Lisa Owen interviews Fonterra CEO Theo Spierings

Lisa Owen interviews Fonterra CEO Theo Spierings

Headlines:

Fonterra boss worried about the spread of Ebola in West Africa and potential “big consequences” for the company, saying “it doesn’t feel to me like that it is under control at the moment”

Estimates if Ebola worsens, it could “very quickly” hit 5-6% of Fonterra’s exports, worth $150 million in sales.

Spierings says China as a market is “stable” – volume growth might slow to 4% from 6%

Downplays chance of sealing a Trans-Pacific trade deal – “where the world is right now, we should not be overly optimistic on reaching this… it’s going to be very difficult”.

Can envisage a day when New Zealand reaches ‘peak cow’ – “there could be a point in time that you say no more” – but not for some years.

Says New Zealand dairying can continue its expansion in the next decade – “with 60% based on conversions and more animals and 40% is productivity”.

Disagrees with Environment Commissioner’s comments that more dairying means a drop in water quality – “New Zealand can easily grow for the next ten years by 2%, 3% a year”.

“Not worried” about sales of productive land to foreigners so long as we are “working together” with foreign owners

If China takes “a single-minded focus on dairy” he agrees with comments it could be self-sufficient in dairy in five years, but China’s leaders “have many other priorities” and prefer partnerships with firms like Fonterra.

Spierings says China as a market is “stable” – volume growth might slow to 4% from 6%

Confident dairy prices will start to rise in 4-6 months, once China comes back into the market in December, and Fonterra’s $5.30/kg forecast payout is realistic.

It’s one of the main engines of the New Zealand economy, but is dairy powerhouse Fonterra running out of gas? Could foreigners be stealing the cow that gives the golden milk? And as more and more farms convert to dairy, have we reached peak cow? Our largest company has been hit with a near 50% slump in dairy prices this past year and slashed its milk payout forecast to a six-year low. The man at the helm of New Zealand’s largest company, Theo Spierings, was in the studio earlier, and I began by asking why the bank economists don’t think even the revised forecast is realistic.

But that, Lisa, is where I really disagree with banks, because it’s very easy to look backwards for one or two months and then extrapolate that line going forward, but that’s not forecasting. So what I’m doing is we are where we are. We know our demand pools, we know the supply pools, so forecasting means from today, not looking backwards. If I look at the last four GDT events and I look forward, I might land on a figure starting with a four, but I have to forecast based on what do I see on supply, what do I see on demand. So that’s where—

So how confident are you that you’re right? Give me a percentage – how confident?

It’s still a forecast, but everybody in the world knows, and I’m talking to milk traders but also all the milk companies. A very fair price level for dairy is 3500, so we’re way below that price point right now. So we will come back to that level, whether it’s in four months or in six months, but we will get back there.

But you think definitely by six months, you will be on the up?

That is in our forecast right now, so last GDT even for milk price produce was slightly up. So let’s see if China comes back, and they will come back in December, then we will look at better prices.

So what do you think are the biggest risks for you right now and in the next year? What are the biggest risks for you across the globe?

The biggest risks – look, China is stable, and China might show a little bit less growth, but that’s from a 6% volume growth to a 4% volume growth, and it’s still strong. Supply only grows by 2%, so that gap is increasing. So China is stable. The biggest risks are really what is going to happen around the Russian situation and what is going to happen in the Middle East. So it’s more geopolitical. And, look, all the supply pools, we can try to make a forecast, but that’s kind of the weather forecast. If you have one weather event in one milk pool, so if El Nino hits or whatever, then one supply pool will be affected, yeah. If demand is strong, prices will come up very fast.

The Middle East and Africa are identified as a growing market for you. You’ve mentioned Ebola. What impact could that have for you?

What you see is that countries are locking down their borders, so that limits us logistically. So West Africa – movements in West Africa become more and more difficult, so that limits movement of food as well, movement of people – people going to the market, doing their groceries – so you see demand really dropping pretty fast. And Ebola – the question is can it be contained quickly, but it doesn’t feel to me like that it is under control at the moment, and I’m saying it mildly.

So how worried are you about that?

I’m quite worried about it, yeah. I’m worried about it, and I’m worried that it will spread, because I’ve lived in West Africa, and it’s very difficult to contain an Ebola virus or whatever virus to a certain region because people are used to travelling, crossing borders. It’s a heavily populated region.

So potentially what impact could that have on you and Fonterra’s business?

I mean, if West African demand would slow down or drop off, you’re talking about 100,000 tonnes of powder very very quickly, right.

And what does that mean in money?

That is of our total, that is about, you talk— let me quickly think. That’s about 5%, 6% of our exports. So you talk, yeah, 150 million or something like that, yeah.

So huge consequences for you?

Those are big consequences, but that’s why we are constantly looking around the globe – where are the opportunities? Now there’s opportunities, for example, in the US, arbitrage opportunities with butter – very high prices. We can come in with our prices. So we use that opportunity.

So you’re talking there about diversifying your markets, but so much of our wealth as a country is dependent on China’s growth at the moment. But that is a country where the government is aggressively encouraging the growth of its own dairy industry. Does that keep you awake at night?

No, no, because— Of course, that they develop their own dairy industry, in my opinion, that’s very—that’s even good because that is, in my opinion, from a food safety quality perspective, number one. If you look at from 2008, melamine till now, the China milk pool was 35 billion litres and still is 35 billion litres because of food safety issues but also biosecurity issues. So effectively you see a flat line, and you’ve seen demand growing. The gap in China between supply and demand now is 10 billion, and we’re expecting by 2020 to be 20 billion, and they are going to rely—

In saying that, though, one Australian dairy boss has said that China could— should be – those were his words – self-sufficient in dairy in the next five years because Australia is selling them live dairy cows, and we’re doing the same thing, aren’t we?

