Naval Sabri, senior vice president, Olam Food Ingredients.
Naval Sabri, senior vice president, Olam Food Ingredients.
Singapore government-backed Olam says it plans to become a “relevant” player in the New Zealand dairy industry and will look for opportunities anywhere in this country.
This undertaking by Naval Sabri, dairy senior vice president of Olam Food Ingredients (Ofi), the name by which Olam has set up as anew milk processor and exporter in Waikato, will fuel industry speculation the company will expand into the South Island.
Sabri told the Herald from Singapore Ofi was “not tied to” the new $100 million-plus investment in the Waikato but would focus on it “for now”.
“But in future we will look for opportunities anywhere in New Zealand. We have definitely invested to become a relevant player in the industry.”
The new Tokoroa plant, for which Ofi is now planning a second stage to move into higher-value proteins and ingredients, received its first milk tanker last week.
Ofi’s parent company Olam is majority-owned by Temasek Holdings, a conglomerate owned by the Singapore government which managed a total of US$496.59 billion ($805b) in assets as at December last year.
Asked about the challenges of starting up in a global milk price slump in a crowded milk processing region when New Zealand milk production is predicted to fall, Sabri said he was asked this a lot, but Ofi saw several opportunities in the situation - for itself and the dairy industry.
He said Ofi “and most of the industry” was not surprised by the downturn in milk prices. It had become obvious once an expected return of demand from China in the second quarter of the year when it came out of Covid lockdown did not happen. Market observers had also spotted an increase in China’s domestic milk production.
“At that time the expected slowness of demand was for at least the next two quarters. We adjusted our business model to be prepared for that eventuality.
“For me it was surprising that Fonterra took so much time to communicate to their farmers that there is an issue in the market and that the milk price was way too high to support that.”
In a deliberate strategy, China was an important, but not dominant market for Ofi. Only around 20 per cent of its product would head there from the Tokoroa operation.
Sabri agreed that when Ofi announced its Tokoroa plans in 2019, some people thought it was a mad move.
“I’m happy people see us as mad rather than over-smart. For me that is a better way to start but I think we have proven we are not (mad).
“We have great support from the farming community. Waikato is the biggest milk producer and there is competition for milk, but it is who can offer the best value for milk sourced from the farmer. As long as we are able to do that I am confident we will be able to source as much milk as we need.
“There was a lot of doubt we would get any milk for the plant but (as at) today we have secured a large part of the milk required, and if you add what is contracted for next season, we have virtually what is needed for the next investment.
“We are very gung-ho about New Zealand as an important dairy origin and we will continue investing.”
Sabri declined to say how much Ofi had invested to date aside from the $100m-plus plant build.
“Numbers are still being worked out for phase two and phase three but it’s very substantial”.
The company won’t divulge its supplier numbers but a major score has been attracting milk from one of New Zealand’s biggest dairy farmers, Colin Armer, a major Fonterra shareholder and former director.
A newcomer to the $20 billion-plus dairy export industry in its own right but, as Olam, a former shareholder of exporter Open Country Dairy, Ofi is entitled under the Dairy Industry Restructuring Act (Dira) to hit up Fonterra for up to 50 million litres of milk a season at the base farm gate milk price, until it is self-sufficient.
It has not taken up that entitlement.
As for the risks of starting production in a world dairy slump, Sabri acknowledged it was a difficult time for the industry “but it does come with a lot of opportunity”.
Newcomer Olam Food Ingredients is already finalising figures for an expansion. Photo / RNZ / Cosmo Kentish-Barnes
“Every downturn is also an opportunity to look inwards and reflect on processes and operations. One is forced to cut costs and look at operations and efficiencies.
“I feel as an industry everyone will benefit once we get past this because they have to adjust in a manner that becomes more cost competitive.”
Market price volatility was inherent in the dairy industry and the world had seen bigger movements before, he said.
“What is important is how you mitigate and manage volatility in a sustainable manner. This is also a time when one can build relationships and trust with local farmers.
“We do understand this is one of the most difficult times New Zealand farmers have seen in the past few years. The speed at which it (the milk price fall) happened has also surprised - just two months ago we were looking at about an $8 milk price and suddenly it’s gone down to close to $6 (per kg milk solids).”
By virtue of its industry dominance, collecting around 78 per cent of the country’s raw milk, Fonterra’s farmgate milk price becomes the guide for the whole industry.
Sabri said Ofi was supporting its farmers by paying them the highest milk payment advance rate in the industry.
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the dairy industry, agribusiness, exporting and the logistics sector and supply chains.
