There were at least three options for processors to maintain their milk base - protecting and defending the status quo milk supply, aggressively recruiting for new supply or expanding into new territory, or acquiring existing production assets with milk supply attached.
''Regardless of the supply strategy employed, processors will need to deliver more competitive returns to farmers to ensure supply stickiness, either by adding value to their product mix where possible and passing some gains through to farmers or efficiently producing commodities at low cost,'' Ms Higgins said.
Both those strategies came with risk; value-add was ''easier said than done'' and required ''exceptional'' execution.
Producing commodities at low cost was a possible strategy but a tight rein on cost control was required and there was no guarantee of relief from global market volatility.
The final implication was greater competition at the farmgate, as milk supply slowed and processors looked to fill plants.
''We may see new pricing structures emerge and new, innovative products to support farmers to manage cash flow and capital in order to attract and and retain milk supply,'' she said.
Increased competition for milk was most likely to impact on Fonterra, Open Country Dairy and Westland, as the most exposed processors to adverse shifts in their existing supply base in relation to their current plant capacity.
Farmers in Southland, Canterbury and the Waikato regions were the most likely to benefit from increased competition, with three new plants in the pipeline over the next two years.
Mataura Valley Milk, which is building a $240 million nutritional formula plant near Gore, was due to begin production in August next year.
It intended processing about 500,000 litres of whole milk a day, to produce 30,000 tonnes of infant formula a year at full capacity.
Fonterra started with 96% of the farm-gate market when it was established in 2002 and now sat at 84%, the New Zealand Dairy Companies Review, compiled by TDB Advisory in April, said.
Over that period, Westland and Tatua's market share remained much the same at 4%, while new processors had grown to a combined 12% share.
Open Country Dairy, Synlait Milk, Tatua and Westland, with combined annual sales of about $2.3billion in 2016, collectively accounted for 90% of the milk processed by Fonterra's competitors.
The collective size of Fonterra's competitors was significant. If their aggregate revenue was compared with NZX-listed food companies, it would be similar to the combined revenues of Sanford, Scales Corporation, Delegat Group, and Comvita, the review said.
Competitors' milk volumes had grown from 600million litres when Fonterra was established to 2.9billion litres last year.
- Otago Daily Times