We do the same thing, but dairying is not only about cows. First of all, you need to have a piece of land which is suitable for dairying, and probably the most scarce—

But do you think—? So you’re saying there’s a skills issue there as well and land, but do you think that they could reach that self-sufficiency within five years in terms of dairy?

If they would have a single-minded focus on dairy, I’m not going to say to you that they can’t, because they can. But they have many other priorities, like the meat industry. Pig farming is massive. If the Chinese government has to choose what are we going to do – pig farming or dairy? – they will choose pig farming because that’s part of the staple—

But if they do take an aggressive approach or a single-minded approach, as you say, where does that leave you?

I think that the relationship between China and our country here is extremely strong, so there is a very strong government-to-government relation. I’m very close, business to government. We do talk to government as well. We see the dynamics in China. They are not adamant about self-sufficiency. They are adamant about people like us developing the milk pool and from a food safety quality perspective and local partnership.

But if they develop their own resources, there’s less opportunity for us, less business for us.

There’s possibly less at the beginning of the supply chain, but there is still a lot of money to be made downstream. We have to do both. We do farming. We do ingredients. So if you look at the value chain, we are at the source – farming – we do the ingredients, and we do brands. So we capture with our brands the entire value chain.

It’s funny you should raise that, because Lochinver Station, which is going into Chinese hands, that’s one of the big staging stations for live cattle exports, so there is a fear in some quarters that basically China is aiming to own the whole supply chain, and that would shut you out. So they’d get a farm here with staging for live cattle, they get a processing plant, and then you’re out.

No, but China really thinks in partnership, and, of course, they want people to create value on ground, like we are doing, in China, but you are right. They would like to partner with companies like us and other companies in other milk pools in Australia or New Zealand. That’s why there’s the Beingmate deal for us. For Beingmate, it is very important to have access to another milk pool rather than China. So these partnerships – they are definitely the top of the agenda of the Chinese government.

But does foreign or Chinese ownership of productive New Zealand land – does that worry you?

Look, I’m not a politician, and you know that—

No, but you’re a businessman. You are a businessman, and this is buying up elements of a business that you are invested in.

Correct, but I also have to go back to principles and roots of democracy. I mean, in China, nobody can own land.

The question—

No, no. In China, nobody can own land. Not even the Chinese can own land.

No, you lease it, but does it worry you that our land – our productive land – New Zealand productive land is being bought by Chinese, for example?

I am— What is important for me is that you have—that one rule applies and there’s no discrimination. And I think if I can buy land as a Dutchman, then it’s very strange if a Chinese person cannot buy land.

So you don’t think there’s any need for further restrictions?

Again, I’m not a politician, but if we have proper partnership, like what we do with Beingmate, that we are in their milk pool, they are working together in our milk pool, that we work together in the entire value chain and it’s not us and them, I’m not worried.

At the moment, we have our— I’m just going to check these figures so that I’ve got them exactly right – 4.7 million dairy cows on 1.7 million hectares of land currently. So when do we reach peak cow?

I don’t know what you—

That’s from Dairy New Zealand 2013.

No, but I don’t know exactly what you mean with ‘peak cow’.

So optimum number of cows – when have we hit the ceiling? Are we there now?

That depends, really, on the system you run. I mean, I come from a country the size of the Waikato, with three million cows, right, so it depends what solutions and willingness for investments in the farm.

But what’s your gut feeling? Because at the moment you have, say, for example, the Environment Commissioner saying that it’s a zero sum situation – more dairying means inevitably, no matter how you do it, degraded water. So when are we hitting a peak for cows?

That last statement, I do not agree with that, because New Zealand can easily grow for the next 10 years by 2%, 3% a year, but we need different solutions. Can we grow, again? Same with the banks. If I look backwards and I say the last 10 years we have grown X%, or 3% to 5% on average, can we grow the same way in the coming 10 years? No, we cannot. We have to—

So, what? 10 years we’ll hit a ceiling—potentially hit a celling in 10 years?

No, we need different solutions on farm to allow ourselves to grow. I mean, this is a big country.

But in the future, do you conceivably see a time where we would have to say, ‘That is the cap. That is the optimum number’?

There could be a point in time that you say no more; we limit the increase of animals – the number of animals. But we are going on the productivity route only, that you get more milk—

And when do you see that time? How far down the track?

I believe, and we have made a sustainable growth plan, and that’s not just dropping a top-down figure on to the organisation and saying, ‘Work with it.’ No, we went catchment by catchment all around New Zealand—

So when is it?

In every catchment, becoming 10 years, we can still grow with 60% based on conversions and more animals and 40% is productivity.

So in a decade you think that we will be around the perfect equilibrium?

The balance.

The balance. Now, just before we go, I’d like to ask you a question about the Trans-Pacific Partnership deal. We’re going to be talking about this a bit later in the show. Are you confident that we’re going to reach a deal and when do you think?

When I came into New Zealand and I had the first interactions and I went to the US at the end of 2011, I was pretty positive about reaching deal in the near future. But the longer these things take and you look at the complexity of who wants what – America has an agenda, Canada has an agenda, Australia has an agenda. And, again, I’m not a politician, but I’m a very close contact with the Ministry as well—

So you’re telling me you don’t think it’s going to happen?

I think it will take time. Where the world is right now, we should not be overly optimistic on reaching this—

So not in the next year?

That’s what I can see. It’s going to be very difficult with all the issues you see in the world at this point in time.

All right, thank you very much for joining me this morning. Theo Spierings from Fonterra, thank you.

Okay, thank you.

Transcript provided by Able. www.able.co.nz

ENDS

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