On The Nation: Lisa Owen interviews Theo Spierings

Headlines:
Fonterra CEO says it’ll be “a bumpy ride” for another six to 12 months before milk prices start to recover, as the $3.85 milk price is “not sustainable”.

Asked if the price could go any lower, Spierings says “we are below the bottom”.

Remains confident “that China will not continue on a flat or negative growth…so China will go back to volume growth on a consumer level and the prices will pick up”.

Says Russia is welcome to buy Fonterra product on its global dairy auction, but Fonterra will not go against the government’s plea for it to not expand into Russia while New Zealand’s allies have imposed sanctions.

“We are not going to have an aggressive policy against the government of New Zealand. But the global dairy trade auction platform is a global platform, which is accessible for all bidders.”

Sees Iran offers “huge potential” now that sanctions are to be lifted and it’s “definitely part of the future plans”.

Hints at major changes to Fonterra’s global trade auction, perhaps introducing a reserve price.

“…we have to look at some more drastic thinking around our global dairy trade auction, because in Europe there's a kind of a bottom created by governments, and we don't have that, so we have to look at out-of-the-box solutions at that point in time.”

Defends his forecasts of $5.25 last October, when he told The Nation he disagreed with banks who were forecasting a payout “starting with a four”.

Points to sanctions with Russia, trouble in the Middle East and the financial crisis in China as major problems that it was “very difficult” to see coming.

Support programme for farmers will be paid from “working capital reduction” not by cutting capital expenditure.

Theo Spierings: This is a serious situation, and it’s not sustainable. Where the milk price right now is absolutely not sustainable, and therefore we go back to the strength of the co-op and the support programme because we have to be able to go through this bumpy ride, and it is going to be a bumpy ride for another six to 12 months, and we have to make sure that we get through with, yeah, minimum damage and as strong as possible. Because where you see other parts of the world where cost prices are much higher, there’s really an even more difficult situation for farmers.

Lisa Owen: So at this level, how many farmers do you think are going to make a loss? What’s your estimate?

Look, you can never generalise, but we do know that pure variable cost on farms are at the three, three and a half to four-dollar level, right, and you don’t talk about cost of finance, so, really, if the number starts with a five, total payout, already quite a number of farmers have problems. So we really—

Well, some estimates were around 90%, Bill English saying probably all farmers would be making a loss, depending on the numbers.

Yeah, but remember we’re coming out of a record year. It seems ages ago, but we’re coming out of a record year, and this huge volatility is something we have to live with. And I think that New Zealand and on New Zealand farms and the farming system has proven over time that we can cope with volatility the best in the world.

But if you had to put a number on it, 90% are going to make a loss? 80%?

Look, when you’re talking about total cashflow on farms, on levels of 3.85 is not sustainable, so you talk about those numbers. That’s—

80% to 90% - you agree with those numbers?

Yeah, but that’s why we go to the strength of the co-op. 50c is a significant amount, yeah? And a 40c to 50c earnings per share, that steps the level up to much better level.

As you mentioned, this is coming down from a record high of about $8.40. How low can this go? Could it go lower?

We are below the bottom, really, because intervention, yeah, the global dairy trade-off this week and the prices which were shown on global dairy trade, they are way under the intervention levels of Europe, so this is absolutely not sustainable, and we are on a very low level, below the bottom, in my opinion.

Well, in October you told this programme, The Nation, you said that your $5.30 payout was realistic and that bankers’ forecasts that were less optimistic were wrong, so how did Fonterra get it so wrong?

No, I have to put that into perspective, because I said 5.25 was our best estimate in a highly volatile situation, and you can trace it back, but I, when they asked me, ‘What is your—? What is the sensitivity of this number?’ I said, ‘It’s 5.25 plus or minus one and a half dollars.’ That’s what I said in October. It’s the best estimate we had at that point in time.

Okay, well, you also said that you expected dairy prices to be back up within six months, and that hasn’t happened. So what’s your prediction now for when it’s going to get better, when it’s going to be back up?

My ongoing assumption, and that still is my ongoing assumption, that China will not continue on a flat or negative volume growth. China will— the whole economy is based on volume growth, so China will go back to volume growth on a consumer level, and then prices will pick up, and the recent downturn of the whole stock exchange in China has affected consumer confidence, right, and—

Yes, but also on that programme, you said that China was ‘stable’ and that the Chinese market didn’t keep you awake at night.

No.

Does it keep you awake now?

Look, I do— The whole situation around the stock exchange was, I think, very unexpected, even for Beijing, for the government—

So were you caught by surprise? You were caught out too?

