Is Fonterra selling up or selling out?

The impending sale of Fonterra’s extensive array of consumer brands moved a step closer on Thursday after chairman Peter McBride told farmer-shareholders attending the co-op’s AGM in New Plymouth that it could no longer justify investing in its consumer businesses that generate returns lower than their opportunity cost of capital, while also exposing farmers to more risk.
It has been a dramatic U-turn in strategy for New Zealand’s biggest exporter after decades of investment establishing iconic household dairy brands such as Anchor, Mainland, Kāpiti and Fernleaf.
If the proposal goes ahead, Fonterra will divest its $3.4 billion global consumer products business and focus exclusively on building its global ingredients and foodservice export manufacturing businesses instead.
Farmers were told that a sale process, pursuing both a trade sale and IPO options were being considered, but the decision would be subject to a full shareholder vote before being finalised.
For farmer-shareholders up to their eyeballs in debt, or equally, older farmers who are nearing retirement and relatively debt-free, the potential to receive a somewhat unexpected multi-billion dollar capital payout obviously has the same appeal as being told you’re about to win a major prize in lotto!
But there are several bigger issues at stake with a potential sale, particularly given the strategic importance Fonterra has in the NZ economy accounting for a quarter of this country’s export revenues.
In a recent op-ed piece in Farmers Weekly, Keith Woodford, managing director of AgriFood Systems, pointed out that one of several risks with the 100 percent business-to-business focus being proposed is that Fonterra becomes completely dependent on firms, many of them global food giants, purchasing its ingredients.
“That’s fine in a static world, but in a changing world, success for Fonterra is tied to the success of those businesses buying its product.”
Woodford also highlights a further risk that Fonterra may react too slowly to changes in consumer markets where its ingredients have to end up, given it will no longer have direct insight into those markets or emerging trends.
However, Woodford’s biggest gripe is with the main premise for the sale itself.
Fonterra has previously stated that it is not the “highest-value owner” of the consumer and associated businesses in the long term and a divestment could allow a new owner with the right expertise and resources to unlock their full potential.
“That in itself is a remarkable statement,” Woodward says.
“In effect Fonterra is saying that it doesn’t believe it has either the right expertise or resources to take the consumer business to its full potential. There is no way the Fonterra of five to 10 years ago would have made a statement like that.
“But it also raises the obvious question of why Fonterra could not buy the expertise that it lacked? The answer is that buying the right expertise does not work if the organisation does not have the right culture to make a particular strategy work. Quite simply, innovative marketers were never going to feel comfortable with the Fonterra corporate culture.”
Hawkes Bay farmer Ben Anderson, also an opponent of the proposed sale, asks a more pointed question: is Fonterra selling up or selling out?
“Wouldn’t NZ’s wool industry like a couple of globally recognised and valued consumer brands in its portfolio right now? How about NZ’s velvet industry? Wouldn’t those farmers also love to own a consumer brand that is internationally recognised to drive sales?” Anderson told Farmers Weekly.
“These industries have been selling raw, undifferentiated commodity products for quite some time now, and I suspect their farmers would be more than happy to discuss with Fonterra how that’s currently going for them.”
Commodity dependency is another well-recognised issue for farmers and the NZ economy.
“It’s hard to reconcile that fact with Fonterra’s desire to sell off the only things that make it recognisable in its consumers’ eyes.”
A former senior dairy industry executive also points to the risk that exists with the commodity price cycle itself.
“We know prices are cyclical and having a portfolio of consumer brands can be a valuable buffer when milk prices fall, as we know they will at some point. By selling off these brands Fonterra will leave its farmers highly vulnerable to market downturns.”
Those farmers who attended last week’s AGM raised few questions or objections regarding the proposed sell-off suggesting the majority of them support Fonterra’s plans.
Many of them, understandably, will be swayed by the raw numbers as Fonterra chairman Peter McBride was keen to point out in his pitch to them.
“Right now, we estimate the weighted average cost of capital for dairy farmers is somewhere around 10 percent. Consumer businesses are inherently more capital intensive and riskier businesses to operate and when you overlay that with the higher geographic risk in the markets where our consumer business operate, a respectable return on capital for those businesses should be north of 15 percent.
“Our consumer businesses had one of its better years in 2024, but despite that, its return on capital was just 6.8 percent, up from 3.9 percent in 2023 and 0.2 percent in 2022.”
It seems Fonterra is all but admitting defeat that after decades of investment and extensive marketing support establishing its consumer brand portfolio it now says it has failed to provide an appropriate return to its farmer-shareholders.
For a country that has always prided itself on its ability to develop and sustain globally successful businesses, but actually has very few of them like Fonterra that operate at scale, the decision to sell off what are arguably its most valuable and iconic assets, will for many people be a bitter pill to swallow.
