Fonterra

Fonterra, the coveted pearl of the Pacific New Zealand dairy producers are like the All Blacks, the 2011 Rugby World Cup champions. This national sport, a football cousin, is practiced without helmets or shoulder pads. At the national level, breeders do not have any state aid, since subsidies were destroyed in the 1980s. And like their gamers, they play their livelihood without protection on the international market.

The secret to their success is their cooperative, Fonterra, the world's leading exporter of dairy products, but its control may escape them, like a ball too slippery. Since then, the new giant trans cooperative has formed 90% of milk production in the country. The domestic market accounts for only 5% of this volume.

All the rest is exported in powder form. Last October, the company celebrated its 10th anniversary with record sales of NZ$19.9 billion (CAD $16 billion), a price of milk paid to the producer and historical dividends! However, you must have the heart and stomach firmly hung to be a lai-tier producer in this country, warns New Zealand farmers are like the All Blacks, champions of the 2011 Rugby World Cup, a game that is similar to football, but that is played without protection (no helmet or shoulder pads...).

Their livelihood is directly related to the Yoyo prices of milk powder or other ven-foods - due by Fonterra on the international market. Compared to last year's, Mr.Gryer's revenues will melt by more than $ NZ $100,000 ($80,000 CAD) in 2012. The latter has a small herd, 180 cows, while the average in the country is 386 animals. u do you know who Fonterra belongs to?" asks Andrew Cryer.

The tone of the dairy producer is dry. After 71⁄2 p.m. on a plane to cross the 14,000 km between Montreal and New Zealand's main city, Auckland, I am brought back to land unlico. "To dairy producers," I say. Fortunately, that is the right answer.

Otherwise, I think I'd have left his farm in a flat flight."Most of the time," says the farmer, "people think our cooperative is a government organization."The stake of the hour for the 10,500 Fonterra member breeders is the threat of moving into a company listed on the Auckland Stock Exchange. As a result, they would lose control of their cooperative to be subject to the dictatorship of shareholders.

Fonterra was born in 2001. The New Zealand Parliament passed a law called the Dairy Industry Restructuring Act (DIRA), which allowed the merger of the country's two largest cooperatives and the Dairy Board, a single selling point for dairy products on the international market, similar to the Canadian Wheat Board. E Texts and photos by Nicolas Mesly PHOTO: ISTOCKPHOTO "FEBRUARY 2012!"The Farm Co-operator 45 Dossier Fonterra Andrew Cryer holds hard as an iron to ensure that Fonterra's control remains in the hands of producers.

"We have built an extremely efficient business, and investment companies would like some cream," he says. New Zealand Population: 4.3 million Dairy cows: 4.7 million Sheep: 32.6 million Source: Statistics New Zealand, June 2010 2008. But the sale of these products represents just under half of its income. Cooperative - rative is much more than just a regular powder seller.

Its international network of researchers has developed high-value dairy ingredients that are very lucrative. This is the case with an excipient popular with pharmaceutical giants. This product, a lactose derivative, is used in the manufacture of certain pills to mask their unpleasant flavour and facilitate their absorption. More than half of Fonterra's revenues come from the sale of these super-ingredients and consumer products.

Milk, ice cream, cheeses, yogurt, of course, occupy the shelves of the supermarkets of New Zealand, but also of the Australian neighbour. According to a country's demographic profile, the cooperative will sell more milk formulated to fight osteoporosis of an aging population or of milk formula for infants. Fonterra conquers the planet with stra - tegic alliances, for example with Dairy Farmers of America (Nestlé) to cover Latin America. It also plants its flag in the second economy of the world, China, where it builds a third dairy farm.

And it is looking back at India, the world's largest dairy producer, whose population will soon surpass that of the Middle Empire. Today, one third of the milk processed by the cooperative is outside New Zealand. It was announced only on November 17, at the general meeting, that it would release the cooperative's governance after eight years in office. Since then, Fonterra's staff has come back to the burden by proposing a new capital structure to its members, always with the aim of eliminating this costly risk of redemption.

This strategic plan establishes a market for traded shares between producers, known as TAF (trading among farmers). "Thanks to the TAF, Fonterra will no longer have to pay back the producer, and it transfers the risk to the outgoing farmer. It is he who has to sell and find a buyer for his shares," says Bill Hanson.

