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Q+A: Andrew Ferrier interview transcript

Published: 12:00PM Sunday August 07, 2011 Source: Q+A

GUYON Could we start with the world economy? I mean, Fonterra's New Zealand's biggest company and is responsible for something like a quarter of our GDP, so what happens to Fonterra obviously impacts on the New Zealand economy hugely. What do you see as Fonterra's prospects, given the troubled times that we see ourselves in?

ANDREW FERRIER - CEO, Fonterra
Well, I guess the first thing I'd say, Guyon, is we're fortunate to be in the food industry, because the food industry is much more recession-proof than other industries, and it showed its way through 2007, 2008. But we're not immune to economic volatility, and I think with the downgrading of the US, it's another sign that we are in very uncertain times, and in uncertain times you're going to see our Kiwi dollar move around quite a bit, and both exporters and importers are going to get hit by that.

GUYON Do you think that the&? What do you think that the Kiwi dollar will do on the back of this news about the credit rating downgrade for the United States?

MR FERRIER Well, I understand in the last 24 hours, after having dropped 5c when the US was downgraded, it actually came back up a couple of cents. It's ironic that people are now seeing the Kiwi a little bit as a safe haven, given the situation in the US. I do think it will remain quite strong.

GUYON How key is China in your exporting strategy and your level of exports? How key is the growth of China?

MR FERRIER Well, the growth of China, in terms of dairy consumption, has been very significant in the last five to 10 years, and it's been very good for New Zealand, very good for Fonterra, because it's been another part of the global population that is seeking healthy food, and we've seen a big increase of New Zealand exports of dairy products to China, and with Chinese growth continuing, I think we'll see good stable, steady growth of sales into China.

GUYON They came out this week in quite an unusual briefing to the New Zealand media, talking about their economy and some of their desire about wanting to invest in New Zealand, including buying New Zealand farms. Does that worry Fonterra at all? What's your perspective on Chinese buying New Zealand farms?

MR FERRIER I think the Chinese& One thing the Chinese are going to be thinking about is food security. How are they going to continue to be sure that they can feed their growing population? Cos they won't do it out of agriculture just in China, so it's natural for them to be looking around for investments in other countries. And of course they've invested a lot in Africa. So for them to come and look at New Zealand and say, "I want to invest perhaps in a farm," I can think it's understandable. Now, what we try to do in Fonterra is, with all of our major Chinese customers, show them that we can give them long-term supply security without worrying about actually having to come and invest in a New Zealand farm. So that's a business response that we have to the Chinese. We've got a lot of milk. It's going to go to China. They can have the security that we'll continue to do it, anyway.

GUYON Without actually owning the farm?

MR FERRIER They don't have to. Now, some people are going to look at doing that, both as an investment and as food security. But we don't actually see the need for it, because New Zealand milk will be going to China anyway. We'll be selling to these people anyway.

GUYON Let's talk about the price of milk. David Carter, the Agriculture Minister, wasn't able to assure New Zealanders this week whether they were paying too much for milk. Is that an assurance you can give?

MR FERRIER I can give an absolute assurance that New Zealanders essentially pay the world price for milk. And the world price for milk gets translated to a price here in New Zealand, so at times of high world prices, you will see New Zealand prices move up. In times of lower world prices, you see it go down. It is a fair price, and it's absolutely reflective of the world price.

GUYON If this is solely set by international events and international prices, how were you able to, on the 18th of February, freeze the wholesale price of milk? Because you've got a... You've acted on the domestic market.

MR FERRIER What we did there was we made a decision. Given how high pricing was going, you're going to look at it and you're going to say, well, consumers will buy less of your product if the price goes too high. And so sometimes it's better to take a lower margin in order to keep volume moving through. That's...

GUYON So were you taking too much of a margin?

MR FERRIER Not too much of a margin, because the world price was going up. What we had to do was we had to take a margin squeeze if we wanted to keep the volume flowing.

GUYON But you've shown that you can decouple the domestic from the international price.

