Fonterra

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Fonterra Co-operative Group Limited
Type Cooperative
Industry Manufacturing, retail
Founded 2001 (2001)
Headquarters Auckland, New Zealand
Products Milk, butter, cheese, ice-cream
Revenue Increase NZ$19,871m (2010-11)[1]
Operating income Decrease NZ$965m (2010-11)[1]
Profit Increase NZ$771m (2010-11)[1]
Total assets NZ$15,530m (2010-11)[1]
Total equity NZ$6,541m (2010-11)[1]
Employees 17,000[2]
Subsidiaries Anchor, Anmum, Anlene, Mainland Cheese, Tip Top
Website fonterra.com

Fonterra Co-operative Group Limited /ˈfɒnˌtɛrə/ is a New Zealand multinational dairy co-operative owned by 10,600 New Zealand farmers.[2] The company is responsible for approximately 30% of the world's dairy exports[3] and, with revenue exceeding NZ$19.87 billion,[1] is New Zealand's largest company.

History[edit]

Te Rapa dairy factory north of Hamilton.

In New Zealand, as in most Western countries, dairy co-operatives have long been the main organisational structure in the industry. The first dairy co-operative was established in Otago in 1871. By 1920, there were 600 dairy processing factories of which about 85% were owned by co-operatives.[4] In the 1930s there were around 500 co-operatives[5] but after World War II, improved transportation, processing technologies and energy systems led to a trend of consolidation, where the co-operatives merged and became larger and fewer in number.[6] By the late 1990s, there were four co-operatives: the Waikato-based New Zealand Dairy Group, the Taranaki-based Kiwi Co-operative Dairies, Westland Milk Products and Tatua Co-operative Dairy Company.[4]

Fonterra was formed in 2001 from the merger of the two largest co-operatives, New Zealand Dairy Group and Kiwi Co-operative Dairies, together with the New Zealand Dairy Board, which had been the marketing and export agent for all the co-operatives. Fonterra effectively has monopsony control of the New Zealand domestic and export dairy industry.[7] The merger was initially turned down by the New Zealand Commerce Commission, but later approved by the New Zealand Government,[8] with subsequent legislation deregulating the dairy industry, allowing for the export of dairy products to be undertaken by any company. The two smaller co-operatives, Tatua and Westland, did not join Fonterra, preferring to remain independent.

The company has an annual turnover of around US$17 billion. Its core business consists of exporting dairy products under the NZMP brand (95% of its New Zealand production is exported). It also operates a fast-moving consumer goods business for dairy products, Fonterra Brands. Fonterra has a number of subsidiaries and joint-venture companies operating in markets around the world.

Fonterra Riverina Fresh in Wagga Wagga, New South Wales, Australia

In 2005, the company purchased a large factory in Dennington, Victoria, Australia, from Nestlé, after they moved out of the collection of milk from farmers and the manufacture of powdered milk in Australia.[9] Also in 2005 the company made moves towards purchasing Australian companies Dairy Farmers and National Foods. It also converted its 50 per cent stake in Victoria dairy producer Bonlac to full ownership. At this time $1 billion of Fonterra's revenue was from Australian sales, which was 14 per cent of the dairy products it sells around the world.[10]

In June 2008, the company acquired the yoghurt and dairy dessert business of Nestlé Australia.[9]

In 2010, US embassy cables leaked by Wikileaks suggested New Zealand had only sent troops to Iraq in 2003, following the initial invasion, so Fonterra would keep valuable Oil for Food contracts.[11][12]

Changes to capital structure[edit]

In November 2007, the board of directors announced[13] a two-year consultation programme regarding their preferred capital re-structuring option: putting the business operations in a separate listed company, with the co-operative maintaining a controlling interest. The aim was to give more access to funds for global growth.

Praised by some[14][15] as a bold move which would allow better access to outside capital, the proposals encountered significant opposition from both farmer shareholders and the government (who would be required to pass enabling legislation). Despite including a range of safeguards, farmers were clearly concerned at the risk of losing control; in what was sometimes described as a demutualization.

