Fonterra in the World - Diplomatic Club Speech

“Fonterra in the World”

Graham Stuart
Chief Financial Officer

Diplomatic Club of Wellington

Duxton Hotel
Wellington

1.00 pm
Thursday 25 October 2001

Thanks for this opportunity to meet with you today, and for your interest in Fonterra. We want to keep in close contact with you, as representatives in New Zealand of many of the countries in which we operate internationally. Our CEO, Craig Norgate, regrets that he couldn’t be in Wellington today because of a board meeting. He recognises the importance of our relationship with the diplomatic community.

I can report that Fonterra Co-operative Group Ltd is now in business. For those of us who have been involved in the process from the outset, it has been a long, challenging year. We have had to bring two companies together, with a long history of fierce competition – and a fair bit of parochialism. We’ve had to bring them together with the Dairy Board’s business units – NZMP and NEW ZEALAND MILK – and put in place processes to ensure a fair result for the two smaller dairy companies, which are giving up their stake in the board’s assets. We have worked constructively with the New Zealand Government, which – throughout the process – took a common sense approach to our merger. And we now face the twin challenges of export deregulation and building a brand new company – Fonterra – to take off from where the old structure left off, in the next stage of the development of New Zealand’s most important industry.

We are often asked what people offshore will see as a result of the creation of Fonterra. Our immediate answer is: “we hope not much”. Customers in your countries looking for the world’s best ingredients will continue to buy them from NZMP, and they will be branded NZMP. Companies owned by NEW ZEALAND MILK will continue to supply consumers in your countries with fast-moving consumer goods, under the wide range of brands used before. We’ve told our teams around the world that it must be business as usual. Our 20,000 staff have a business to run – everyday earning one in five of the dollars New Zealand earns offshore. They must ensure our partners and customers continue to receive the high standards of service they have come to expect.

The difference is that our team is now all part of a wider group, Fonterra. They are collecting milk from 14,000 farmers around New Zealand, and some milk from offshore. They are exploring the components of that milk, to unlock its full potential. They are manufacturing it into dairy products, and other goods. And they are marketing products in 120 countries around the world. Whatever their role and in whichever part of our business they work, they are now part of one group.

We have a specific goal from day one, and that is to deliver on the Business Case that was put to shareholders and which they voted for. It outlines gains of over NZ$300 million a year, by the third full year after the merger. Craig Norgate has challenged us to deliver as soon as possible. The details of our Business Case can be found on our website, at www.fonterra.com It’s a very transparent plan.

The expectations for our company, though, go well beyond the Business Case. Our shareholders, our staff around the world, the New Zealand Government, and the wider community, all have an expectation that we will firmly establish ourselves as one of the world’s leading multinational dairy companies. Here in New Zealand, we seek to earn the status of a true New Zealand national champion. We want to be a valuable part of every community in which we work internationally. The expectation was that we would launch an aggressive strategy of acquisitions and alliances, and we have been able to finalise important deals since the shareholders’ vote in favour of the new company.

We’ve become the major exporter of skimmilk powder out of the United States, as a result of our export agreement with Dairy America. In Mexico, we have purchased two companies – La Mesa and Eugenia – making us the number one player for cheese and number three for spreads, in a dairy market that is bigger than China’s. In the Americas, due diligence for our alliance with Nestle is underway, to market shelf-stable and chilled milk foods and beverages. In the United Kingdom and EU, our alliance with Arla is designed to maximise the value of our Anchor brand in the very difficult spreads market.

We don’t see ourselves so much as a global company, as we do a multinational company. In different markets around the world, we will apply different strategies. In some markets we will go it alone. In others there will be acquisitions. In others there will be alliances. We’ll use the brands that are best for the market concerned. Our primary focus is to sell products made from New Zealand-sourced milk. Where appropriate – and particularly for the valuable fresh milk market – we will use locally-sourced milk.

We are a dairy farmers’ co-operative. And we are a multinational marketing company. And we are also an international capital investor. We seek to invest in those parts of the world, and in those product lines, where we see the best potential for profitable growth for our shareholders. We intend to be ruthless in our use of capital at home and internationally. We will sweat our assets and make strictly commercial decisions. Our shareholders are businesspeople and they have a very wide range of investment opportunities available to them. We are obligated to apply their capital only to investments where we are confident we can deliver superior returns. If we can’t, we should sell the asset and give the money back to them. That’s the perspective we are going to take as we manage our global portfolio of assets.

