No need for Fonterra to go corporate — expert

03-01-2005 | Terry Brosnahan

New Zealand is in an ideal position to supply shortfalls in the global dairy market, but will still have to strive for lower costs of production.

That’s the view of Dr Adrie Zwanenberg, a global dairy specialist with Rabobank based in the Netherlands who was recently in New Zealand.

Zwanenberg says EU companies are gradually withdrawing in terms of milk powder and butter and concentrating on local fresh milk markets. EU demand is increasing by one billion kilograms a year.

“European companies are focusing on the higher income earning EU market as it is a beautiful market to be in.”

As the EU withdraws from global markets opportunity is created for NZ but Zwanenberg says there is limit to price rises. The ceiling on skim milk powder is $US2000/tonne which is about that now. If it goes beyond that price countries start to export, especially the United States, which lowers the price. Also importing countries are mostly developing countries. They cannot afford to pay the price increase so switch to alternatives.

“That is why the price will not go up and up and up.”

He says Fonterra’s strategy should be to cut costs and be the low cost provider of ingredients and consumer products. It cannot rest on its laurels as competitors will also strive for efficiencies and lower costs of production.

He saw no reason to change Fonterra from a co-operative to a corporate structure as it had good capital behind it and was efficient. If it wanted more capital to fund growth and farmers were not willing to pay for it there were a number of ways of raising it without compromising its co-operative status. One way is joint ventures where it puts up the expertise and manages the project while a partner provides the capital.

World milk production is about 600m tonnes and the EU is the biggest milk producer at 120 million tonnes a year (NZ is 14m, Australia,10m). The EU and Oceania dominates global trade in milk products but EU market share is decreasing.

He says out of the top 20 companies in the world, 11 are in Europe. Fonterra controls 40% of the market and is the fifth largest dairy company in the world. It is in a good position to take advantage of the growth in global demand driven mainly by non-traditional regions such as China, sub-Saharan Africa and South East Asia.

Since 1999 New Zealand’s share of the world market has grown from 22% to 29% while during the same period the EU has gone from 36-29%. The world export milk market has risen from 32.2m tonnes to 36.7m tonnes.

Global milk demand is increasing 2% a year while world production is only growing at about 1% a year. In 2003 world production only grew 0.8% while NZ increased 3-4%.

“Add it up and in theory world production is not keeping up with demand.”

Zwanenberg says EU dairy policy is under pressure from the World Trade Organisation requirements and new EU applicants. It has led to lower milk prices and less export subsides which are paid to companies, not farmers.

As EU export protection reduces so does its share of export markets. Its share of the global market for skim milk powder, butter and to some extent whole milk powder has fallen. The exception is cheese where it remains strong. Cheese is highly branded, niche product and the world market remains attractive to EU companies.

Zwanenberg says global trends for skim and whole milk powders are upwards. The food processing industry has a growing demand for dairy ingredients and milk powder is a flexible product that can be used if there is scarcity of liquid milk. In China most of the milk production is in the north and has to be transported over long distances. It is put into skim or whole milk powder form.

Zwanenberg is global head of Rabobank’s Food and Agribusiness Research Department based in the Netherlands. As Rabobank International's Dairy expert, he is intimately involved in the bank's efforts to further develop and promote business in the Dairy sector on a global basis.

This has been his fourth visit to NZ and he believes there is confusion here about the term added value.

NZ makes a distinction between commodities and value added. Commodities are the ingredients and value added consumers goods but Zwanenberg says they are not. Adding value is not selling consumer products.

“Consumers products and ingredients can both be value added. There is no clear cut distinction, the line is blurred.”

He says a daily risk is always going to be the world price so it is good to spread it by being in more than one market.

“Buying into National Foods in Australia is a very good move.”

So too were joint ventures like the one with Nestle in South America.

He says the failure of Fonterra’s venture in Mexico was due to it not buying one of the two main co-operative companies already operating there or entering into alliance with one.

He says the formation of Fonterra has been crucial for NZ dairy farmers. It needed a united domestic production system, not a divided one competing for supply.

“Without Fonterra (NZ) dairy farming would be dead. There was no alternative but to combine.”

Since 1984 dairy production in Europe had been stable thanks to quotas which controlled the volume of milk production. Intervention prices have been dropping and 60% of farmers’ income will be a direct payment from Brussels rather than production based. They will be tied to political conditions such as environmental and animal welfare considerations.

As EU dairy farmer incomes fall and quota prices climb more farmers are leaving the industry as part of rationalisation in the sector.

Zwanenberg says every year 5% of Dutch dairy farmers sell their land, cows and quota mainly to existing farmers.

“Farmers live poor and die rich.”

Zwanenberg says buying a dairy farm remains a good investment as the outlook remains positive though costs are rising.

His message to NZ farmers is that there are good opportunities ahead but they must remember they are not just producers but processors. They must be efficient and keep costs low throughout the supply chain to remain competitive.

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