The board responded in 2008 by shelving the November 2007 proposal and continuing consultation and discussion with farmer shareholders. In September 2009, the board announced a three-step process to revamp Fonterra’s capital structure.[16] The new approach abandoned thoughts of a public listing of Fonterra shares and retained 100% farmer control and ownership of the co-operative.

A key goal of the capital structure changes was to stop large amounts of money washing in and out of Fonterra’s balance sheet each year as milk production fluctuates.[17] Under the previous structure, farmers matched their shareholding with their milk production by owning one co-operative share for each kilogram of milksolids (kgMS) produced annually.[18] If their milk production dropped in any season, they could redeem shares back to the co-operative, which was required to buy the shares back off them. Consequently, Fonterra faced the risk of losing large amounts of share capital through redemptions during times of declining milk production.[19] For instance, after milk production fell during the 2007/08 drought, Fonterra had to pay out $742 million of share capital to farmers via redemptions.[20]

The capital structure changes also sought to provide greater incentives for farmers to increase their investment in Fonterra shares, helping ensure Fonterra has sufficient share capital to fund profitable business opportunities and drive a higher payout to dairy farmers.[21]

The first two steps of capital structure change received good support from farmer shareholders at Fonterra’s annual meeting in November 2009.[22] The first step allowed farmers to hold” shares above their level of annual milk production; farmers could now own an additional 20% of “dry” shares (i.e. up to a maximum of 1.2 shares per kgMS).[23] There were also enhanced incentives for farmers to hold shares even if their production falls. The rules about the pricing of end of season share transactions were also tidied up.

The second step changed the way Fonterra shares were valued to reflect that share ownership is restricted to farmers only. Previously, Fonterra shares were valued on a theoretical basis as if the shares were freely traded like a public share.[18] An independent valuer subsequently assessed that the restricted market value should be at a 25% discount to the freely traded value.[24]

The third step, titled "Trading Among Farmers", involves more far-reaching change to Fonterra's capital structure. The co-operative would no longer be obliged to issue or redeem shares at a price established via an independent valuation process. Instead, farmers would buy or sell shares among themselves at market prices through a farmer-only share trading market. This would have the effect of making Fonterra shares permanent capital, providing the co-operative with more confidence to invest in long-term projects without fear that some of its share capital might be needed to fund redemptions in future years.[25]

As part of the changes, farmers would have greater flexibility with their Fonterra shareholding. The maximum shareholding would be 2 times production (up from the 1.2 times approved in step one) and farmers would have up to three years to comply with shareholding rules when entering/exiting the co-operative or increasing/decreasing their milk production.[19]

Additionally, Fonterra would set up a special fund that would financially help farmers purchase shares (or retain shares they would otherwise have to sell). The fund would pay farmers for the right to receive dividends and the gain/loss from any changes in value of some of their shares, but the farmer would still be the owner of the shares.[19] The fund would raise the money it needed to pay farmer shareholders by selling investment units to investors.[26] Fonterra would require the fund to target "friendly" investors such as sharemilkers, retired farmers and offshore Fonterra suppliers, although the public and institutions would also be able to participate.[26]

The "Trading Among Farmers" proposal went before a special meeting on 30 June 2010 and received 89% support from farmer shareholders voting, easily exceeding the 75% threshold required for a favourable vote.[27]

Brands[edit]

Lower part of the Fonterra Centre, the firm's headquarters in Auckland

Key brands[edit]

Brands in New Zealand[edit]

  • Anchor (milk)
  • Anchor Calciyum
  • Anlene
  • Tip Top, Kapiti and Mammoth Supply Co. (icecream)
  • Country Goodness
  • Yoghurt-2-Go, De Winkel, Fresh and Fruity, Anchor Symbio (formerly Metchnikoff), Slimmers Choice and Mammoth Supply Co. (yoghurt)
  • Primo (flavoured milk)
  • eon, Zing, Whole (pure/flavoured water)
  • Mainland and has changed to meadow fresh, Kapiti, Ferndale and Galaxy, Perfect Italiano (cheese)
  • Fernleaf
  • Kapiti
  • Whole

