In last week’s post about what it will take to encourage dairy farmers to grow, I promised to follow up with some ideas. The first is a guest post from Ian Macallan, a project strategist and business architect who has operated in the Asia Pacific for over 30 years across a number of industries including dairy.

Whilst 97 per cent of Australian dairy farms are family-owned, there are smatterings of “corporate farming” that bring together large parcels of land and cows.

If left unchecked, this type of pure farm aggregation could swing to the extreme of looking like feudal farming, leaving no capacity for family dairy farming. These corporate farms are also still vulnerable to milk price fluctuations.

Using aggregation as a means to support vertical integration and make it work effectively and efficiently in a balance manner is a very different proposition.
Aggregation must integrate more than land title. It must fully integrate the farming families, provide for supporting farm provisions and services, efficient plant and equipment usage, intellectual property retention, optimal logistics and transport, processor relationships and so on. The list of areas to integrate is long, including appropriate management and governance across the aggregated operations to ensure compliance, risk, cost, initiatives and reporting.

Vertical integration: knitting together the supply chain
Australia is now left with the majority of its processing capacity owned by international operators who need to ensure a regular supply of low-priced raw milk. This type of corporate investment in dairy processing drives cost reduction across all parts of the business and the greatest exposure is the supplier of raw milk, the dairy farmer.

Even existing large co-operatives only partially vertically integrate, starting from the point of collecting and collating raw milk leaving the dairy farmer out of the integration model.

To vertically integrate is more than just plunging large sums of dollars into a factory or storage facility or a distribution centre or port slots or a reprocessing facility in some distant location. No, it requires solid, deep analytics about what chain the business wants to purse and how best to secure that point of the chain so to have its goals aligned with that of the other parts of the supply or value chain.

Horizontal and vertical integration in one package
Combining the horizontal and vertical integration into a “keiretsu” style of structure invests funds into “community” entities that hold farm aggregation as well as process raw milk into value-added product for consumer markets and control or own the distribution channels to get the product to their market.

Essentially the horizontal aggregation is a standalone but dedicated milk supplier to the nearby processor who produces product for downstream distribution channels to the end consumer all under the one ownership structure or with tight cross-ownership. Combined, they reflect a local “keiretsu” style of structure with the same investment community spread across the value chain. This localised keiretsu model can then be replicated in key production regions across the country with the same source of underlying investment.

Keep in mind legal, legislative and market share issues need consideration when using this model as with any business model seeking scale of presence or market dominance.

Triple-bottom-line practice and reporting be included for reasons of ensuring investor drivers do not compromise sustainable farm practice drivers and provide greater appeal to the ethical investment community.

Back to the future with $1.4 billion or more
Reduced to its simplest form, this is merely order of magnitude upscaling of the historical dairy farm where all activities were on farm and locals could buy their dairy products from the farmer at the farm or better still have them delivered. I wonder if anyone remembers getting milk delivered daily to their home in 1-pint-sized clear glass bottles with pressed aluminium tops?

Currently between $1.4bn and $3.6bn worth of opportunity in the Australian marketplace is ripe for this type of approach right now.

Ian can be contacted on macallan@bigpond.net.au 0419 504 255.