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.”

Light at the end of the tunnel: Fonterra

Well, as you saw in the previous post, I’m looking for light at the end of the tunnel (other than an oncoming train!) for Australian dairy farmers like me. In that post, ADF’s Terry Richardson took up the offer to present a vision. Today, Fonterra Australia’s new(ish) managing director, René Dedoncker, presents his view. My brief was pretty open: give farmers a reason for optimism without going into all the intricacies of Fonterra’s strategic direction.

I’m very grateful to René for sending Milk Maid Marian not just the written response below but a video too. Both are worth a look because they’re a bit different.

There’s no question that there have been challenges in recent seasons. What happened last season was a reminder that we operate as part of a global market – we can reap the rewards, but it also means we share in the risk. We as companies have a responsibility to tell it like it is, so that our farmers are prepared – positioned for prosperity when conditions are good and able to weather the storm when they aren’t.

However despite the challenges there are still plenty of opportunities for Australian dairy – it’s about knowing how to capitalise on those opportunities. Today, around 406 billion litres of dairy are consumed globally every year. By 2020 it will be 465 billion litres. That’s a 59 billion litre difference – around seven times the size of Australia’s current milk pool.

We know that countries that don’t have enough milk will look to the countries that have a surplus. Australia is one of those countries. But simply selling our surplus supply in the global marketplace will only ever achieve commodity returns. It will not be enough to win back confidence on the farm.

We need to be providers of premium dairy products that are aligned with specific consumer needs and life stages, and we have to make sure we produce and deliver those products as efficiently as possible.

Two years ago Fonterra embarked on a mission to change the way we operate to enable us to better capture that demand. Overseas consumers want Australian cheese. We have a reputation for quality and excellence. Across Asia demand for cheese is growing. Mozzarella demand in China is growing at around 30 per cent each year.

In China, and across Asia, pizza is a social food – they eat it with friends and with their hands rather than a knife and fork. That’s why it’s important that as a dairy company we create a cheese that enhances that social experience.

Understanding what our customers want is crucial to our long term success as an industry. The reason there is such high demand for Fonterra’s cheese is because we’ve been immersed in the Chinese market for 25 years.

We know what Chinese consumers want. For example, we know how they eat their pizza, and how they want it to taste. Chinese consumers want their food to look as good as it tastes – they want that slightly brown crust on melted mozzarella, they want those stretchy cheese strings as they pick up a slice. Now, Fonterra cheese tops around half of the pizzas in China.

As companies, we need to leverage Australia’s reputation for high-quality dairy to make the most of the opportunities before us. The way we do that at Fonterra is through innovation – innovation in farming, in manufacturing, and in product development.

It’s why we’re investing in modern and efficient manufacturing; using technology to make dairy foods that tastes and performs the way our customers want it to. We have the technical know-how to deliver what they want – products developed with the end user in mind.

When it comes to nutritionals, the fundamentals in China remain incredibly strong, despite recent dips in demand. Here are just a few figures to consider:

  • The Chinese economy has been growing for 26 consecutive years, with economic growth still relatively strong at 6.8 per cent per year.
  • Over 54 per cent of Chinese people live in cities; by 2030 it’s expected that over 1 billion people will live in Chinese cities.
  • In 2000, just four per cent of Chinese families were considered middle class. By 2020, 76 per cent will be deemed middle class
  • China’s birth rate is climbing after the relaxation of the one-child policy – in a country with only four weeks of maternity leave many Chinese mums rely on infant formula to feed their babies after they return to work.
  • The next 12 months will be tough, as authorities seek to get greater control through regulation over the supply chain. However, the reputation of Australian dairy and the quality associated with that in China is invaluable.

We take a base commodity product and leverage everything that we have – high quality farm practices, best in class manufacturing and a point of difference on country of source, and make it into a higher-value product that is highly-desired in China.

That’s why we are continuing to back and develop the nutritional partnerships that we have so that when we get to more stable settings in China, we can take the opportunity to flourish.

There is huge potential for dairy looking ahead – not just in China, or Asia, but across the developing world. If we as processors work smarter, developing products that meet the needs of our customers and fulfilling that demand, our entire industry will benefit through greater investment, more jobs, and most importantly, a higher farmgate milk price.