Richard Inder: Landcorp sends clear message to Fonterra

A new player in the dairy market quietly flexed its muscles this week, sending national champion Fonterra an unmistakable signal - it would not be pushed around.

The state-owned Landcorp sent the message in the form of an agreement with Open Country Cheese, the south Waikato cheese factory led by former deputy prime minister Wyatt Creech.

At the start of the next season, Landcorp will pull production from eight of its Waikato farms - equal to about one quarter of its supply - from Fonterra and deliver it to Open Country.

The 1.8 million kilograms of milk solids, amounting to less than 0.2 per cent of Fonterra shareholders' 1.16 billion kilograms of annual production, is of no great consequence.

But, over the next few years as Landcorp develops 25,000ha under pine forests in the central North Island - land formerly owned by the old Fletcher Challenge Forests - it will command attention.

It will take 18 years for this land to come into full production since it is being converted only as the forests are harvested. However, at full production, it will conservatively be producing about 25 million kilograms of milk solids a year or 291 million litres of milk. This is equal to 2 per cent of Fonterra shareholders' 2005 production and equal to more than four-fifths of New Zealand's 350 million litre liquid milk market.

More to the point, it is sufficient to give a rival exporter such as Open Country critical mass in the export market. And it could easily strike a deal with one of the major supermarket chains to supplant Fonterra in the highly lucrative domestic fresh milk supply.

Australia's National Foods, a former Fonterra target and owner of the Yoplait brand, has indicated it may set up a retail milk operation in Auckland. Across the Tasman, it is already a supplier to Woolworths, which has just bought local supermarket giant Progressive Enterprises, and may seek to negotiate a transtasman contract.

Goodman Fielder, which sources milk from Fonterra for its Meadow Fresh, Tararua and Puhoi brands, may also be keen to switch supplier.

Open Country's frustration with the terms Fonterra supplies fresh milk are well documented, so it is a fair bet Goodman feels the same way.

But Fonterra's shareholders - or for that matter the dairy giant itself - need not fear its rise.

Chris Kelly, Landcorp's affable chief executive, recognises that he can keep Fonterra and Open Country on their toes by leaving the door ajar to both. This week as he disclosed the deal, he spoke in considered tones.

The move would mitigate risks as Landcorp would not be dependent on orders from just one customer. It would not cash in its $10 million of shares it needed for the Waikato farms to supply the co-operative. Instead, they would be used to offset the extra shares it requires as it converts the forested land into farm land.

Sure Landcorp may be able to use its clout to extract more favourable supply terms than are available to smaller players. However, its interests will often be aligned with the wider shareholder base.

Farmers are already fired up about the price Fonterra pays for their milk. At the Dairy Farmers of New Zealand conference in Christchurch this week, Fonterra chief executive Andrew Ferrier fielded questions over why Australian suppliers got more for their milk than local suppliers.

The questions may have been flawed. As Ferrier noted, domestic Australian demand has a much greater influence on returns than it does in New Zealand. Nevertheless, Landcorp has the clout to demand an audience with Ferrier and chairman Henry van der Heyden. It also has the skills, resources and the incentive to argue the suppliers' corner on this issue and others as they arise.

Landcorp, joined with other majors such as the Canterbury-based Synlait, may become a far more effective check on the co-operative than the Fonterra-funded shareholders' council ever has been. The New Zealand industry and the economy, already heavily dependent on dairying, will be the better for it.


Punchy numbers

Winemaker Delegat's has been selling a picture of robust growth ahead of its long-awaited and potential $300 million flotation. But would-be investors would be wise to stress-test these projections.

The winemaker has told professional fund managers that its trading profits will grow from $18 million in the year to this June to around $40 million in the following year - a more than doubling of profits. It is counting on the strength of its brands, a weakening kiwi dollar and a big increase in production.

These are all projections that make sense given the wine industry's recent history.

However, it is worth remembering that Delegat's has made similar projections before and not delivered. In 2004, when it issued $35 million of capital notes, it forecast a June 2005 net profit of $5.15 million, but delivered only half that.

Delegat's blamed the high dollar and higher interest rates. That may be the case. However, a repeat of such a failure would be a disaster for the market.