As a multinational, the policies your governments operate are inevitably a major influence on our commercial decisions. What policies your countries choose to pursue are ultimately your own business. We have an interest in them, insofar as they impact on our business.

We have never sought subsidies and protection from the New Zealand Government. Internationally, we seek nothing more than the same level playing field to be extended to dairy companies and industries. Ultimately, we want to see the end of subsidies and protection, which artificially boost production in some parts of the world – at the expense of the environment – but prevent others from developing their dairy industries and rural economies, contributing so significantly to poverty in developing nations. That’s our goal.

We are, of course, realistic businesspeople. It has taken a number of generations of dairy industry executives and officials to take the first steps towards our goals. They have made a good start towards one important goal – eliminating export subsidies. The practice of taxpayers in the developed world paying for their dairy industries to export product to the less developed world – destroy emerging dairy industries in the process – is being controlled and reduced, thanks to the implementation of the Uruguay Round agreement. That work needs to be continued.

The next barrier to our goal is the practice of Governments banning their people from buying the dairy products they want, or restricting the aggregate amount they can buy, or taxing them for doing so. Expanding quotas and cutting tariffs is the battle that must be fought by this generation of dairy industry executives and this generation of officials.

Our ultimate prize must be to end the practice of taxpayers subsidising inefficient production. As a first step, we need to delink the subsidies from production, so that if Governments believe there are wider benefits from dairying, it is at least those wider benefits that they promote. Ultimately, of course, we would disagree that farmers need handouts for any purpose. Eliminating subsidies altogether may need to be the task of the next generation of dairy industry executives and officials.

Fonterra stands wholeheartedly behind the Government in its efforts to liberalise the dairy trade. Our Prime Minister, Helen Clark, has shown a very clear understanding of the dairy industry and what is required for us to further contribute to New Zealand’s economic development. The Prime Minister played a vital role in facilitating our merger and the creation of Fonterra. We applaud her advocacy of trade liberalisation, and the progress that is being made.

The successful launch of a WTO round at Doha next month is vital. It was part of the Uruguay Round agreement – and is therefore part of the implementation of that agreement. A successful launch would help to restore confidence in multilateral institutions, and in the international business community, following the failure of the Seattle meeting in 1999 and last month’s terrorist attacks in the United States. In some ways, the terrorist attacks were a catalyst for faster progress, and APEC over the weekend has helped secure the ground. It looks to Fonterra that we are on track for a round, and we back our Government’s efforts along with those of the Cairns Group.

We also back our Government’s efforts with bilateral agreements around the region. The Singapore Free Trade Agreement was largely symbolic from a dairying point of view, as would be an agreement with Hong Kong. That’s not to say we don’t have an interest in them. We support them wholeheartedly for the message they send: that if the multilateral train doesn’t leave the station then some of us will hire the bilateral rental car to make the journey.

Beyond the symbolic power of bilateral agreements, we have a very immediate interest in proposed arrangements involving the United States, and potentially involving Chile and Australia. Again, the terrorist attacks in the US have proven a catalyst for faster progress, and APEC has also pushed the issue along. There could hardly be a greater trade policy prize to the New Zealand dairy industry than the potential for open access to the United States and the dismantling of its unfair domestic support.

We’re pleased that an agreement has again been spoken of at the highest levels, between President Bush and the Prime Minister, Helen Clark. The President is the first leg of the treble, with the Senate and House being the second and third. We shouldn’t overlook – although nor should we be daunted by – the political pressures that some in the Senate and House would feel if they supported agricultural reform.

That the Prime Minister supports and promotes a free trade agreement is good news. Even better news is that the Prime Minister has clearly stated that agriculture would have to be part of such a deal. As she puts it: “It’s dairy which is the big prize”. We wish her and her ministers well as they pursue such a deal, and we will support them in any way we can.

There is much ahead for our company as we build Fonterra over the weeks and months ahead. Let’s hope that there is as much ahead with the trade liberalisation agenda. As we have applauded the commitment of the New Zealand Government to trade liberalisation, we urge the support of your governments. Fonterra offers a brighter future to New Zealand. Trade liberalisation offers a brighter future to the world. I look forward to a more informal discussion with you in the time we have remaining. Fonterra looks forward to maintaining a strong relationship with you in the years ahead.

END

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