Q+A: Holmes interviews Fonterra CEO Andrew Ferrier

Sunday 17th May 2009: Q+A’s Paul Holmes interviews Fonterra CEO, Andrew Ferrier
Points of interest:
• Ferrier: Dairy markets have “hit the bottom” of the recession
• Fonterra kept staff out of China during melamine crisis, fearing what might happen to them
• Dairy company can “never be 100% certain” of it supply chain
• Ferrier: Before re-entering China, Fonterra will have to control “every aspect” of it supply chain, from cow to consumer

The interview has been transcribed below. The full length video interviews and panel discussions from this morning’s Q+A can be seen on tvnz.co.nz at,

http://tvnz.co.nz/q-and-a-news

ANDREW FERRIER interviewed by PAUL HOLMES

PAUL Andrew Ferrier, the Chief Executive Fonterra is with us. Well what about the diary prices internationally, what about the recession internationally, what signs of recovery are you seeing if any internationally?

ANDREW FERRIER – Fonterra Chief Executive
We are seeing signs of a recovery in dairy prices which is encouraging, although more accurately I guess I'd say we've hit the bottom and we're starting to show some signs of moving up.

PAUL Whereabouts are those signs developing?

ANDREW They're developing because the price dropped so rapidly we've seen supply reduce in a number of countries, it's reduced in South America, it's reduced in the United States, some of the excess that the Americans have been exporting on the market has been cut back, so that’s the good sign. Now we need to see with the lower prices we need to see consumer demand snapping back and we haven't seen that yet.

PAUL Do you think we'll see that over the next year?

ANDREW Yes we will, I think between now and certainly this time next year we will see demand picking up due to the lower prices that are ultimately making their way through to the consumers, but there's a long gap in that happening, so it'll still take a little while.

PAUL How tough a business is the dairy business internationally. I mean you're a giant, what are you sixth largest dairy company in the world, that would give you a great deal of clout. Is it still a tough business?

ANDREW It's about making sure that you can supply the right product at the right place, at the right time, in a very perishable commodity, so it's not easy to do, but we've had such a fantastic history in New Zealand of getting product to the world, better than anybody else, so we're absolutely in the sweet spot of winning in the global dairy market.

PAUL Why have we been so good at that, how have we been so good at that?

ANDREW We've been good at it because New Zealand farmers have always had to export the majority of their product, where if you go around the world people –dairy farmers are selling liquid milk locally. We've gotta get our milk ten thousand kilometres away from home and we've gotta get as efficiently as the other companies are simply selling around the corner.

PAUL I know you're a dairy man but are we too reliant on diary, 25% of our export earnings dairy?

ANDREW I think that that’s a good thing not a bad thing, it says that we are world's best at exporting diary products and that’s a good thing for New Zealand, so we should just encourage an atmosphere that allows us to be good at what New Zealand is best at and dairy is certainly right there in our sweet spot.

PAUL Last year however was miserable wasn’t it, this year might be better, last year must have been miserable. Is it fair to say the Sanlu disaster is behind you?

ANDREW I think so, I remember the Queen talking about annus horribilis a few years ago and certainly that was the case with dairy prices and with China, it was a very very tragic incident. I'd say yes it is behind us and the whole business is focused on the future.

PAUL Yes in terms of putting Sanlu behind you how important was John Key's visit with you and other business leaders to China a few weeks back?

ANDREW I think it was very very important to get the acknowledgement, the open acknowledgement from the Chinese leaders, that they see New Zealand and they see Fonterra being part of the long term solution for China, and for food safety and food security in China, I think it was very powerful and I think the Prime Minister was first class in the way he handled that.

PAUL It was also symbolically powerful wasn’t it that Henry van der Hayden got to shake the hand of Premier Wen?

ANDREW It certainly was, it was an acknowledgement from the highest level of the Chinese that they appreciated the role that we played through that.

PAUL Nevertheless in those months, and let's talk about them now that the heat has gone out of the situation and now that we appear officially to have moved forward from Sanlu, was there a time after the melamine scandal broke and children were getting sick and dying, that you kept some of your people out of China in case they should be detained?

ANDREW Doing business in China is a very very tricky issue. What we did is we made all the calls that we thought appropriate under the circumstances...

PAUL I know that but did you keep some of your people out of China?

ANDREW Yes we did at one point in time.

PAUL Was there any indication from the Chinese that they were going to seek some Fonterra heads?

