Sunday, 30 March 2014

Don't follow the money

Rod Oram is complaining today that Fonterra is just cashing in on the China-driven boom in milk powder. The co-op has been "stricken" with Dutch Disease in which by Rod's account
"The bonanza sucked capital and resources out of other sectors, drove up the exchange rate and generated excessive optimism and poor decision-making by companies, investors, government and consumers. 
Sounds horrible doesn't it. But let's think about it for a tick. The symptoms of Dutch disease are capital inflows leading to an over-valued exchange rate. There is fairly widespread acknowledgement that NZ's dollar is over-valued, some say by 20%. But how is that the fault of the dairy industry? I'd be more inclined to look at the nexus between monetary policy and real estate prices. Maybe Rod has a theory for how Fonterra's strategy is to blame for our high dollar? If so, I'd love to hear it.

Moving on, we get to the real substance of the piece, which seems to be a plea for Fonterra to not follow the money. Apparently these high prices are a bad thing:
"The high WMP price has caused havoc with Fonterra's finances and strategy in three main ways
Crikey. What could they be?  Here is the list

  1. Fonterra has missed out on some of the boom because it doesn't have enough milk powder making capacity. Funny, I thought Rod was arguing that we were doing too much milk powder.
  2. Fonterra couldn't afford to pay the modelled milk price because of #1 above. I discussed this last year, but again I'm struggling to see how this is a bad thing or something to blame Fonterra for.
  3. The high commodity price inflated the input cost for (added value) consumer & ingredients products so these made less profit. Sure, but isn't this just underlining one of Fonterra major strengths? It makes money from commodities when commodity prices are high and from other stuff when commodity prices are low. How is this bad?

When it comes down to it, Mr Oram is basically arguing that Fonterra should not earn good $ from commodities during high price periods. Leave those $ on the table for God's sake. Its all a trap.

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