Brands in Australia[edit]

  • Bega Cheese[28]
  • CalciYum
  • Mainland Cheese
  • Mammoth Energy
  • Nestle Ski
  • Nestle Soleil
  • Munchables
  • Perfect Italiano
  • Riverina Fresh[29]
  • Western Star [30]

Business units and subsidiaries[edit]

  • Fonterra Brands

Consumer goods business

  • Fonterra Ingredients
  • Fonterra Global Trade

Dairy ingredients supplier to the globally traded market

  • Fonterra Foodservices

Hospitality supplies

  • Fonterra Group Manufacturing

Fonterra's food processing and manufacturing operations

  • Fonterra Milk Supply

Collect and Distribute milk from farms

  • Shared Services

Finance, Communications, M&D, Human Resources, Strategy and Information Services.

  • RD1 - a wholly owned rural retail supplier. RD1 was formed at the end of 2001 through the merger of RD1.com and the Town & Country Agri-centres, Fonterra's two rural supply companies. With revenue exceeding $900 million, RD1 is New Zealand's largest retailer of agricultural supplies to dairy farmers. It operates 66 stores throughout New Zealand.

Environmental performance[edit]

Initiatives[edit]

Dairying stock entering waterways due to lack of fencing and poor use of fertilisers are major contributors to water pollution in New Zealand.[31] Fonterra's environmental policy states that "Fonterra shall demonstrate a global commitment to protecting the environment. Sustainability, good environmental practice and environmental improvement are cornerstones of Fonterra’s environmental commitment."[32] Fonterra claims to have a number of initiatives such as the Dairying and Clean Streams Accord, relating to environmental protection to achieve this policy. In December 2011, the Green Party questioned Fonterra's credibility and the effectiveness of the self-auditing approach given the wide discrepancy between Fonterra's claims and an independent audit of Dairying and Clean Streams Accord.[33]

In 2003, Fonterra became a signatory to the Dairying and Clean Streams Accord, which sets a timeframe for the improvement of water quality on farms. Progress on the Accord goals is reported by the signatories in March of each year on the basis of data collected by Fonterra. The integrity of this data was later questioned when a 2012 independent report commissioned by MAF indicated that while Fonterra’s survey of farmers suggests that nationally 84% of properties have stock excluded from waterways, an independent audit by MAF revealed a position that only 42% of farms nationally had stock exclusion.[34] The difference in Fonterra's results against those in an independent audit suggest further work is required by Fonterra to protect streams and that evaluating success in this area may be better carried out by an independent third party auditor.

In July 2007, the Green Party called on Fonterra to use financial penalties on its suppliers who were "dirty dairying", and to particularly penalise the 'recidivist polluters' the Crafar Farms.[35] In 2010, Fonterra launched its every farm every year initiative. Fonterra plans to check every farm's effluent management infrastructure every year in a move to address non-compliance with regional council dairy effluent rules.[36] The 2012 independent audit spurred further progress in this area with Fonterra announcing that suppliers will be required to complete fencing of Accord waterways by June 2013.[37] Whether this will occur is yet to be seen.

In February 2008, the inaugural Fonterra Environmentalist of the Year was announced at the Beehive.[38] The Award continues a partnership between Keep New Zealand Beautiful and Fonterra. Fonterra is also a Corporate Sponsor of the Society and each year teams of staff from the company's manufacturing sites participate in the Keep New Zealand Beautiful Clean Up Week campaign, clearing rubbish from around roadsides, sports fields, parks and beaches. These activities have been criticised as token however as they have limited impacts on preventing stock from entering waterways and in assisting farmer to implement more effective fertiliser regimes that could cut farmers costs and improve water quality.[36]

In March 2013 Fonterra unveiled a new type of opaque milk container it called a "game-changer", claiming it would keep milk tasting fresh for up to two weeks after opening.[39]

Awards[edit]

In 2007, Fonterra won two awards in the Energy Efficiency and Conservation Authority, Energywise Awards:

