Fonterra measures threats, opportunities

01-08-2010 | Not Specified

Fonterra views the growing supply from other countries as both a threat and an opportunity.

Peter Moore, head of international farming for the co-operative, maintains New Zealand will continue to be one of the lowest-cost milk producers in the world.

"New Zealand's climate supports pastoral production, and pasture will always be the lowest cost of feed available. Few countries in the world can compete with NZ on a cost basis."

He says the opportunity for Fonterra is in complementing NZ milk production with a supply of milk within other markets.

"In Australia, Latin America and Sri Lanka we need a reliable source of high-quality fresh milk to supply our consumer brands businesses.

"In China we are investing in new, best-practice farms so we can develop a high-quality, traceable milk supply and support China's endeavours to raise dairy farming production standards. In China, Fonterra will consider partnering on the investment. However, we would want to have full management of the farms."

Global growth in milk consumption has averaged 1.5%-2% in the past five years and this trend is likely to continue. Moore says global demand will be driven by the developing nations of Africa, Latin America, and Asia - especially Asia. Because these developing nations import more product (proportionately) than developed nations such as North America and Europe, the globally traded sector is likely to grow faster than milk consumed behind borders.

"However, the globally traded sector only makes up 7% of total global milk consumption, with milk consumed behind borders making up 93%. The lion's share of the market opportunity will be domestic."

Fonterra believes China and India will make up about 50% of growth in global demand for milk over the next 10 years. Most of this demand will be met by growth in domestic production, but imports from countries such as NZ will continue as the local industries struggle to keep up.

Southeast Asia will provide the next largest growth opportunity. "Given New Zealand's geographical proximity to Asia and excellence in dairy, we see a positive story for New Zealand going forward. We also see there will be large opportunities within countries such as India and China, and are investing in milk-supply development in China for this reason."

Expectations are that for a long time yet, dairy will remain a sensitive industry when it comes to access. "We can expect countries may maintain protectionist measures against imports, although some of these barriers are slowly coming down (eg the FTA with China)."

A large part of the growth in the NZ industry in the past 10 years has resulted from filling the hole left by Europe's retreat from export markets. "Ongoing retraction by Europe, trade liberalisation and ongoing growth in export markets will continue to ensure a steady opportunity for NZ milk growth," Moore says.

A large opportunity sits in investing behind borders in 93% of the milk that is not traded. NZ can deploy its technology and dairy knowhow in countries experiencing rapid growth yet with underdeveloped and underperforming dairy industries. Fonterra is already pursuing this strategy with investments in China. Other areas are being considered.

"Many NZ companies have technology in dairy that can be deployed against these opportunities, meaning there is significant opportunity for NZ Dairy Inc as a whole."

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