"We found that the often promoted 'move up the value chain' from commodities to more specialist products had not been necessary to achieve strong risk-adjusted financial returns," the report said.
One of its authors, TDB director Geoff Taylor, said the main message was the industry had moved beyond two "theoretical" performance benchmarks. One was the premise for Fonterra's creation from an industry merger in 2001 in a "privileged, monopoly position". The merger, enabled by special legislation, the Dairy Industry Restructuring Act (DIRA) , gave Fonterra 96 per cent of the country's raw milk supply, which has since fallen to 82 per cent.
The other benchmark now redundant was Tatua's enviable reputation as the country's milk payout leader. The relatively small volumes of milk it processed made it flawed as a valid industry benchmark.
For the first time farmers and the industry had the market benchmarks of Open Country being a standout commodity-based processor, Synlait being the standout ingredients processor, and a2 being the standout consumer business," said Taylor.
"Bundle them all together and for the first time you get a comparable market-based benchmark to make judgements about Fonterra's performance."
Taylor and fellow TDB director and report author Nigel Atherfold are former directors of Open Country. Taylor is a shareholder in Open Country and said TDB are retained by consumer goods retailer Goodman Fielder, which has guaranteed access to Fonterra milk at a regulated price.
Taylor said he is also a direct investor in Fonterra and on the board of several large Fonterra suppliers. TDB had done the work because it had clients in the industry.
A Fonterra spokesperson said its farmer-owners were significantly better off than before Fonterra was formed.
"You only have to look at the global milk price over the last 20 or so years to see that since Fonterra's formation the New Zealand milk price has doubled and is now higher than the EU and US.
"We know from our own analysis it is difficult to compare the varying business models and payouts of New Zealand dairy companies, some of which are corporates and some, like us, cooperatives. All are of varying sizes, have different asset bases and different ways of calculating their milk price," the spokesperson said.
Anecdotally, Fonterra knew of farmers who had shifted to other dairy companies and did not receive the milk price they were expecting due to variables in competitors' price structures.
Fonterra's purpose was to maximise a sustainable return to its farmer-owners.
"This means achieving the highest possible total payout. And we do this through our farmgate milk price and our dividend payout, which many of our competitors do not offer and which is good for our unit holders."
The Fonterra Shareholders Council, which represents Fonterra's cooperative farmer-owners, declined to comment.
The 42-page report said when the return-on-assets segment performances of Open Country, Synlait and ATM were taken together they provided a comparator that suggested Fonterra's global "volume into value" strategy had not produced additional shareholder value beyond what could have been expected from a New Zealand-based commodity and ingredients processor.
Fonterra's two largest competitors, Open Country and Synlait, now represented 60 per cent of the non-Fonterra market and had processing volume growth of 15 per cent last year.
"Of more significance is the growth implied by their estimated market values – (their) combined equity is estimated to be $2.9 billion which translates into $15 of equity per kilogram of milksolids processed. By way of comparison, the market value of Fonterra's equity is $6/kg," said the report.
"This value differential implies significantly higher forecast growth rates of volume and profitability for Fonterra's competitors."
From 2001 to 2017 total milk volumes had grown by 52 per cent or about 470 million litres per year, the report said.
"Therefore while Fonterra's market share has fallen, its milk volume collections have grown by 37 per cent. For a highly perishable product that can't be stored, that growth carries with it the consequence of having to invest in increased processing capacity for the forecast peak milk volumes.
"This level of growth means that it has been very difficult to do anything with the additional volume other than to channel it into commodity exports."
With Fonterra collecting over 300m of the average 470m litres of "new milk" per year, the remaining 170m litres had been going to Fonterra's competitors.
The report estimated that with milk growth now stalled, Fonterra's market share would fall to about 78 per cent by 2020.
Open Country's processing volumes were projected to rise by 8 per cent per year and Synlait's by 7 per cent a year until 2020. No growth was assumed for Westland Milk, Tatua and Miraka. Growth of 28 per cent a year was anticipated for the Oceania company which would complete a new plant soon.
TDB said if Fonterra was allowed to pay a higher milk price to defend its volumes, competitors would likely to continue to offer premiums. Introduction of risk-transferring pricing structures could also speed up. Such arrangements could include longer-term milk supply agreements, fixed milk price contracts and toll processing pricing.
TDB expected the Government's imminent review of the industry would trigger consideration of the removal or phasing out of the regulated milk price; the potential for stranded assets with those with spare capacity fighting harder to keep milk with resulting greater milk price variations; and the potential for reduced consumer protection in the domestic market if Goodman Fielder lost its access to Fonterra milk.