  1. Transpower Project Innovation Award; Winner: Fonterra Co-operative Group - Whareroa heat recovery loop
  2. Contact Energy Management Award; Winner: Fonterra Co-operative Group - Energy efficient project management team[40] Fonterra was also commended for its road to rail project by the EECA.[40]

In 2008, Fonterra Edendale won the New Zealand Clean Air Society's annual Clean Air award, which recognises exceptional contributions by individuals and businesses to researching and improving the environment.[41]

In 2009, Fonterra won the supreme prize at the Packaging Council of New Zealand’s Environmental Packaging Awards for its introduction and promotion of a more environmentally sustainable packaging.[42]

In 2012 Fonterra won the Export Category at the 2012 TVNZ New Zealand Marketing Awards for their Anchor Strong marketing to the Pacific, with designs by Dow Design. [43]

Biofuels[edit]

Fonterra is New Zealand’s largest producer of biofuel, processing a waste stream from casein manufacture into bio-ethanol. The company produces around 20 million litres of premium ethanol annually.[44]

Since 2004, Fonterra has produced ethanol from whey, a by-product of casein, in the Edgecumbe, Tirau and Reporoa plants. That year Fonterra’s Edgecumbe plant showcased the power of its biogag, operating a 1.8 litre Hyundai vehicle on a petrol mixture containing 10 percent ethanol.[45] In 2008, Fonterra began supplying Gull Petroleum with ethanol from its Edgecumbe plant.[46]

The fuel has significant environmental benefits. It is renewable, biodegradable, and, by reducing the amount of fossil fuel in use, could help the campaign to cut greenhouse gas emissions.[44] Every five million litres of ethanol used in biofuels saves more than 7,000 tonnes of carbon from entering the earth’s atmosphere.[47]

Manawatu River waste water[edit]

In 2006, Forest and Bird asked Fonterra to 'clean up its act', instead of obtaining consent to continue to discharge 8,500 cubic metres per day of wastewater into the Manawatu River.[48] Fonterra responded to Forest and Bird’s request, agreeing to treat wastewater it discharges into the Manawatu River, greatly reducing its impact on the river. Treatment will be phased in so that by 2015 the discharge will be treated to a level where the water will be fit to swim in year-round.[47]

In 2010, Fonterra signed a voluntary agreement with local councils and freezing works to clean up the river.[49] Fonterra has since encouraged its farmers to clean up their waste and plant trees alongside waterways.[50]

Greenpeace protest deforestation allegations[edit]

In August 2009, Greenpeace claimed that Fonterra was implicated in the destruction of Indonesian and Malaysian rainforests, causing deaths of orangutans and increased global greenhouse gas emissions. In response, Federated Farmers said the use of palm kernel oil does not cause the destruction of tropical forests as it is a waste by-product with almost no commercial value. A spokesperson John Hartnell stated that “Not one millimetre of forest is being cleared just to feed dairy cows”.[51]

Fonterra says it shares community concern about tropical deforestation, "which in some cases has been driven by the establishment of palm oil plantations”. Fonterra says it has been proactive in ensuring a sustainable supply of palm kernel "and ensuring we do not support deforestation, directly or indirectly"[52]

Fonterra is a member of the Roundtable for Sustainable Palm Oil to ensure it was informed or sustainability issues in South-East Asia and "to actively contribute to more robust sustainability certification systems"[52]

Fonterra was also the subject of Greenpeace Aotearoa New Zealand protests off the Port of Tauranga on 16 September 2009 and Port Taranaki on 5 February 2011, where Greenpeace activists invaded ships carrying palm kernel animal feed, destined for dairy farms.

Palm kernel imports went from 0.4 tonnes in 1999 to 455,000 tonnes in 2007 and then to 1.1 million tonnes in 2008,[53] one quarter of the world's palm-based animal feed.[54] Greenpeace says that deforestation for the production of palm products is a significant cause of climate change, and loss of bio-diversity.[55]

Greenpeace campaign director Chris Harris said only 4 per cent of palm oil came from sustainable sites.[56] Greenpeace stated that forests were being cleared for the planting of the trees that produce palm oil.