MR FERRIER As long as you want to take a lower price, you can decouple. As long... And that's a decision of any business at any point in time. You'll be weighing volume versus margin, and you'll vary your margin according to a formula of "how am I going to get the best ultimate long-term connection with my consumers?"

GUYON Yes, but it is fair to say, then, that you can set a domestic price lower than the international price, cos you've done that.

MR FERRIER You couldn't do it for long-term. You can do it for a short period of time, but long-term, if milk is returning less and less in New Zealand than the export market, then everyone will just export. You won't have the milk in New Zealand. That's the issue - we're an export country and the export market and the world market will always set the price in New Zealand.

GUYON So will New Zealanders simply just have to get used to milk at about $5 for 2 litres? Commodity prices, international prices are remaining high - that's the forecast. Will we just have to get used to a new normal?

MR FERRIER Well, I think New Zealanders... The answer is no, because, you know, I was in a grocery store yesterday and milk was being sold for $3.25 for 2 litres. You're always going to have businesses looking at selling on different value propositions to a consumer. So even today, through this whole furore of high milk prices - and, yes, we have high world prices - you have milk available in New Zealand anywhere from $3 for 2 litres up to $5.50 for 2 litres.

GUYON Well, let's break that down if we can and use a litre of milk, which we went on the internet before this show and saw Countdown selling for about $2.20 for a litre.  Now, the farmer gets 65c of that, right?

MR FERRIER Sounds about right, yep.

GUYON OK, your margin you've said is 12%.

MR FERRIER Mm-hm.

GUYON It takes up perhaps 25c.  You've got GST - roughly 30c. You could get, very rough maths, to about $1.20. Where does the other dollar go?

MR FERRIER You basically... You have raw milk. Then you've got the costs of shipping that raw milk, of manufacturing, of bottling that raw milk, of course. So you've got to get from raw milk to a finished product in a bottle. Then you've got to get it to the store. You've got to have a manufacturer's margin, as we just talked about. And then an individual supermarket is going to have their own costs inside there and their own margin, and all adds up to, you know, as I said, between $3 and $5.50, depending on the philosophies of the individual vendor.

GUYON So you don't see any need for any other inquiry into the price of milk?

MR FERRIER Well, we think the Commerce Commission was very clear that they see that there is good solid, robust competition at the retail side. And so people then shift to looking at the wholesale side and looking at the raw milk price, and the raw milk price is simply that reflection of the global market.

GUYON But how can it be...? I mean, you collect 90% of the milk produced in New Zealand, right? So you have a virtual monopoly, so how can it be competitive? Isn't the fact that there isn't that competition to drive the price down?

MR FERRIER Well, first of all, we're regulated through the Dairy Industry Restructuring Act, and they ensure that we sell milk effectively at our cost through. And that's been done for the 10 years Fonterra's been around, so we have regulation that ensures we have a fair price at our cost. We also have... The scale of Fonterra is very efficient, so our costs are lower than they would be if you had 20 organisations collecting milk, so actually the Fonterra model will give a more efficient and effectively a lower milk price to consumers than if you had 50 people out there chasing farmers' milk.

GUYON So how can it be, then, according to New Zealand Consumer, that we pay more on a dollar-for-dollar basis than they do for milk in Britain when we're so good at producing it?

MR FERRIER At any point in time, you can compare milk prices around the world. On average, New Zealand retail milk prices are in the bottom 25%. On any given day, you can go and find a supermarket that's selling milk as a loss leader, just as they were doing in Australia recently. But you've got to ultimately track it back to what is the core milk price in that environment? European and American milk prices - and Japanese and others - have been very very significantly above the world market for the last 15, 20 years. In the last two or three, New Zealand's been fortunate enough to see the world market come up to the point where we're now quite close to the European pricing and the American pricing, and that's a great thing for New Zealanders, because all of that export earnings are flowing here into New Zealand and getting reinvested in the economy.

GUYON The price freeze lifts at the end of the year, right?

MR FERRIER That's what we've announced, yes.

GUYON And would you expect to see prices for milk to go up or down or stay the same at that point?

