Fonterra 'poised for greatness'

Dairy exporter Fonterra has the potential to become the world's "greatest" food company if it makes the right moves with regard to its capital structure, says Fonterra Ingredients managing director Andrei Mikhalevsky.

"I believe Fonterra is at a pivotal point in its history. It can turn into a small co-operative selling New Zealand product or become the greatest food company in the world. This is within our reach in the next couple of years," said the Chicago-based American.

"All the stars are aligning for Fonterra right now in ingredients. We have the strategic advantage if we choose to grab it."

But the challenge for New Zealand's biggest company is sourcing the hundreds of millions of dollars needed for infrastructure to advance its ingredients strategy.

The $19.5 billion revenue business is a co-operative owned by farmers through redeemable shares. To achieve its global growth ambitions and stabilise its balance sheet against share redemption shocks like drought, Fonterra needs permanent capital and more of it.

But its farmers, fearing loss of control, last year rejected a capital restructure proposal from directors which involved creating an investment company with public shares outside the co-operative.

A tightly-held new capital reform package is likely to be unveiled to Fonterra's 7000-odd shareholders in the next two months.

Mikhalevsky indicated he would soon ask the Fonterra board for about $150 million to step up his drive into paediatric and medical nutrition, primarily using New Zealand milk.

With the global infant foods market expanding at 6.5 per cent a year, Fonterra has recently invested $30 million in upgrades at its manufacturing plants in Northland and Victoria, Australia, and an expansion is under way at a joint venture plant in Allerton, in the United States.

Ingredients, ranging from cheese slices for multinational food businesses such as McDonald's and toppings for pizzas in 30 countries to pharmaceutical-grade high-tech protein, are the rising stars of Fonterra's business.

Mikhalevsky claims to have grown the business by up to 40 per cent in the past three years, though specific revenue figures were not available. (Fonterra's 2008 annual report put combined sales revenues for commodities and ingredients at $13.5 billion for 14 months to July 31. Just five years ago the ingredients business was a quota import cheese operation.)

But Mikhalevsky offers plenty of figures to support his case for chasing growth in the paediatric and "vulnerable"global foods markets. "Vulnerable"consumers include chemotherapy patients and the elderly.

Returns on investment could top 20 per cent, he said. The global market was now worth about US$5 billion a year and was expected to grow to US$21 billion within eight years.

The US was around a third of the market with Asia the fastest growing, Mikhalevsky said.

"I could put all the milk New Zealand produces into infant nutrition alone and it would always be sustainable."

Mikhalevsky also wants to make further inroads into the US$91 billion ($132.5 billion) global processed cheese market. He is chasing a $20 billion slice of it. The McDonald's headquarters in Illinois says it bought 6000 tonnes of cheese for its Australian, Asian, South African, Middle East and South American outlets last year.

Fonterra will not discuss its business with McDonald's, but the Herald understands it supplies a quarter of the chain's global dairy requirements.

McDonald's has 32,000 outlets in 118 countries. Its revenue last year was a record US$23.5 billion.

While his first priority was to find the highest earning markets for New Zealand milk, this country could not supply enough to meet all the ingredients orders Fonterra received and customers had to wait up to three months for a ship's arrival. Extra milk would need to be sourced offshore, which would require more capital.

A founding principle of Fonterra eight years ago was that value-added business returns should one day surpass commodity milk price returns. That day still looks far off. Just 31c/kg of last year's record $7.90/kg milksolids payout was from value-add earnings.

MILKING IT

* Global markets annual growth (source Euromonitor)
* Baby food 6.5 per cent
* Bottle proteinised water 6 per cent
* Yoghurt 5.8 per cent
* Functional protein drinks 5.6 per cent
* Cheese 4.1 per cent
* Snack bars 3.5 per cent

Andrea Fox visited Chicago as a guest of Fonterra.