob them to prop up the milk price. That has, quite rightly, devalued the share value and now farmers are stuck with shares they can’t afford to sell at such a low price because they owe the banks $42 billion.
In other words they are trapped in the co-op.
There’s another option of holding back money from the milk price to give the co-op the cash it needs but Fonterra has said it is not considering that.
And farmers have made it quite clear they won’t wear it. They have good reason for taking that attitude with more regulatory costs on the horizon and pressure from banks to repay capital but it doesn’ send a good signal to outside investors or lenders who will see farmers unwilling to support their own co-op.
They could also fully corporatise Fonterra and list it on the NZX. And there’s always the option of selling the whole thing. But that’s not an option farmers or the country want to contemplate so let’s hope the directors and managers come up with a sound plan to deal with the issues rather than just writing down assets and selling anything they can find buyers for.
We also shouldn’t forget many of those now claiming to have seen all this coming are in some cases those who held Fonterra up as a model for the meat industry to follow during the Meat Industry Excellence reform campaign. Ironically, Fonterra has the same issue that faced the meat industry of suppliers demanding high procurement prices leaving it little capital to reinvest or pay dividends.
