Thursday, 30 July 2015

Fonterra - what went wrong?

Fonterra has not performed well, either objectively or in comparison to expectations at the time it was formed. Higher value branded products were supposed to provide farmers with a natural hedge against the vagaries of commodity dairy prices but that just hasn't happened in almost 15 years of trying.

Why not? That's what Fonterra's farmer-shareholders need to know, because you can't fix something until you know what's broken. There are really only two potential explanations.

One is that Fonterra is/was capital constrained. Sure, we could drop US$100m on San Lu in 2005 and $500m on Darfield in 2012 and $750m on Beingmate in 2015. And yes it's true that we pulled in $500m from the IPO in 2012, but we need much more capital to deliver on the original dream/vision. If this is true, we need to hear it loud and clear from the management and board. And since they haven't told us it's true, I'm going to assume it's not.

The only other explanation is that we had enough money but spent it on the wrong stuff. Mistakes happen as all farmers know. But when they keep happening year after year (x15), something is seriously wrong. Brian Gaynor's recent analysis hints at the underlying problem by comparing Fonterra's consumer revenue with the number of staff earning more than $100k per annum.

All those extra thousands of well-paid people have not translated into higher value-added revenues. Again we have to ask: why not?

In my view it is quite likely that Fonterra has fallen victim to managerialism, an elitist doctrine that constrains shareholder power by ensuring that "managers, not owners, ... get the final say in corporate decisions". Three facts support this view.

  1. The flow of information between Fonterra and its owners is almost entirely one-way. Farmer-owners are told/sold stuff by managers but we are rarely, if ever, asked for our views on the company's direction, major decisions or methods of operation except where required by the constitution.
  2. TAF was designed to make capital management easier for managers and harder for farmer-owners. Time-smoothing flexibility over the share standard was always under Fonterra's control but managers preferred TAF and were able to push it through.
  3. The head count of highly paid staff has ballooned without a commensurate increase in value-added revenues.
The imminent staff cull is way overdue and when you look at the above chart, 500 jobs (averaging $114k each) doesn't seem a lot compared to the previous blowout in well paid staff.  But if you think the cull might undermine the managerialism hypothesis, you'll be interested to hear how the CEO described the role McKinsey played in it:
"...hard-nosed outside consultants who have given what Spierings dubs a private equity view of the company and supported management to make some tough calls."
Got that? We pay Mr Spierings quite a lot of money each year, but he still needs to pay lots of extra do$h to managerialist mates before he can sack members of his own (manager) class.

Monday, 27 July 2015

Monitoring Leviathan

Dairy farmers in New Zealand are coming to terms with a second year of poor milk prices. Those who are full members of Fonterra are accustomed to the idea that when milk prices increase, profits in the firms value-added (e.g. branded) products fall, because the input price or raw milk has increased, and vice-versa. However in this particular slump, there has been no real offset from higher value-added profits.

Some farmers are grumpy.

There are not many ways this grumpiness can be expressed. Fonterra is so big that it's impractical for Directors to interact personally with the 10,000 shareholding farmers. So the main channel is through the Shareholders Council (SHC) which represents the interests of farmers through councillors elected in 35 wards around the country.

This system makes a clear distinction between representation (which occurs through the SHC) and governance (the role of the Board). It should allow us to elect the best directors and keep an eye on their performance. It also creates a clear channel for grumpiness: call your local councillor and get him/her to represent your views further up the food chain.

The main job of the SHC is pretty clear on its webpage:
The Council’s key responsibilities include monitoring the performance of the Board on behalf of and representing the views of all Fonterra Shareholders as suppliers, owners and investors. (emphasis added)
Contrast that with the view of the new Chairman of the SHC, Duncan Coull, as part of (otherwise sensible) comments on the forthcoming Board elections.
Coull said he was uncomfortable with the council being described as a "watchdog" for the interests of Fonterra's 10,000-or so farmer-owners.
I really hope Duncan reconsiders this view, because it makes him sound in awe of the Board and management rather than someone dedicated to representing farmer interests by holding them to account.

Friday, 17 July 2015

Allow Unicorns Now

When will governments finally grow some backbone and stand up to the anti-unicorn brigade?

The lack of unicorns is a crime against humanity, depriving countless children of the pleasure of having these cute little pets.

Worse, this is a hidden scandal because the unicorn haters never actually declare themselves or form organisations that we can demonise. They just proceed as if they have some kind of god-given right to avoid supporting unicorn research and the development of these wonderful creatures.

Everyone knows that unicorns are perfectly safe. That pointy bit on the front defines the unicorn but there is no peer-reviewed science that proves unicorns are any more dangerous than regular ponies. So don't even start whinneying about safety.

Honestly, the way people just flagrantly ignore them, its as if unicorns don't even exist. But they do. We have the pictures, concept drawings and plenty of market demand. Once the government stops blocking our funding there will be breeding plans. Unicorns are not quite market ready; I'll grant you that. But so what? I'm pretty sure that Patrick Moore will be keen to front our anti-anti-unicorn campaign too, after which success will inevitably follow.

Wednesday, 15 July 2015

Golden Vapourware

About 10 years ago I did some analysis for a guy on the other side of the world who reckoned he'd cracked the carbon emissions problem. He wanted an estimate of the value of his technology and somehow I'd ended up in his path as an economist who could do such things.

Obviously I had no clue whether his thing worked or not because it was new technology, fresh out of the lab, and I'm just a humble economist. So I put a big caveat on the front of the report saying IF this works, its value is roughly this enormous number.

I never quite figured out whether he believed his own hype or not, but for a while after that I was fielding calls from potential investors, trying to hose down their expectations and drawing their attention to that great big IF statement, the significance of which they'd all somehow missed.

The experience made me think there's a pretty big market for vapourware that targets things we want to believe, like the idea that technology will save the planet in some way. The business model is to suck cash into R&D for a grand plan that sounds promising and might just work. Investors look forward to doing well by doing good and are willing to commit cold hard cash.

For all we know they might actually succeed. That's the thing about R&D: the outcomes are uncertain by definition. We're all lucky that brave souls dive into it because some of them do succeed and when they do the world can become a better place.

But. It's pretty annoying when those brave souls try to change the world before they've succeeded. And here I'm thinking particularly of that gosh darned golden rice. Somehow lots of people have got the idea that golden rice is ready to go. Such as this guy who reckons it's been ready since 2002, and of course this guy who famously decided not to drink the roundup after all.

Maybe they're really busy mounting emotional campaigns to blame anti-GMO folks for killing poor people, because they're obviously not reading the science updates from the actual scientists who are still working on developing the actual golden rice which doesn't actually work yet in the way they'd like to claim it works. Here's the link. It's an easy read but here's the key passage:
Golden Rice will only be made broadly available to farmers and consumers if it is: (a) successfully developed into rice varieties that retain the same yield, pest resistance, and grain quality—agronomic and eating traits acceptable to farmers and consumers—as current popular rice varieties; (b) deemed safe and approved by national regulators; and (c) shown to improve vitamin A status under community conditions.
Got that. It doesn't work yet.