Back in October 2016 Fonterra’s shares traded at NZ$5.9. However, shoot forward 5 years and the stock has gone backwards to NZ$3.35 leaving management with more questions than answers.

Fonterra is a dairy cooperative, owned largely by New Zealand based dairy farmers that supply the business.

In Asia-Pacific, Fonterra is a well known brand. China is one of its largest export markets.

However the company’s history is checkered. At one time international was high on the agenda. In 2008 it spent $202m to buy the remaining stake in Chilean dairy company Soprole. As late as last year it acquired Dairy County, an Australian cheese business.

Yet milk is a commodity and farm gate prices vary dramatically impacting margins.

Fonterra’s gross margin is just 16%. Arla, a somewhat similar business, although focused on Europe and the Middle East makes 22%. Nestlé by comparison makes nearly 50% gross margin.

Last week Fonterra’s management revealed plans to dial back on international looking at divesting or IPO-ing its Australian and Chilean businesses.

Debt is one big headache. Fonterra also needs to shore up its capital base and wants to change the link between the number of shares a dairy farmer owns and the quantity of milk they supply.

Photo: Nick Savari

Discussion and rumours of this change, which has yet to be finalised, is driving down the share price.

Management is fighting increased competition and dis-satisfied stake holders. Whilst NZ milk enjoys a very positive image, especially in Asia-Pacific, the company’s future growth path lacks clarity.