What Would Synlait Be Worth to Fonterra or a2 Milk?
Speculation of a possible joint move by Fonterra and a2 Milk to buy Synlait raises a much bigger strategic question, says agribusiness expert Dr Nic Lees.
This follows the cooperative's recent announcement that it plans to introduce a market-linked organic milk price for its organic milk farmers.
Paul Grave, head of cooperative affairs, Waikato, says while the opening forecast organic milk price is a big step up from the $5.65/kgMS payment organic farmers currently receive (the organic fixed premium on top of the Farmgate Milk Price), it reflects consistently high prices for organic milk products in its global markets.
Grave says the marketplace for organic milk is very competitive and the market-linked organic milk price will help Fonterra to secure a steady stream of organic milk.
"The growth of the organics business is good news for the whole cooperative. Organic farmers actively participate in creating value by providing Fonterra with a certified organic milk stream and all farmer shareholders share in the value created by the organic business through dividend payments."
Increasing demand for organic milk products, and organic food in general, is leading to high prices for these products in international markets. While global milk prices have been volatile recently, prices for organic dairy ingredients have remained at the same relatively high levels since 2013/14, says Grave.
"Organic milk prices are high because consumers' appetite for organic milk products is growing faster than supply."
The margins the cooperative is achieving on its organic milk products are similar to some of its highest-earning consumer and food service products, says Grave.
"By selling higher-value products at premium market rates, the long-term organics strategy reflects Fonterra's priority to drive more value from every drop of milk."
Grave says Fonterra's organics business has been consistently profitable recently and has paid back the cooperative's investment in the business.
"Organics is a profitable business. The cooperative is focused on growing its organics business to benefit from the consistently high global market prices so that it can increase returns from this business for the benefit of all our farmers", says Grave.
