'Attacked from all sides'

Fonterra Australia 'attacked from all sides' says managing director Rene Dedoncker


Agribusiness
FIGHTING FIT: Fonterra Australia managing director Rene Dedoncker says the Australian business is very strong but has suffered attacks from every direction resulting in figures that do not reflect its true performance.

FIGHTING FIT: Fonterra Australia managing director Rene Dedoncker says the Australian business is very strong but has suffered attacks from every direction resulting in figures that do not reflect its true performance.

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Fonterra Australia is rebuilding to become a very profitable business that will one day restore farmer trust says managing director Rene Dedoncker.

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Fonterrra Australia managing director Rene Dedoncker doesn't underestimate the challenges his business faces.

"We're being attacked, I guess, from all sides," he told Stock & Land.

But despite drought, reputational damage and competition for milk from thirsty white milk processors, he insisted the local arm was strong and fitted with the besieged cooperative's new NZ-first strategy.

Mr Dedoncker also knew its supply base was vulnerable.

While national milk production declined 5.7 per cent last season, Fonterra Australia's milk collection fell by 20.3pc.

Read more stories on the Australian Dairyfarmer website

"We've got about 18pc of the milk supply, which is about 1.5 billion litres," Mr Dedoncker said.

"You know, if you go back sort of three or four years, that's about what we were as well - we've sort of gone full circle - and we did hit a peak of 2 billion litres.

"So look, you're right, the maths speak for themselves, to some extent.

"About half of our loss, or to half of the change is due to specifically to our share of milk that's affected by drought.

"Where we've had another impact, though, and perhaps more so than some others, is that because the white milk companies that just put white milk into bottles, particularly in the north, have had to come hunting for milk.

"So we haven't just lost our share of the drought-affected milk, we've lost through competitive tension to the white milk players that prepared to pay a lot more for milk than we are.

"We've had to make a compromise on how much milk we want to retain and that's why we've come up with our approach to specialty milk pools to make sure that we can pay above the odds where we get something back for it.

"But our farm gate milk price can't compete with some of the prices that we've seen from some of those white milk players.

"And then you've got the other added element of third parties.

"We've got third party milk brokers that are three and four-fold the size they were last year because the squeeze on milk has meant that it's a valuable commodity.

"We're being attacked, I guess, from all sides.

"And I guess that's been a wake up call for all of us.

"We've had to work out where do you draw a line, what actually enables our business to work?

"And at 1.5 billion litres of milk, would I like more?

"I would like some more but, does it work, you bet it does.

"In quarter one of the new year, we're profitable, our earnings are covering the milk price and we're providing a modest dividend. So we're making it work."

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Reputational damage from its role in the dairy crisis had also impacted Fonterra Australia, Mr Dedoncker said.

"Trust is something that can take many, many years to rebuild," he said.

"Our job is to be consistent, to make promises that we can deliver on, to pay a competitive farmgate price.

"And over time, you know, my belief is that consistency will turn back into confidence and, one day, confidence becomes trust.

"But it's a journey.

"Right now I'm focused on being consistent, we do what we say will do and that's how we hold ourselves to account."

When asked about verbal assurances Fonterra had made at Australian supplier meetings that it would not step down despite no written guarantee, Mr Dedoncker said it was hard to imagine any set of circumstances that might cause a price drop.

"We've signed up to the code of conduct and that already puts a stake in the ground," he said.

"And we've said it verbally at all of our farmer meetings...so the reality is that we're on - all processes are on notice - to behave correctly.

"I can't imagine a situation frankly, where that's possible, it's only if you really push, you'd say, it would have to be something that's not in our control, but in the control any other processes, but some global force that, you know, has a massive impact on the industry ... the reality is, we don't want to go back to 2016.

"That's not the business we run.

"What we want to do is make sure that we honour the commitments we make and that's what we're doing.

"We've been doing it now for, you know, since 2016, we've certainly been doing that, and will continue to do it."

Despite strong NZ-first rhetoric from Fonterra global chief executive Miles Hurrell that it will focus on NZ milk rather than international milk pools, Fonterra Australia remained important, Mr Dedoncker said.

"The New Zealand strategy is all about maximising the value from 18 billion litres of milk out of New Zealand and we play a complementary role to that," Mr Dedoncker said.

Many Asian customers wanted a dual source of supply "as a precautionary measure".

"Typically, grass-fed has beta carotene in in the product and that is the flavour profile that customers in Japan love," he said.

"And the two places to get that from that are close to home in New Zealand and Australia."

Fonterra's financial results showed the gross margin for the Australian ingredients business fell 87 per cent - from $77 million to $10 million, while the local consumer and food service element was profitable.

Asked about the source of milk for the more profitable consumer and food service business, Mr Dedoncker said that, in the last 12 months, Fonterra manufactured about just over 400,000 tonnes of product in Australia and brought in about 70,000 tonnes from New Zealand.

It supplied supermarkets with category-leading brands, including Western Star butter, Bega cheese and Mainland, as well as culinary versions of the products into 80,000 food service outlets.

"We have great market share, we're number one or two in all of those segments and it's very successful, and it's growing, it's very profitable," he said.

"The ingredients business is also actually a business that does very, very well, the challenges we've had in the last 12 months, particularly, are that we've had a number of one-offs that have affected our earnings."

Read more stories on the Australian Dairyfarmer website

The story 'Attacked from all sides' first appeared on Stock & Land.

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