Lignite coal use protest[edit]

In 17 November 2009, Greenpeace members protested at Solid Energy's New Vale opencast lignite mine near Gore, New Zealand by unfurling a 40 by 40 metre banner reading 'Fonterra Climate Crime'. Greenpeace was protesting about Fonterra's use of brown coal (lignite) at the nearby Edendale Fonterra plant. Greenpeace alleged that the Edendale plant will burn 179,000 tonnes of lignite, which will release over 250,000 tonnes of carbon emissions.[57][58]

In response to the protest, Fonterra said, "We use 13.9 percent less energy to produce each tonne of export product than we did in 2003. That’s equivalent to the energy required to power 100,000 homes and, relative to 2003, represents a 320,000 tonne reduction in CO2e [59] greenhouse gas emissions in 2010. We use the best mix of energy sources available to us at every one of our sites. We're continually looking for ways to be more energy efficient." [60]

Pollution prosecution[edit]

In September 2010, Bay of Plenty Regional Council made a statement that it had prosecuted Fonterra for allowing nitric acid and a caustic cleaning agent from its Edgecumbe milk processing plant to spill into a storm water drain and into a water course. Fonterra was fined $24,000.[61] The Dominion Post[62] and The New Zealand Herald reported the prosecution.[63]

Fonterra is currently educating its sites on the best way to reduce pollution.[64]

Product issues[edit]

Sanlu milk scandal[edit]

In September 2008, one of the biggest dairy companies in China, the Shijiazhuang Sanlu Group, 43% owned by Fonterra,[65] recalled more than 10,000 tonnes of infant milk powder after a food safety scandal involving the criminal contamination of its raw milk supply with melamine . Court papers showed the company first began receiving complaints of children becoming sick after drinking its milk in December 2007, but only stopped production when Fonterra blew the whistle in September 2008.[66] After the initial focus on Sanlu, China’s quality watchdog said that inspectors had also found the chemical melamine in baby milk powder produced by 22 companies nationwide.[67] An estimated 300,000 Chinese babies were affected, and six died after developing kidney problems as a result of drinking milk powder formula containing melamine.[68]

Fonterra first became aware of problems on 2 August 2008, when the Sanlu board, which had three Fonterra directors, was advised there was a problem with the contamination of infant formula. A trade recall began shortly after Fonterra was first notified.[69] Prime Minister Helen Clark later said Fonterra had been lobbying for a public recall since 2 August, but that "local authorities in China would not do it. At a local level … I think the first inclination was to try and put a towel over it and deal with it without an official recall." Ms Clark said she first heard of the contamination on 5 September and three days later ordered that Beijing be told directly, bypassing local and provincial Chinese authorities.[70]

On 21 September 2008, an editorial in The New Zealand Herald questioned the "moral courage and leadership" of Fonterra chief executive Andrew Ferrier. Citing Fonterra's number one corporate value, the journal questioned why it took nearly a month after it had become aware of the contamination before it notified the government. It said Fonterra's press release had been "minutely scrutinised by lawyers and spin doctors, and that the company was far less interested in 'moral courage and leadership' than it was in preserving its own position."[71] The next day, Helen Clark, agreed that the company had been too slow to speak out.[72] Ferrier was also condemned by Business Day for his "silent hand-wringing", when he should have immediately blown the whistle.[73] Ferrier denied Fonterra knew that Sanlu lied for eight months to hide complaints about its baby formula causing illness.[74] He said if one partner did not tell the truth to the other "you have a critical breakdown in that relationship". He admitted people deeper down in their organisation in China could have been "fooling us".[75] However, Access Asia, a Shanghai-based consumer consultancy, said Fonterra was a classic example of western executives in China "believ[ing] advice in business books that they must avoid making their local partners 'lose face' at all costs." It suggested Fonterra paid a heavy price in write-offs, a wrecked business and public condemnation.[76]

In a video press conference with reporters in September 2008, Ferrier said Sanlu's milk supply may have been sabotaged. He added the company did not come forward with the information earlier because it was waiting for the recall process to move through the Chinese system.[77]