The problem is that the price of shares is lower if many producers sell their share at the same time in case of another large dry-house or to join the ranks of a competing company. Moreover, the plan provides for the establishment of a parallel market, called Shareholderss & Fund (SHF), which would allow investors of any kind to buy shares of Fonterra, but without the right to vote. This new plan would allow farmers to keep control of their cooperative while being certain of having buyers for their shares. u C'est que qu'en 2011 le total du prix du lait paid à la farm et des dividends collectés sapproche au prix minimum touché par les cherches canadiens, i.e. $ 7.90 NZ per kilo de MG or $70 NZ lhectolitre (CA$55 lhectolitre).

The Kiwis have reached the lowest production costs in the world developed by relying on a pastoral diet. New Zealand is six times smaller than Quebec, but it remains a vast pasture planted in the middle of the Pacific. Nearly five million cows (13 times the size of the Quebec herd) graze there year-round. In this temperate climate, no expensive stables, vertical silos, moulded or large tractors are needed.

The result is that farmers are getting good pay for quickly clearing their debts. And they have made Fonterra the world's most formidable milk processing machine. Fonterra is certainly selling milk powder in all its forms and cheddar cheese to the international market. This is partly through the Global Dairy Trade1 exchange, which it created in The Achilles Heel "Fanterra is vulnerable, because producers can sell their shares at any time.

And the cooperative has an obligation to buy them back," explains Bill Hanson, Fonterra's liaison officer, who met at Mr. Unlike Canadian farmers, who produce under quota, New Zealand farmers can deliver all the milk they want. This volume is based on the shares they hold in Fonterra. The principle is simple: one share = one kilo of MG.

"I deliver 74,000 kg, I own 74,000 shares in Fonterra," says Mr. The share price is set by an independent company, and at the current price of $4.52 NZ l'action, Cryer has a $334,500 NZ ($262,650 CAD) share in his cooperative. The more successful it is in international markets, the more a farmer will buy shares to grow his herd and produce more milk. But the opposite can happen.

In 2008, Fonterra had a bad-go-round game, and she had to give her members $ 700 million NZ (CAD 550 million) to give back to her. A severe drought fell on the country, and the producers were unable to deliver their full volume of milk. At the same time, the world was plunged into the worst economic and financial crisis since 1929.

Also, farmers sold their shares massively to deal with the storm. "Bankers consider it very risky that very large sums of money go and come from the cooperative and its members. This is detrimental to its financial health," Hanson continues. "The company's debt ratio has broken the 60% ceiling while a conservative index is almost 40%.

Bankers then demand higher interest from the cooperative to cover its borrowing and other financial activities. To eliminate this risk, the chairman of the Fonterra board of directors, Sir Henry van der Heyden, proposed a solution: to demote the cooperative to register it on the stock exchange. The company could thus carbide in part with the money of the shareholders. He received a non-categor - gorique from its members!

FUSHING the position as a member of the Board of Operations on the stock exchange of Auckland, his position was perceived as a conflict of interest. He resigned from this position on the stock exchange in 2009. But 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Market Price $ NZ / kg MG EVOLUTION OF THE LAIT PRICE PAYED TO PRODUCERS Ristourne Fonterra 2002 2003 2004 2005 2006 2007 2009 2011 $ NZ / share EVOLUTION OF THE VALUE OF A FONTERRA Rang ACTION Transformer Country US$ 1 Nestlé Switzerland 28.0 2 Danone France 16.4 3 Fonterra New Zealand 12.1 4 Lactalis France 12.0 5 Friesland Campina Netherlands 11.7 6 Dean Foods United States 10.9 7 Dairy Farmers of America United States 9.8 8 Arla Foods Denmark/Sweden 9.1 9 Kraft Foods United States 7.0 10 Unilever Netherlands/United Kingdom 6.7 1 SIGAR 11 SAGUT Canada 5.7 12 Meiji Dais Denmark 9.9 9 Kraft Foods United States 7.0 10 Unilever Netherlands/United Kingdom 9.9 5 FIGAR 9 9 FIGAR 9 FAR 9 FARS/S 9 FARS

Exports of dairy products account for 30% of the country's total exports. And the economic weight of the dairy sector exceeds that of fisheries, forests and mines. 1 www.globaldairytrade.info Fonterra employees order on the shelves of a grocery store in Christchurch. The price of a two-litre 2% milk container ranges from $3 to $5.50 NZ ($2.40 to $4.40). LAIT PRICE SURVEY New Zealanders find that they pay too much milk, cheese and butter!

