Competition for New Zealand milk is on the rise as national production is tipped to decline.
A company majority-owned by the Singapore Government is taking on Fonterra in New Zealand’s dairy heartland, luring farmers away from the co-operative with a premium milk price offer.
Olam, set up as Olam Food Ingredients (OFI), is majority-owned by Temasek Holdings, a conglomerate owned by the Singapore government which manages a total of US$496.59 billion ($805b) in assets as at December last year. It will start processing export milk powder at a new $100 million-plus plant at Tokoroa in August.
Olam learned its way around the $18b dairy export industry as a former shareholder of Open Country Dairy, the country’s second-biggest dairy processor and exporter after the farmer-owned co-operative Fonterra.
But its plans to build in Waikato in 2021 raised questions about its chances of success. The region is already well-served for dairy processing and national milk production is flatlining and expected to shrink.
While OFI operations director Paul Rennie won’t divulge farmer numbers for commercial reasons, it seems the style of the company’s approach to farmers and a premium milk price offer has secured enough supply to produce 10 tonnes of milk powder an hour, and enough interest to spur OFI into planning a second plant to make higher value, functional protein products at Tokoroa.
The second investment should be up and running for the 2025-2026 dairy season, said Rennie. A third stage is planned.
Olam has already lured one of our biggest farming names.
Colin Armer, one of Fonterra’s largest shareholders and a former director, has confirmed sector chatter that his business will be among those supplying Olam.
Securing supply from Armer is a notable win.
It’s also viewed by industry observers as a farmer warning shot at Fonterra, which, 22 years after its legislated creation from an industry mega-merger, still collects around 78 per cent of the country’s milk production.
Billed as “a national champion”, its financial performance has sometimes disappointed and the size which makes it a formidable player in offshore markets has at home fuelled claims of a disconnect with farmers and a deaf ear.
Armer told the Herald his business was sending “a portion” of its milk to OFI.
“The majority of our milk still goes to Fonterra. The value proposition offered by OFI is hard to ignore.”
Fonterra, New Zealand’s biggest business, requires farmers to buy shares to supply it. Its processing rivals like OFI, which have emerged since the 2001 industry deregulation which ushered in Fonterra, do not.
As the industry heavyweight, Fonterra sets the baseline for the price companies pay farmers for milk. Fonterra farmers also receive dividend payments.
It’s understood OFI will pay its suppliers above the baseline Fonterra milk price. But observers suggest the newcomer’s promise of “a partnership” relationship with farmers has also attracted supply.
And as Rennie notes, Olam is a multinational with strong relationships with other big food multinationals such as Nestle and Mars, offering the potential of extra value returns to farmers.
But securing milk supply has not been a walk in the park for OFI, which has employed around 50 people at Tokoroa. The company fielded 500 inquiries for those 50 jobs and has been warmly welcomed by the local community, said Rennie.
“It’s competitive. It didn’t just fall into our laps. The team has worked very hard. Authenticity and reliability on-farm took us a long way and as well, OFI is a large multinational present in global markets and has a track record in the New Zealand dairy industry.”
Unlike some dairy farmers, Waikato farmers have plenty of processing choice. There are at least 15 processing sites in the greater region. Fonterra operates nine of them. Six are privately owned and include OCD and Synlait. Traditional milk payout leader, the blue chip specialist product exporter, the Tatua cooperative, also calls Waikato home.
The region is the country’s biggest dairy milk producer, with 22.3 per cent of the national dairy herd of 4.84 million cows. The region’s 3051 herds, made up of 1.08 million cows, produced 402 million kilograms of milk solids in 2021-2022, according to DairyNZ.
The new entrant will also be on the radar of farmers to the south on the central North Island plateau. DairyNZ says this region has 5.8 per cent of the country’s dairy cows and last year produced 102 million kgs of milk solids. In this area, the established processors are Fonterra at Reporoa and Miraka, near Taupō.
The newcomer’s success in attracting milk supply has prompted a warning from Fonterra, the world’s sixth biggest dairy company by revenue.
Fonterra group director, Farm Source, Anne Douglas, said while a competitive environment could be helpful to drive innovation, over-investment in new processing assets could result in existing assets becoming redundant.
That would impact farmers, companies and employees connected with those assets, she said.
Douglas didn’t directly refer to Fonterra processing assets, but given the forecast fall in milk production, and that Fonterra has plants in the area that are aging, or claimed to be under-utilised, it’s tempting to suggest the big co-operative is concerned. (Manufacturing industry insiders claim Fonterra’s $360m, 7-year-old powder plant at Lichfield, south Waikato, has yet to do some real work.)
Meanwhile, in farming circles it’s being suggested OFI might also set up in the South Island. Rennie said to his knowledge the company had not bought land there.
Earlier this year, in a hedge against loss of milk to rivals in the shrinking production scenario, Fonterra implemented a new capital structure to make it easier and cheaper for farmers to sign up and for existing members to remain. Sharemilkers, contract milkers and farm lessors can also now become Fonterra shareholders.
Douglas said “an efficient co-operative of scale” was essential to ensure farmers were “paid the highest sustainable milk price over the long term”.
“Our farmgate milk price sets the benchmark from which most other companies set their price. The fact that it’s a farmer-owned co-operative setting the benchmark at a price that appropriately values farmers’ milk is important because of what drives us compared to corporate processors.
“One of the key reasons farmers form co-operatives [is] to protect against ‘hold up risk’. This is the risk of a processor not owned by farmers deciding they’re not going to pick up a product - for example during unfavourable economic conditions - or driving down the price they pay farmers for their milk in order to maximise their own profits.
“This is particularly important for producers of a highly perishable product. That’s why Fonterra is built on generations of New Zealand dairy farmers who chose to join together to collectively use their capital to collect, process, market and sell their milk domestically and internationally.”
By comparison most of Fonterra’s competitors were corporates, whose role was to maximise returns to shareholders, who were often not the ones producing the milk, Douglas said.
OFI’s Rennie wasn’t interested in analysing why some farmers have switched from Fonterra.
“We’ve just concentrated on our own programme, our own strategy and what will appeal to farmers and how we can be good business partners with farmers.
“OFI is a new brand and Singapore-owned so a bit of education is needed around what that means. OFI has bought a lot of dairy product from New Zealand and sent it around the world. That brings with it some credibility and gives farmers confidence in the stability of the business and its ability to sell product and find customers.”
OFI’s appeal was “partly about the money but also about the broader offer”, he said.
“We listened to farmers and had a lot of feedback. Transparency was important [to them], they also wanted consistency and honesty. Of course farmers are also commercial, they want a good deal, but they had concerns around the work that had to be done to be [emissions] compliant and wanted help with that.
“I wouldn’t say we’re fighting them off but it’s nice to know we have a list of farmers waiting.
“But there’s a lot of hard work to go.”
Despite having to plan, source and build during the peak of the Covid pandemic and associated supply chain upheavals, the Tokoroa site will be operational just two weeks behind schedule, Rennie said.
Andrea Fox joined the Herald as a senior business journalist six years ago and specialises in writing about the dairy industry, agribusiness, exporting and the logistics sector and supply chains.
Slipping share of milk supply market raises shareholder concern.