Investors engaged in a reality check of sorts last week in the wake of US President-elect Donald Trump’s election win the previous week that sent markets surging.
Locally the NZX50 fell 0.7 percent to close at 12,685, much the same level it was at three months ago, while in the US the S&P500 erased around half of its gains from the previous week in the wake of the election outcome with the benchmark index falling 2 percent to close at 5,871, having earlier traded above 6,000.
Seafood exporter Sanford was the toast of the local market with its shares rallying 6 percent to $4.07 after reporting a better-than-expected earnings result, driven by an improved performance from its wildcatch and mussels divisions, though the company remained cautious about its outlook.
On the flipside, manufacturer Steel & Tube highlighted the continuing challenging environment it faces as a result of the ongoing residential and commercial construction slowdown. Its shares closed down 3 percent to 87c after reporting a $41.6m slide in revenue to $141.7m in the first four months of the current financial year after the company said demand for steel had fallen and margin pressures were intensifying.
Mainfreight reported an 8 percent fall in its net profit for the first half of 2025 because of continued “challenging trading conditions” but said its result was marginally better than the guidance it provided in October. Revenue increased 8.4 percent to $2.55b while its pre-tax eased to $161.2m. The company said directors had set an interim dividend of 85c a share.
“Freight volumes and warehousing utilisation have all increased on the prior period,” the company said in a statement, adding that it expected the improvement in profitability to continue into the second six months of its financial reporting period.
Shares in Auckland Airport closed at $7.28, down 1.6 percent for the week, after reporting a 3 percent lift in passenger numbers to 1.6 million for October. International passenger numbers increased 4 percent on the prior year but domestic travellers were relatively flat, up just 1 percent. The airport operator said passenger numbers were now back to 89 percent of pre-Covid levels.
Just as it was starting to show some signs of improvement, the country’s manufacturing sector contracted at a faster rate during October, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for October was 45.8 (a PMI reading below 50.0 indicates contraction). This was down from 47.0 in September, and the lowest level of activity since July. The sector has now been in contraction for 20 consecutive months.
BusinessNZ’s Director Advocacy Catherine Beard said that despite some momentum over the previous few months that saw the results for the sector getting progressively closer to the no change mark of 50.0, October’s result had halted that. Recent business surveys have also shown a sharp contrast between improved expectations for activity and weak current conditions.
Globally, markets have become increasingly nervous in recent days as the prospect of inflation risks and fewer interest rate cuts by the US Federal Reserve once again haunt investors. A strong rebound in the 10-year US Treasury yield, which is the global benchmark for setting interest rates, saw it pushing above 4.5 percent at one point last week. The 10-year yield has now jumped by more than 25 percent since mid-September sending bond prices lower.
Some analysts believe that should the 10-year push above 4.5 percent it will create a potential inflection point for stocks and could send markets into reverse.
Traders also grappled with comments from Federal Reserve Chair Jerome Powell, who said last week that the central bank was “in no hurry” to cut interest rates. He noted that the economy’s strong growth will permit policymakers to take their time as they decide the extent to which they reduce rates going forward.
On currency markets, the US dollar index, which measures the greenback against a basket of currencies, gained a further 1.8 percent for the week to close at a year high of 106.9, while conversely the NZ dollar continued to ease hitting a one-year low of US58.6c, down a further 1.7 percent for the week.
Rocket Lab founder Sir Peter Beck has been anointed the world’s newest space billionaire by Forbes magazine in a new feature story over the weekend, further elevating the status of the influential space entrepreneur and his unlikely homegrown success story.
Rocket Lab reported third-quarter financial results last week that sent its shares rocketing higher after the end-to-end space company reported revenue of US$104.8m, beating the consensus estimate of $102.3m.
Rocket Lab said that it expects fourth-quarter revenue to be in the range of US$125m to US$135m and plans to finish out the year “strongly” with more Electron launches scheduled. It has already set an annual launch record with 12 Electron launches to date.
“In the third quarter we once again executed against our end-to-end space strategy with successes and key achievements reached across small and medium launch, as well as space systems. Revenue grew 55 percent year-on-year to $105 million and we continue to see strong demand growth with our backlog at $1.05 billion,” the company said in a statement.
Rocket Lab also announced a multi-launch agreement with a confidential commercial satellite constellation operator for its new medium-lift rocket Neutron. It intends to launch two dedication missions under the contract, starting in mid-2026. The company noted that it could end up deploying the customer’s entire constellation under the collaboration.
Rocket Lab shares, which trade on the US Nasdaq exchange, closed on Friday (US time) at a new all-time high of US$19, up 40 percent for the week and an impressive 250 percent since August when they were trading at about $5.50.
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