Three different public surveys are looking at the issue: according to a New Zealand Consumer Association study, these commodities cost 50% more than they were five years ago."We are told that dairy prices are linked to the price of goods sold on the international market, but when the price of the goods decreases, there is no difference at the grocery store," says Suzanne Chetwin, Managing Director of the association.

FONTERRA MENACED ON ITS PROPER TERRITORY "I didn't have $ 1.6 million NZ to buy shares of Fonterra. But it's not said that one day I won't be a member of the cooperative again," explains Chris Lewis. In 2005, this 36-year-old producer wanted to grow his herd from 336 to 1000 cows. He went on to work with the competitor, Open Country.

The farmer is partly owned by Singapore's interests, and pays the kilo of milk 20 cents less than Fonterra. But the farmer considers his choice wise, since he did not have to sever to buy shares of the cooperative and pay the extra bank interest charges. Far from denigrating Fonterra, he considers on the contrary that the giant obliges private companies to be more efficient and to pay the milk a reasonable price.

To retain young and talented producers like Chris Lewis, Fonterra provides for the possibility of buying its shares over three years, as part of its capital restructuring plan. Alan Robb says the real threat to Fonterra lies in his own territory. Seven major dairy companies compete with the cooperative – one Russian and one Chinese – and attract the expertise of its producers.

The son of a third generation sheep producer, John Gregan, a former rugby player, traded his 7,500 sheep against 1,000 cows in 2007, "to be part of Fonterra's success." Over the past five years, more than 750 sheep and beef cattle farmers have converted to dairy farming for this reason. However, the fulgurant development of dairy production is not just a happy one."Grain prices have risen as a result of the growth of the dairy industry," says Ian McIntosh, managing director of FreshPork Farms, one of the country's two largest free-bred hog producers.

Many already rare cereal lands are converted into pastures. Landcorp, a state-owned company, has not hesitated to shave 25,000 hectares of forest in the North Island to set up dairy farms, which has attracted him the lightnings of the ecologists. THE TERRE PROMISES LAITIER ElevORS "I worked three years with a breeder to learn my job. With my salary, I built a core of 150 very good cows.

This was my starting capital," says Matt Ross, a 36-year-old agronomist who graduated from Massey University in 1998. From 2001 to 2005, he and his wife, Julie, also an agronomist, doubled the size of the herd from 520 to 1100 cows. In addition to the animals, they provide the labour. And they share the income from the sale of milk 50-50 with a farmer who owned the land and the infrastructure.

Then they sold 300 animals to buy their own land. Fifteen years after its beginnings, the couple owns four dairy farms and a herd of 2,000 cows. This system of income sharing between established and beginner breeders is called "Sharemilking System" (SMS). This agreement allows those who are not sons of farmers to climb the scale in the dairy hierarchy and establish themselves in this production. (Note: The SMS contracts are available on the site of Federated Farmers, the New Zealand counterpart of the UPA: www.fedfarm.org.nz/ourshop/contractsandagreements.) ENVIRONMENT: PRODUCERS TO SEE THE BLANCHE PATTE New Zealand producers experienced a week of horror last October.

A break in a gas pipeline that supplies the 86 Fonterra plants in the North Island stopped operations, as the company collected 80 million litres of milk a day, in the midst of a peak of production. Greenpeace criticizes the giant cooperative for its dependence on fossil energy. More than 30 million litres of milk had to be poured into the wild every day.

Several other organizations accuse Fonterra of tarnishing New Zealand's green image, whose economy is also based on tourism and the film industry. (After producing the trilogy The Lord of the Rings, it was shot last fall Bilbo the Hobbit.) In 2003, Fonterra signed an agreement with the government to protect the watercourses. The cooperative set up an intervention unit composed of some 30 experts to assist producers in their environmental management.