David Oliver, a New Zealander who works as a corporate advisor to companies in the Chinese agricultural industry, feels that while Fonterra had board representation in Sanlu, it is unlikely they had much influence within the company as they only had a minority stake.[78]

Said Ferrier, "I can look myself in the mirror and say Fonterra acted absolutely responsibly in this one. If you don't follow the rules of an individual market place then I think you are getting irresponsible."[69] Ferrier later said the feedback he received from both government and business contacts in China was that Fonterra was seen to have acted with integrity.[79]

On September 2008, Henry van der Heyden, chairman of the board, said the scale of the tragedy has been "truly shocking". "As a direct consequence of the criminal contamination of milk in China, Fonterra has recognised an impairment charge of $139 million against the carrying value of its investment in SanLu." "Following this impairment charge, Fonterra's best estimate at this point of time, of the book value of its investment in Sanlu is approximately $62 million", which was 69 per cent below its previous carrying value.[75] "We’ve learnt an incredibly painful lesson through this and we will be much, much more suspicious worldwide on ensuring the safety and integrity of our supply chain everywhere in the world," said Ferrier. But he also pointed out that the company can never be 100% certain against a criminal contamination of the supply chain, which is what happened in this incident.[78]

On 17 September 2008, Fran O'Sullivan[80] noted that Fonterra had already set "up a 3000-head dairy farm in China itself to provide quality product and demonstrate best practice."

On 10 October 2008, Ferrier announced in Beijing that Fonterra will "donate NZ$8.4 million to the Soong Ching Ling Foundation over five years for a co-operative charity project to provide medical care and advice to pregnant women and the mothers of infants in rural communities." Andrew Ferrier said Fonterra was "shocked by the degree of tragedy" and the donated fund is set up to "help over the long-term in infants and maternal mother health." Andrew Ferrier said Chinese consumers have lost confidence in Sanlu, not Fonterra, and Fonterra is working towards rebuilding a safe supply chain of dairy products.[81]

In April 2009, during a state visit by New Zealand Prime Minister John Key to Beijing, Chinese Premier Wen Jiabao asked Prime Minister Key for help in developing food safety standards for China. Mr Key said the Chinese Premier considers 2008's contaminated milk scandal a one-off incident that can be put behind both countries.[68] A report by Fran O’Sullivan in the New Zealand Herald[82] said that Fonterra had learnt some heavy lessons from Sanlu and the company would have to have confidence in the safety of its milk supply chain in China before reinvesting significantly in the local production of dairy products.

DCD contamination[edit]

In September 2012, traces of 2-Cyanoguanidine, a fertiliser commonly referred to as DCD that is used to slow down nitrate leaching, was found in some milk samples.[83] Fonterra, Federated Farmers and the Government moved quickly to reassure the public and overseas buyers there was no risk to health.[84] Fonterra has received praise for its handling of the DCD issue.[85] The levels were very low and attempts were made to prevent the test results from being reported in the media.[86]

On the 16th of August 2013 a Sri Lankan court banned the sale and advertising of all Fonterra products in Sri Lanka.[87][88] The health ministry has said tests by Sri Lanka's Industrial Technology Institute found DCD in some Fonterra milk powders and it had ordered their recall.[87]

Alleged presence of botulism[edit]

Main article: 2013 Fonterra recall

On 3 August 2013, authorities in New Zealand announced a global recall of up to 1,000 tonnes of dairy products after tests turned up a type of bacteria that could cause botulism. Products included were infant formula, sports drinks, protein drinks and other beverages. The countries affected were New Zealand, China, Australia, Thailand, Malaysia, Vietnam, Sri Lanka and Saudi Arabia.[89]

Fonterra's head of its milk products business, Gary Romano, resigned over the scandal on 14 August 2013.[90]

In late August 2013 laboratory test results revealed that the bacteria found in the whey protein concentrate manufactured by Fonterra was not the botulism-causing Clostridium botulinum.[91]

See also[edit]

References[edit]

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