No, financial turmoil is – look at 2008 – it’s always a surprise. But, I mean, the question is after financial turmoil, does it really deeply affect consumer confidence? And what you see is that it has affected consumer confidence, but people think in China, and I think the same, that volume growth on the consumer level will come back.

So in terms of farmers, New Zealand farmers, are they going to be walking away at this level of payment? Are they going to be walking off their farms?

We do believe with what we have announced today that this support programme will avoid farmers walking away. We use the strength of the co-op…

All of them? All of them?

…to… Look, I can’t speak for all of them. Everybody is running a business, and they will take decisions themselves, but we, the 50c support programme, is aimed at a core of our co-op, at the farmers who have shared up in the past, shared up their programme.

But that is a loan. They have to pay that back, so it’s another—

When the milk price is above six, yeah. It’s interest-free. It’s an interest-free loan, and when the milk price is over six.

It's still a debt, though, Mr Spierings, isn't it? It's still a debt.

Is it a loan? It is a loan to farmers. Yes, that's correct. That's correct. Yep.

And that means that you are pulling back on capital expenditure in order to extend them those loans, aren’t you?

No, that's not the case. The support program is really based on working capital reduction — so inventory levels, accounts payables, accounts receivables. We definitely look at our cost base and our KPEX base, because times are tough at the moment, and we are pulling back on our capital expenditure. Part of that is due to what we have announced today as well, that we expect a 2% decline of the volume in the New Zealand milk pool, right? So we face our capital expenditure, but the support program is fully based on working capital reduction.

So back when you spoke to us on The Nation, were you trying to put a positive face on things, or is Fonterra's forecasting that bad, that you got those numbers wrong?

Look, I have a lot of contact with all the big dairy players in the world, and we are all saying the same —that the levels we are talking about of $3500, that is the levels where we will go back to, and that's the weighted average we're looking at. You come out of a very high price and good supply, so that means that some demand is going to burn and prices will drop; that's what we said when we were at $8.50; strong supply around the world for quite a while. What we did foresee and forecast is really the multiple demand issue. We did not foresee the closure of Russia. No, we didn't. We did not foresee the trouble in the Middle East, and we did not foresee the financial crisis in China.

Should you have?

I think it's very difficult to predict. We have to look at the dairy scene and to predict geopolitical issues around the world — multiple geopolitical issues in key reporting regions — is very difficult.

You mentioned Russia. I just want to ask you — government ministers spoke to Fonterra last year and said it would be a bad look to expand into Russia with the political situation as it was there. So should you get in there now?

We have had Russian authorities at our factories auditing them, and when we have factories able to produce, and Russians want to buy— own global dairy trade. Global dairy trade is an open global platform that they can buy.

So did you ease back on that, though, when you were advised by the government? Is that a change in your position?

No, it's not a change in my position. What I've said to the government — we will not actively go after key customers in Russia.

Should you, though, given the difficulties your farmers face and the enormous market it could offer for you; should you aggressively be getting into that market?

Depending, it real depends on the political situation as well. We have to— I mean we are not going to have an aggressive policy against the government of New Zealand. But the global dairy trade auction platform is a global platform, which is accessible for all bidders.

So what about Iran? Is Iran Okay, though?

Yeah, the sanctions on Iran have been lifted, so yes. And that's a huge market, by the way. It's huge potential.

Is that part of your future plans?

Iran is definitely part of the future plans, yeah.

In what way?

Iran is a very— is a massive market for fat, so for butter and butter oil, so that's the ingoing position, but you will see demand coming out of there for milk powders as well.

So before you go, what is the strategy now? How do you turn this around, cos it's not rosy, as you say?

No, so we are the largest exporter in the world, so we really have to— when the price would drop even more, and we are already below the bottom, right, then we have to look at some more drastic thinking around our global dairy trade auction, because in Europe there's a kind of a bottom created by governments, and we don't have that, so we have to look at out-of-the-box solutions at that point in time. We will keep our eye, our focus, on milk prices per yield point. What do farmers need on a 100% basket-based model to live through this difficult period. We will use the balance sheet in our transformation to support our farmers to the max, because this is the strength of the co-op, and we have to keep on delivering with value at offshore sales to keep that bracket of earnings growing. So keep our eye on milk price; and our eye on global dairy trade; keep on growing the earnings bracket, which we're doing; and use all possible balance-sheet strength to keep— to make sure that our farmers can go through this bumpy ride.

Thank you very much for joining us. Appreciate your time.

You're welcome.

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ENDS

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