Fonterra’s China woes a concern for all Kiwis: Minister

Every New Zealander should be concerned about Fonterra’s problems with its China investments, says Agriculture Minister Damien O’Connor amid speculation that his early call for a review of the dairy industry could be significant for the big cooperative.

Asked for the Government’s view on Fonterra’s fast-deteriorating $756 million investment in China’s Beingmate infant and child food company following the review announcement, O’Connor told the Business Herald it was a matter for the farmer-owned company and its shareholders “but our reputation of course as a country is linked directly to Fonterra and its actions”.

“Every New Zealander should be concerned our single biggest company is struggling with a couple of its offshore investments.”

Fonterra, which has dividend-carrying, non-voting units on the sharemarket, bought an 18.8 per cent stake in the Chinese retailer in 2015. Fonterra has also invested about $800m establishing farms in China.

By September last year, Beingmate’s continuing poor performance saw the investment value cut to $615m on Fonterra’s books compared to market value just under $400m.

Last month, Beingmate said its expected loss would be far bigger than forecast – between $171m to $214m for the December year against a previous forecast loss of $75m to $107m.

Meanwhile, Fonterra’s capital investment of close to $800m in farms in China yielded just $1m in earnings before interest and tax in the 2017 financial year. This despite a $38m subsidisation of the farms’ operations by the ingredients division.

Fonterra said it was “extremely disappointed” at the Beingmate loss downgrade. Chairman John Wilson has been reported as being confident the Beingmate business could be turned around “over the medium term”.

Nearly three years after its investment, Fonterra revealed four Beingmate directors, including two of its own appointees, had expressed concerns about some aspects of Beingmate’s financial management and reporting practices.

Beingmate sells Fonterra’s Anmum product in China through a joint venture.

O’Connor has surprised industry watchers by putting on hold scheduled changes crafted by the previous government to Fonterra’s enabling legislation in order to allow a broader review of the $12.4 billion export dairy industry and whether it’s doing a good enough job of adding value to New Zealand’s biggest commodity.

A new review under the provisions of the Dairy Industry Restructuring Act (DIRA), which in 2001 enabled the formation of Fonterra from a big industry merger and deregulated dairy exporting, was not due until 2020-2021.

Industry leaders in 2001 said the merger would create a national export champion. The merger of the two biggest dairy manufacturers and the exporter Dairy Board gave the resulting company Fonterra 96 per cent of New Zealand’s raw milk supply. Seventeen years later that dominance has eased with the emergence of export rivals, but is still 82 per cent.

O’Connor said the review, to be led by the Ministry for Primary Industries and hopefully completed within a year, would look at “a large number of issues”.

When the Government and competition watchdog the Commerce Commission passed the ruler over the industry before, its focus has been on competition and capacity.

This time issues to be looked at would also include pasture-based versus intensive farming, corporate versus family farming and environmental matters, said O’Connor.
“The fact is, a lot has been done (environmentally) in dairy but not acknowledged.”

Industry watchers, noting that an industry review was held only recently, suggest O’Connor sees sufficient issues in the industry to make a broad review a priority and to measure whether the right regulatory and capital structures are in place to optimise returns to farmers and the New Zealand economy.

O’Connor backed up their theories, saying “it’s time for us to look at a large number of issues connected to the dairy sector”.

“I think there will be enough information and enough opinions around the country and internationally now to conduct a really useful process. ”

Fonterra’s investment of more than $850 million in a new plant in the past four years, largely in New Zealand which has flatlining milk production growth, is also expected to inspire questions in the upcoming review.

Fonterra was approached for comment on the review but did not respond.
Industry-good organisation DairyNZ was also asked for comment.

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