MR FERRIER That's a good question, and we are in interesting times in the dairy market as well. We have seen global prices soften somewhat. Of course, we've seen the dollar move very very significantly, and all of these things will be balanced when we get to the end of the year and we see where we are.

GUYON So what do you think - up, down...?

MR FERRIER So it's a little bit too early to predict.

GUYON You don't know?

MR FERRIER No, I don't know now. We do an ongoing forecast and, you know, we'll continue to forecast between now and December.

GUYON OK, you say the price of milk's so strongly influenced by international events - it's a global thing. When we talk about climate change and global warming, it's hard to think of an issue which requires a global response more than that one. Why is it, then, that you are resisting the inclusion of agriculture in an emissions trading scheme?

MR FERRIER I think you hit the nail on the head, Guyon - it requires a global response. New Zealand, we're high in agriculture, of course. Agriculture is a significant percentage of our emissions.

GUYON Well, half.

MR FERRIER So it's simple to say, "Oh well, then just throw in agriculture." The issue, though, is New Zealand agriculture has a much lower carbon footprint than most agriculture around the world. Dairying in New Zealand, for example, has between a 20% and 40% lower carbon footprint than the same dairy products produced in Europe.

GUYON So if we're emissions efficient and we don't produce many emissions, then you wouldn't be worried about going into an emissions trading scheme, would you?

MR FERRIER What we're saying is that those Europeans who are competing with us to sell whole milk powder to China, for example - if they have no emissions trading system on agriculture and we do, what's going to happen over the medium- to long-term? You have more European product going into China, less New Zealand product and that's not helping the world, because the European product has a much higher carbon footprint.

GUYON Sure, but any sector could use that excuse, with respect, couldn't they, and say, "Oh, well, look, you know, others are worse at it than us, so you're just going to shift production offshore." I mean, that's the excuse that everyone uses. On that basis, no one would be in these schemes, would they?

MR FERRIER New Zealand should be careful not to shoot to basically score an own-goal on this one. We're an agriculture nation, and we're the most efficient one. UN says we have to double food production by 2030 globally. We've got a huge issue, and what we need is globally we need to see eye to eye that the efficient countries, from an environmental perspective and from an economic perspective, should be encouraged to grow. That's what the UN says about countries like New Zealand.

GUYON But wasn't Fonterra's argument previously that we couldn't afford not to be in such a scheme because, reputationally, it would be a disaster? You'd have the food miles lobby and you'd have everyone penalising us for not being in a scheme. What's changed?

MR FERRIER Well, I'll say two things. One, we are in the scheme. It's currently costing our farmers $25 million a year. That's going to go up to $50 million, anyway, because we're processing dairy products. So be very clear - we're very clearly in the scheme and we're paying money today. We're also continuing to invest to prove ourselves, and we're doing a good with that.

GUYON When you say you're in the scheme, you mean like any other New Zealander, they pay - farmers pay - because electricity and fuel, etc, is in the scheme. Agriculture is not in the scheme.

MR FERRIER Fonterra's processing assets. We're out there producing cheese and milk powder in factories, and we are paying directly, because our factories are using energy.

GUYON OK, you said this week that if agriculture was included in the scheme, as per is the plan, that the costs would go up to something around $22,000 a year for the average farmer and that that just made no sense. Do you think people would walk off the farm at that point?

MR FERRIER What I'm talking about there is would they? They might. Some will. The marginal producers, the less efficient ones, if they get too high a cost where they cannot mitigate it, you're going to see less growth and production in New Zealand, and as I said before, you will see more growth and production in European or the United States for that matter. And you'll see them shipping more dairy products around the world.

GUYON Final question, Labour is talking about introducing agriculture into 2013 under their policy. There was some debate about whether that would have any impact on the price of milk and cheese. Would it?

MR FERRIER I think the answer ultimately is yes, because any time you add costs to a system, then ultimately those costs will get reflected in prices to consumers one way or another. You can argue this thing 12 ways to Sunday, but you add costs and the costs come out somewhere.

GUYON Alright, better leave it there. Thanks very much for joining us. We appreciate your time.

 

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