According to Neil Deans of Fish & Games, producers have made efforts to close their fields and prevent animals from accessing rivers and lakes, "but there is still a large core of black sheep." The quality and quantity of water has become a major issue for the Kiwis. The growth of the dairy industry will not be possible without a new social contract."Why did the general public buy out of Fonterra's shares?

The shares without voting rights are generally sold at a discount. In the long term, these members will demand more returns. And they will press for a lower price for milk paid to producers. These will be the big losers!" says Alan Robb, a consultant specializing in financing, governance and ethics of cooperative business, met in Christchurch.

The future, cooperative or not? "The huge success of Fonterra in New Zealand was achieved under the cooperative model. But its rapid expansion abroad is done under the corporate model," the expert analyses. And this does not go without slipping.

In China, Fonterra was splashed in 2008 by the melamine scandal, a toxic resin derived from urea that mimics milk proteins. An investigation by the Chinese authorities revealed that of the 109 plants inspected, 21 manufactured melamine-contaminated milk, after the product had caused the death of six babies and rendered 300,000 sick infants. Fonterra, which owns 43% of the Chinese manufacturer San Lu, alerted the authorities about this common practice in the country (see page 50 "The man who created a Fonterra").

Robb, Fonterra could have avoided this scandal if she had taken the time to train producers and found cooperatives."Dither as China has just passed a Canada-inspired cooperative law to prioritize its development." Also auxiliary professor at Saint Marys University in Halifax, Nova Scotia, the latter judge that if Fonterra wants to remain a cooperative, it should change its global business mode. Fonterra's new recapitalization plan was approved by a majority of producers in June 2010.

However, a minority of them see this plan as a Trojan horse that would make them lose the reins of their cooperative - a plan that must be endorsed by the New Zealand Parliament, since we must change the DIRA. But the elections of November 2011 delayed the process. The game will therefore be played in 2012.

If New Zealand producers do not want to lose their "Pacific pearl," they will have to review their strategy based on the All Blacks. u 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 CHANGES IN CHANGE RATES (NZ$ / US$) 0.4 0.5 0.6 0.7 0.8 "I am against subsidies, they are distorting market signals!" says John Gregan. The New Zealand government abolished public aid to agricultural producers in the 1980s. Annual rain precipitation is not enough to grow Matt Ross' pastures.

The latter controls the entire irrigation system of its four farms from its cell phone. L'eau is drawn from the Waikati River, whose dam provides a significant share of the country's electricity."I have to manage my herd of 1000 cows as if I had 40," says Chris Lewis, who relies on the farm's computer system for data collection. The loss of weight of animals regularly recorded is an alarm signal on the state of the animals.

According to him, the challenges of the new generation of producers, besides having the sharp pencil, are the environment and the management of personnel. According to Simon Boxer of Greenpeace, Fonterra is the third coal user in the country, who burns to dry milk powder in the factories of the South Island. In doing so, the cooperative is one of the largest emitters of GHGs in the country. Moreover, it buys a quarter of the palm oil meal sold by Indonesia for feeding dairy cows.

"Faterra contributes to the deforestation of this country in favour of palm groves," he says. (Source: Fonterra Annual Reports) Note: The author thanks Glenys Christian, editor-in-chief of the New Zealand Dairy Exporter, for his assistance in the production of this report. 48 Agricultural Co-operator: February 2012 Alan Robb, an expert in cooperative business, considers that the exchange rate is currently favourable to Fonterra's exports. And that there are more serious threats to the co-operative's financial health than a possible increase in the value of the New Zealand dollar compared to the US dollar.

FEBRUARY 2012: Farm Co-operator 49 Fonterra LCA Fonterra sells products that vary in price in the international market. How do you reduce risks? AF By extracting the maximum real value added from each drop of milk. More than half of Fonterra's sales today are made up of consumer products and specialized ingredients.

And just under half are products like whole milk powder, cheddar cheese, etc. LCA Consumer products have become Fonterra's locomotive? In recent years, these products have grown by 20% annually! We are focusing on three regions: Australia–New Zealand, Asia (China and Middle East) and Latin America.

