Fonterra boss Dedoncker: We’ve learnt our lessons

rene-dedoncker

“I’m a realist. I can’t change what happened but I can make a difference going forward,” he says of the dairy industry crash of last April. It saw Fonterra slash its farmgate milk price by two-thirds from 43c a litre ($5.60 per kilogram of milk solids) to a mere 14c/l ($1.91/kg) in May and June, after claiming its farmers had been overpaid for most of the financial year.

It was a harsh and destructive move — following benchmark processor Murray Goulburn down in a race to the bottom — that threw the Victorian and Tasmanian dairy industry into chaos, forced many farmers to quit and left hundreds shaken and burdened by huge debts.

In his first interview since taking the helm of Fonterra Australia six months ago, Dedoncker does not try to make light of the crisis caused by the Murray Goulburn and Fonterra price cuts, which he refers to as “the event”.

Nor does he try to gloss over the devastation it wrought on Fonterra’s 1200 farmers, who supply Fonterra’s seven local milk processing plants.

The Fonterra boss says he has sat at too many kitchen tables and dairy supplier meetings around Victoria and Tasmania, where Fonterra’s operations are based, talking to farmers and their families, and believes things would get better. “It’s certainly been a baptism of fire. Farmers don’t mince words and you cop the full raw emotions — anger, disappointment, bewilderment. It’s when the kids talk about the effect on their parents, the family and their lives that it affects you the most,” Dedoncker, 49, said.

“I say that I can’t change their lives overnight, but that it will get better; that I can make incremental steps and reforms that add up to business transformation and a higher, more sustainable farmgate milk price.”

Dedoncker, who has worked for Fonterra for 11 years, most recently as head of its global food services business, also acknowledges what happened last year was wrong. Not wrong in the sense that the price correction had to happen, as global dairy markets had been at record lows for 18 months without a corresponding cut in Australian farmgate milk prices. The “wrong” admission is about how the price drop was achieved, with the savage cut delayed until so late into the tail end of the 2015-16 season that farmers had already spent their previous monthly cheques based on a much higher average milk prices to buy feed and equipment.

Although Dedoncker’s predecessor Judith Swales had been warning for more than eight months that claims by Murray Goulburn’s now-departed CEO Gary Helou of a year-end milk price of $6/kg were way too high, Fonterra was locked into a supply agreement attached to its acquisition of Bonlac Milk eight years earlier that it could not pay a price any lower than MG’s to its farmers. “The decision to move (the April price cut) itself was not the issue, but how it was done. It was the right decision but the time frame was all wrong,” Dedoncker admits.

“We had been signalling there had to be a price drop, but our hands were tied. The behaviour from MG changed in the previous 18 months and it created a bubble, which meant the milk price was unsustainable for far too long.”

Dedoncker says he has learnt hard lessons. The first is an obligation to change the way Fonterra sets its farmgate price to be independent and more reflective of global markets. The second is improve its relationship with farmers, regaining their trust.

“Farmers have a view about what we did and why, and I have to cop that; what I have learnt is that having your hands tied and not being able to make your own decisions is not a nice way to run a business,” Dedoncker says.

“We are pricing on our own this year — we will never let our prices be set by anyone else again.”

Not that the aftermath of the crisis has been all bad news for Fonterra Australia, the local arm of New Zealand’s Fonterra, and Australia’s second largest milk processor after Murray Goulburn.

Despite issuing a low opening milk price for the 2016-17 season last July of $4.75/kg (36c/l) — well below the cost of production benchmark of 38c-42c for most southern dairy farmers — improving global conditions have seen a small rebound occur.

Fonterra has been able to lift the average milk price it pays its local farmers to $5.20/kg (about 40c/l), the top end of all processor offers. It has also attracted some disgruntled farmers to its stable from Murray Goulburn, which continues to pay its farmers less than $5/kg for their milk.

Dedoncker said Fonterra Australia’s annual milk supply is now 150 million litres more than before the crisis, boosting its total Australian milk pool to 1.7 billion litres in 2016-17.

In contrast, Murray Goulburn’s supply of milk has plunged 20 per cent and continues to fall, as its farmers walk away. It’s a vote of confidence in Fonterra that has allowed Dedoncker to guarantee all seven Fonterra’s milk processing plants will remain open.

 

Source: TheAustralian

Link: http://www.theaustralian.com.au/business/companies/fonterra-boss-dedoncker-weve-learnt-our-lessons/news-story/ad99291f3287e7da06c0de9416d2007b

 

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