ANDREW No, there never was, but we just didn’t know what might happen in a circumstance like that.

PAUL I don’t want to harp on about the melamine, as you say we've put it behind us, but still the question remains, should Fonterra have known more about melamine in Chinese food production?

ANDREW We can always analyse stuff with 20/20 hindsight Paul.

PAUL The Wall Street Journal has said that everyone knew about melamine.

ANDREW That’s what everybody said after the fact there were 22 dairy companies in China that all got impacted by the same thing, it was a criminal event, and I sure as hell wish we had known more about it, but I think to say we should have is a tough ask because everybody got caught by the same thing in China.

PAUL Was your policy a bit loose though because you’ve said recently you thought that Fonterra had five years, you know once you went into China, had five years to come up to scratch, five years to guarantee supply purity. Does that mean for five years you're prepared to take a punt on food quality?

ANDREW A punt is I guess pushing the argument, we put world class testing in the facilities in China. >From the knowledge base we had we thought that we had every base covered, what we didn’t anticipate was huge criminal activity back in the supply chain, so with 20/20 hindsight of course I wish we could have anticipated that.

PAUL Is your supply chain safe now?

ANDREW Every part of the world that we do business in we went back, we ensured that we had testing for contaminants introduced from outside, you can never be 100% certain, but we're far better than we were six months ago.

PAUL But China's tricky isn't it, being as vast as it is there is said to be some corruption in China at various levels, it's a puzzling country for a western operator, you’ve got language barriers, you’ve got poor farmers with small herds that'll do anything to get their protein content up and so forth, how can you be sure really just six months on that your milk is safe now?

ANDREW We know the milk that we farm in China is safe because we have our own farm, we run that, our plan was to replicate those farms. I think we can see that for us to re-enter what we've gotta do is we've gotta be absolutely certain we control every aspect of the supply chain from farm through processing and ultimately to the products ...

PAUL But are you doing that?

ANDREW Right now we're not processing product, we're shipping New Zealand product in which we know is safe.

PAUL How did you cope personally, you're a family man, and you're a Canadian living in New Zealand with 25% of New Zealand's export receipts in your hands, how did you cope during the worst days of the crisis?

ANDREW It was personally incredibly difficult to deal with that one because you're always always always going through and saying am I doing the right thing, am I doing the ethical and the moral thing. I spent a lot of time in personal introspection about that, but I was comfortable ultimately at every step of the way that we and our people were doing the right thing under these circumstances and so ultimately that’s what you cope with, you cope by knowing that you're doing the right thing.

PAUL But you also knew that you were in business with a company in China, you had significant ownership with a company in China that was producing a dodgy product that was killing children.

ANDREW We focused on getting that product out of the shelves, off the grocery shelves and that’s all we could have done under those circumstances, and we were effective at that.

PAUL Alright other stuff now. John Key says New Zealand and Fonterra must get involved in agriculture in China, how are you going to do that?

ANDREW We will reinvest at some point in the supply chain, as I said we have a farm, it's very successful it's farming about three thousand cows. For us to reinvest in processing that milk we want to make sure that we can control every step of that supply chain, so we will but we'll take it cautiously and slowly.

PAUL So that’s what he means by becoming involved in agriculture, from the field you'll be able to build up to control product and supply chains?

ANDREW Our strength is that supply chain, right from basically from cow to consumer.

PAUL Other stuff – interest rates in this country. The Reserve Bank has read the trading banks the riot act saying follow me down with the interest rate says Alan Bollard, do you agree with him?

ANDREW I think interest rates coming down in the country is a good thing, right now we need to stimulate economic activity.

PAUL Are the Aussie banks wroughties? Wroughting might be too strong a word for a Canadian gentleman such as yourself, but are the trading banks too reluctant?

ANDREW I don’t think so actually, I think first of all we've gotta say that we're lucky to have strong banks through a very very tough economic circumstance globally. The banks in Australasia are as strong as any banks in the world right now, so that’s a good thing. I think they genuinely see New Zealand as a very very important country to do business in, so I think they’ll do the right thing.

PAUL A quick word about how we judge you in a couple of years. How will we judge you as Chief Executive in a couple of years, how should we, by what standard?

ANDREW By Fonterra being a more significant contributor to the New Zealand economy than it was before I got here, and it absolutely is going to be.

PAUL Thank you very much for joining us this morning, Andrew Ferrier, Chief Executive of Fonterra.

ENDS

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