An Australian sister for Fonterra? - co-op weighs its options

Fonterra Australia managing director Rene Dedoncker. Picture / supplied.

Fonterra is working on an ownership model that could result in the formation of a sister co-op across the Tasman, Fonterra Australia managing director Rene Dedoncker says.

Saputo, Canada's biggest cheese maker, last year agreed to buy the troubled Victoria-based Murray Goulburn (MG) for A$1.3 billion, including debt.

Fonterra had put in a merger proposal for the loss-making MG but was rebuffed.

MG's problems, which came after a difficult few years for farmers, have prompted discussion in Australia about how the dairy industry should operate.

Since MG's turn for the worse, Fonterra Australia has emerged as Australia's biggest dairy company in terms of the volume of milk that its processes - 2 billion litres a year.

Dedoncker, in an interview with the Herald, said Fonterra would still be interested in MG if its sale to Saputo - which is before the Australian Competition and Consumer Commission and the Foreign Investment Review Board - does not go through.

"If they were to pick up the phone - then we'd talk, absolutely we'd talk," he said.

"But how would that evolve? It's a bit hard to say."

Fonterra Australia last week announced a big capital spend-up on its plant.

"What we have had to do is start to make choices here because we have got demand that is growing that we can't service," he said.

It appeared MG had made its choice with Saputo, but Dedoncker said the sale process had prompted questions about ownership.

"We are are doing our own work at the moment and at the end of March, we are going to go to farmers to say what would an ownership model look like for Fonterra Australia," Dedoncker said.

"We are exploring ownership models and well take that back through the farming community here just to check the appetite," he said.

As it stands, Fonterra Australia functions purely as a dairy company - not a co-operative.

It has a milk supply agreement with Bonlac Supply, which represents suppliers in Victoria and Tasmania.

He said a sister co-operative in Australia was possible.

"I think there's an appetite for it. We need to be clear that it needs to be farm-led - it can't be something Fonterra pushes on them."

"It's a 'forever' type decision, you know, you can't just say 'we're doing this for a few years'.

"It would change the whole nature of how we operate here," he said.

Dedoncker said Aussie dairy farmers had in the past not spoken with a strong voice, but that was changing.

Fonterra's Stanhope Cheese Plant in Victoria Photo / supplied.

"There is optimism and we're seeing that at the farm gate in terms of milk price and the whole industry is saying the same thing.

"We're starting to see an on-farm investment return and that's always a true indicator of farm confidence," he said.

"We are having a good season and we're starting to see growth of around 3-4 per cent in terms of milk."

In terms of dairy production, New Zealand has far outpaced Australia since the formation of Fonterra, with its near monopoly, in 2001.

"I think the Australians were saying 'wow, for a dairy nation, one that is smaller than those around the world, is the power of one the answer?'

"Well, I think that's what they're throwing out there. If nothing else, it fosters the right conversation about how do you make small nations like New Zealand and Australia competitive, in an enduring way," he said.

In the last six months or so we've had 400 million litres come across to Fonterra, about half of that from disaffected MG suppliers.

MG's financial problems emerged early in 2016, when managing director Gary Helou resigned after the co-operative slashed its profit and farmer payout forecasts - less than a year after MG's partial float on the ASX.

Problems started to mount when MG continued to pay farmers high prices at a time when world prices for dairy had slumped.

Dedoncker said MG's experience was a salutary lesson on what can happen if the price signals to farmers are incorrect.

"Yes, it was a wake-up call for anybody and everybody.

"And again, it comes down to the simple things. It is about how you communicate and take those surprises out.

"You don't carry that burden on the balance sheet for that long and not tell anyone about it," he said.

"There is a stewardship job here to take farmers on the road, and that is why we are over-communicating now.

"And what we need here is not just confidence in Fonterra, we need confidence in the whole industry."

"Look, if we can get another billion litres in the system for everybody over the next few years, that's a win for everyone because there's a home in Asia for all of that.

"So, I think the whole industry's learned lessons. Certainly, we behave very differently and we're very active now to take the surprises out of the system."

Last week, Fonterra Australia announced plans to spend A$165 million ($179.4m) on key sites in Victoria and Tasmania to increase capacity needed to process the extra milk that now flows the co-operative's way. Dedoncker said the move had helped to restore farmer and industry confidence across the board.