Home' NZ Dairy Farmer : March 2010 Contents The Dairyman MARCH 2010 5
THE new independent dairy companies
lack scale and diversification at the
moment to seriously threaten Fonterra,
industry commentators say.
There is some concern that the industry is
beginning to fragment and its co-operative
nature threatened with the increasing number
of proposals for new milk processing plants
from independent companies.
Fonterra was formed as a mega co-opera-
tive in 2001 with 95 per cent of the country's
milk supply. Before that consolidation of the
industry had gradually occurred over 50
years or more, enabling New Zealand to
become a leading player in the international
At least nine other companies are now
either established milk processors or have
plans for milk factories in the pipeline.
Lincoln University professor of Farm
Management and Agribusiness Keith
Woodford said that if Fonterra continued to
run its business efficiently, its economies of
scale in processing and marketing should
enable it to compete with the new start ups.
"If Fonterra gets it wrong -- and I'm not
suggesting it is getting it wrong, because
Fonterra's got a more coherent market strat-
egy now than it's every had before -- that
would open the door and make it easier for
the new companies.
"The new companies have got the advan-
tage that they can, to a certain degree, cherry
pick. So they go to areas where there's a con-
centration of dairy farms, and where they can
have low transport costs and also get decent
volumes of milk from a relatively small
number of farmers.''
He said they also had disadvantages due to
their lack of scale and diversification.
"So Fonterra's got a huge advantage in
being able to divert milk into different types
of product. If you look at their new process-
ing facilities like Edendale, they will be
more efficient than the smaller scale plants."
Professor Woodford said new companies
were typically putting in driers that could
handle 200 million litres a year (Fonterra's
Edendale site with its new drier can handle a
peak capacity of 15 million litres a day).
"Basically the 200 million litre a year
plant is the sort of size where you become
Competition in the international market-
place from local start-up companies was not
a big issue for Fonterra, but the redemption
risk caused by farmers changing processors
"The market's big enough to handle them
all, but redemption risk is always an issue for
Fonterra. When you've started off with a 95
per cent market share there's only one way
you can go from there.
The Fonterra structure
was never really set up
to handle a declining
volume situation. It was
set up for what I would
call down-wind sailing.
"They've only got a
limited amount of equity
capital, and if they lose
suppliers that really does
Chairman of the Fonterra Shareholders'
Council Blue Read said independent compa-
nies did represent a threat to Fonterra. "They
take away milk supply, but I don't think it's
something we should resile from.
"Competition's ok in my book as long as
it's done on an even playing field. The one
disappointing thing is that the competition
that's coming in doesn't seem to be differen-
"They're picking up milk and processing it
with efficient plant which is fine, but they're
not adding any more value to what New
Zealand earns overseas than Fonterra would.
I find that really, really disappointing.''
He said it was always a comfort for farm-
ers that they could send their milk some-
where else if they chose.
"But there's a strong belief in the co-oper-
ative ethos that Fonterra represents, and I
guess it's beholden on Fonterra that the glue
that holds us all together continues to hold us
together, and that the value of that glue is
recognised in a tangible way in relationships
with the company and payments.''
Federated Farmers Waikato dairy section
chairman James Houghton said he didn't
think the independents were undermining the
strength of the Fonterra co-operative.
Not every farmer was happy with Fonterra
and the independents gave choice, and hav-
ing the independents compete against it was
making Fonterra perform.
Fonterra had continued to grow even with
the growth of independent dairy companies.
"If they were taking business off Fonterra
and weakening the balance sheet then that
would be an issue.''
He said a number of the smaller compa-
nies were struggling to get capital. "The pre-
diction is that all these independents are
going to have to borrow money, and that may
affect Fonterra's ability to borrow.''
The situation was likely to come to a head
with Fonterra's capital restructuring, he said.
Once the new capital structure went
through it could be harder for farmers to
leave Fonterra. "I've heard of some large
players looking to leave Fonterra this season
because it may be the last opportunity to
easily get their capital out.''
Independents no real threat to Fonterra
"The new companies have
the advantage that they
can, to a certain degree,
--- Keith Woodford, Lincoln University
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