A new big Aussie dairy co-op?

ReneDedoncker

Fonterra Australia’s managing director, René Dedoncker

“It’ll be months, not years,” says Fonterra Australia’s managing director, René Dedoncker when I ask him about plans to form a new big Australian dairy co-op.

Industry veterans will tell you the idea of Fonterra forming an Australian co-op is not new and seemed a real possibility after the demise of that other great milk co-op, Bonlac, in the early 2000s. So, why now?

“I think the time is right,” says René. “This is a value proposition at a time when the industry is fragile.”

“Fonterra Australia is also in a great position to reduce risk. We have learnt from our mistakes and have a stable, repeatable business model with a balanced customer and product mix. Confidence, if not trust, is running high.”

I cough a little nervously and ask René how he expects farmers would rate Fonterra in the trust stakes and whether that might be a problem.

“Trust may well be a stumbling block.” he concedes. “Farmers – even those who’ve been supplying us for many years – tell me it will take years to rebuild. Purely on trust, we could well be ranked quite low but we are working hard to regain that.”

“I can tell you that there is not a key decision made without the input of farmer voices.”

The consultation on the co-op idea will officially begin at the Bonlac Supply Company AGM next week and be discussed at farmer forums across the country.

If it gets a sufficiently warm welcome, the next stage in the process will be discussions about the form the co-op would take.

“We already have several different models in mind,” René says, “but at this stage we want to keep it simple and see whether there’s an appetite for this co-op.”

What Rene can say is that there won’t be a mandatory requirement for farmer suppliers to “share up”, matching share numbers to milk production.

“We need to make it attractive and give everyone an opportunity to participate. Farmers will also be able to supply Fonterra Australia without becoming shareholders,” he explains.

It’s also decided that the shares would be in the Australian operation only, rather than the global Fonterra organisation. The Australian co-op has the blessing of the board of directors but would not need to clear a Kiwi shareholder vote.

The plans towards forming a co-op has “paused” the progress of a replacement for the Bonlac Supply Agreement, René says. While that replacement has already been drafted, it won’t be made public until it’s clear it would suit any new co-op model.

It has done nothing, however, to dampen Fonterra’s Australian expansion plans. The processor has already committed to lifting its processing capacity by another half-a-billion litres over the next six months and will add another half-a-billion within 18 months.

While René stresses that the 3 billion litre target is in capacity rather than milk supply (allowing enough headroom for a bumper season), he says the processor is aiming for a milk supply of 2.6 to 2.7 billion litres within two years.

At the same time, Lino Saputo Jr is on record saying Warrnambool Cheese & Butter will win back the milk MG lost. And, of course, the main beneficiaries were Fonterra and WCB itself.

“What about Saputo?,” I ask.

“We’re running our own race,” says René. “We have incredible confidence in our business and they’re offering powerful competition that’s good for our industry.”

“It might be better to ask Saputo about us.”

4 thoughts on “A new big Aussie dairy co-op?

  1. Unless a true co-op this will prove to be merely a gimmick to gain supply from disgruntled ex MG suppliers.
    Merely being a co-op has already proven to not deliver the best or sustainable farm gate prices.
    Suppliers must own the element of supply if long-term sustainability is to result

  2. Does MG really still have 1.9 billion litres of milk that number is being used quite a lot? I would suggest it is closer to 1.5.

    Yes, Fonterra think they can spend 100 million and gain another 500 million litres; Saputo wants its 800 million litres back; ACM is putting a new plant and wants 200 million litre; Freedom Foods wants 200 million litres and UDC wants more milk, not to mention Burra, that will want more milk. I don’t know where it will all come from – some magic milk bucket?

    Saputo’s pricing structure is not growth orientated and has to change. Neither is Fonterra’s, along with most of the others. The exception being Burra Foods and UDC that do have flat or a 9/3 pricing structure.

    Saputo has said it now wants to desperately gain and dominate the Australian domestic market in the first instance. It’s what it does best, with the rest exported. The problem is, when Saputo gets control of MG, that will put both Saputo and Fonterra back in the same position they held for the last 15 years, at a Mexican standoff regarding the southern milk pool, and its efficiency and the ability to grow it at the 2-3% they are hoping for, with absolutely nowhere to go. Unless they all change their pricing to not cannibalise the spring (call it the seasonal calving /none flat milk curve) nothing will change. They will just go on with the same farcical merry-go-round of pinching supply from each other. The only bright spot is that Saputo has said no more special price deals, everyone gets paid the same.

    Now finally MR Harvey from RABO bank is finally saying the same, that trying to create a flatter peak to trough milk production ratio has done nothing more than add costs and inefficiency to both the processing and farm production systems. The southern milk pool needs $6.00 KG/MS to grow, along with a flat milk pricing payment system. They are collectively looking for another 1.8 billion litres and are putting in more new stainless steel to process it. We have spare and idle capacity now, making Australia highly inefficient at milk processing with a high cost structure. We do not need more. It’s madness. There seems to be no co-ordinated approach from our industry leaders in all this.
    First, we need to fix the milk pricing structure of the southern milk pool, which was once the powerhouse and engine room of the Australian industry, so it once again has a lower cost structure and is highly efficient and resilient to the commodity price cycles we have to deal with and in a position to grow its milk volume over time. We have to stop putting the cart before the horse. Who will now be the voice of reason in all of this? Who will step up to the challenge – Saputo, Fonterra or our industry leaders, to be the new farmers’ champion, if we ever had one?

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