Fonterra Australia managing director René Dedoncker expects “tense” conversations with farm suppliers to continue, as he tries to rebuild trust in the global dairy giant.
Twelve months into his role, he said big structural reforms to their price-setting mechanisms, farmer representation and more agile product mix was vital for the dairy company to succeed and shore up supply.
He said they were already seeing some results of their change of tact, including the farmgate milk price step up announced on Friday.
“Fonterra in the past 12 months has owned that situation and is behaving differently and our results are starting to show,” Mr Dedoncker said.
At an industry breakfast in Melbourne on Friday, Mr Dedoncker said he wanted to fast-track the end of the Bonlac Supply Company (BSC) contractual arrangement, which stipulates Fonterra’s farmgate milk price cannot be less than the biggest processor, which has been Murray Goulburn since it came into effect in 2005.
Mr Dedoncker said that arrangement would come to an end in 2019, but he is proposing a new farmer representative model to replace the BSC board, which he said no longer serviced Fonterra’s business model, be introduced sooner.
He said by restructuring farmer representation and giving the new body a yet-to-be-decided name, it would be easier to communicate how it differed from the BSC board.
He said by starting with a clean slate, farm suppliers and Fonterra management could create a model that worked better in today’s environment, by asking both groups about the commitments they wanted to make to each other, their decision-making rights and mandates.
“That’s what we’ve done, we’ve come up with the principles we’ll abide by and we’ve turned that into how would we behave, and what decision-making rights go with that,” he said.
He said they were currently talking with their farmers about the proposal, and farmers would have to vote on it.
A Fonterra spokesperson said:” We’ll spend the coming weeks and months meeting with BSC and consulting farmers as to how the model will work and when appropriate we’ll present it to our farmers. It is important that we get the model right, so there’s no set date for its formalisation and launch.”
BSC chairman Tony Marwood said the BSC framework was fit for purpose in 2005 and even when it was renegotiated in 2012 “...but it’s not today”.
He said a structure that gave a small number of farmer representatives more transparency about how Fonterra sets it milk price, as well as giving signals earlier, and not relying on the biggest processor would be much better for their farmers.
“(We’ve had) challenging conversations but the outcome of those conversations are better for the farmer,” Mr Marwood said.
“Give us another 12 months, two years, and I’m pretty confident that we will have a relationship that no other processor has with its farmers.”
“But we don’t have to wait until that (a new representative body) happens – for example, announced opening price six weeks before season opened, whereas have previously waited for other processors to announce their price,” Mr Dedoncker said.
“If you’re going to run your own race, got to be brave enough to announce it.”
Mr Dedoncker said global milk production and dairy commodity prices would remain volatile, so they had to manage it, and the best way he sees of doing that is having an “agile” product mix and efficient supply chain.
He said a new 12-storey, high automated warehouse in Altona, in Melbourne’s western suburbs, exemplified their investment in efficiency-driving infrastructure. It will have product in it in September.
But he warned they needed to grow milk supply to ensure the supply chain was efficient and profitable.
Peak milk in Tasmania He said processing 1.9 to 2 billion litres of milk across Fonterra Australia’s sites struck the right balance of plants’ capacity and certainty to serve contracts.
“We’re on the brink in Tasmania of peak milk – we’re managing it but it’s at a point where it’s going to be challenging right at the peak,” he said.
He said they had plans to divert excess milk into different product lines, but admitted the Wynard plant was the company’s “constraint”.
Mr Dedoncker said the latest modelling showed two weeks a year when they were under strain to process all the milk received, and while Wynyard and Wynyard Cheddar plants had "significant upside", it would take capital for them to process more milk.
“Once we’ve committed to farmers (on price), if we have an amazing season, we’ve got to be able to deal with that,” he said.
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