We forget Canada, the United States and Europe because these markets are ultra-protected. LCA What is the recipe? AF Fonterra's success is based on developing and controlling the supply of milk from the farm to consumers. In Latin America, that's how we operate.

We don't deal with cooperatives, but we help producers improve their production. LCA What has gone wrong in China so Fonterra is involved in the melamine scandal? AF In China, thousands of producers have a few cows and bring their milk to collection centres. If you dilute milk with water to increase the volume, you get caught right away.

Melamine was used to mimic dairy proteins, which was happening throughout China. We denounced it with our Chinese partner, San Lu. LCA.

Recently, the Chinese Prime Minister thanked our Prime Minister, John Key, for alerting the authorities. Fonterra is seen as an honest company in China. And our sales even increased as a result of the scandal. LCA In Canada, the three large Western grain pools were all demutualized to ensure their growth.

Will Fonterra be in danger of experiencing the same fate? AF Fonterra's cooperative status is not negotiable. Producers want to keep control of their cooperative. LCA But is Fonterra not vulnerable to the mandatory buy-in of its members' capital?

In 2007-2008, we had to hand over $NZ 700 million (CAD [550 million]) in capital to producers. We had experienced a severe drought. Producers were disposing of their shares, because they could not deliver their milk. And we were entering a global financial crisis.

LCA What was your solution? AF Create a market for shares between producers, the TAF [Trading Among Farmers]. The cooperative will no longer have to repay the producer who wants to sell his shares. It will run the risk of finding a buyer.

AF Create a parallel market, the Shareholders' Fund (SHF). The general public will be able to buy shares without voting rights, i.e. a dividend right, just like Bombardier does in Canada. Producers will be able to sell their shares in one of these two markets. And the combination of these two markets will provide liquidity to producers.

LCA Where is Fonterra in this process? AF Producers have approved this plan in the vast majority. A very small minority is against it, but it makes a lot of media noise. It is expected to be approved by the New Zealand Parliament in 2012.

LCA One last question: Do you think Canada's supply management system will last a long time? AF Canada is now committed to protecting its supply management system by imposing cheese standards, as a fantastic free trade agreement, called the Trans-Pacific Partnership (TPP), is being negotiated, and will cover all of Asia!

Canada has been told that it could only participate if it was reforming its dairy sector. One cannot claim to be a trading nation and want to freely sell wheat, barley, beef or pork, while maintaining a status quo in the dairy sector. The Agricultural Co-operator When did you land in the direction of Fonterra? Andrew Ferrier Fonterra was born in 2001 from the marriage of two co-operatives and the Dairy Board, the exporting arm.

I arrived in 2003, two years after its official creation. I fell into a completely dysfunctional business. AF There was an absolute climate of distrust between the various actors. Marriage between three business cultures was very difficult.

The producers had made a compromise by appointing one of the two co-operatives and one of the other's chief executive officers, and they had given themselves a two-year period to get things right. Then they planned to recruit a chief executive officer by looking around the world. LCA Why did the producers appeal to you?

AF J-I had a very great experience in agribusiness international. I started my career in Montreal as a sugar broker before becoming president of Redpath. Then I was chief executive officer of Tate & Lyle North American Sugar, whose business covered Canada, the United States and Mexico. I was not looking for a job when I was contacted by head hunters.

But New Zealand is a beautiful and welcoming country. J-a-took a huge poten - tial for Fonterra. And the producers gave me the benefit of the doubt. AF J-a-teased old rivalries and builders of personal empires.

Of the seven top executives, I fired six. There were hundreds of departures. And I infused new blood. I wanted to create "a Fonterra".

This mantra is based on four main values: 1) cooperative spirit, 2) integrity, 3) surpassing the results by action, 4) results by action. LCA So you have instilled a new culture? It took three or four years. Today, two thirds of our staff are the result of internal promotions and a third is recruited outside.

LCA What about the business? AF The crop had to be changed, which was limited to producing milk. There were also seven different computer data management systems.

The new farmers have given the reins of their emerging co-operative to a Canadian, Andrew Ferrier. When he left his post last September, the man left behind a company with sales, a price of milk paid to producers and record dividends! L'homme who created "a Fonterra"

PHOTO: FONTERRA 50 The Agricultural Co-operators