Global trends favour co-op

“Lower volumes will impact price achievement in our ingredients business,” he told the Northland Dairy Development Trust annual meeting in Whangarei last week.

“We will be watching stream returns with whole milk powder and increases relative to cheese and other non-reference products.

“Consumer and food service will remain focused on growth while maintaining gross margins.”

Fonterra will announce its half year results on March 22.

Overall the global dairy markets have come back into balance this year, he says.

European Union production slowed by 3% from September to November. Key milk producing countries contributed including the UK down 11%, France down 7% and Germany down 5%. Australia is down 7% for the 12 months to November.

“Farmers have adjusted production in New Zealand and weather conditions and growing conditions have been poor,” he says “On the demand side we have seen strong growth in two of our key markets – China and Latin America. In China whole milk powder imports in December 2016 were up 99% on the same month of the previous year.”

Reduced global supplies of milk have benefited Fonterra’s forecast farmgate milk price ($6/kgMS).

“But we are not out of the woods yet. Based on milk collection data through to the end of January, we are forecasting milk volumes down 5% on the previous season. That’s a slight improvement on our earlier forecast of a 7% decline.

“The weather has improved in many regions following unfavourable conditions during the peak months,” he says. The Northland drought impact has been factored into current forecasts.

Fonterra lifted its farmgate milk price to $6/kgMS following improvement to global milk prices since December. “There have been a few minor bumps in the road since then but overall the sentiment remains positive,” he says.

“We will continue to monitor the global situation and as always if there is a good reason to change our forecast we will tell you.”

Every year Fonterra is increasing the milk volumes going into higher value products in its ingredients and consumer food services business, he says. All new milk produced by NZ farmers now goes straight into higher returning products.

“We talk now about volatility in global milk prices being the new normal. But this means opportunity for Fonterra,” he says.

“We have invested $1.5 billion in capacity since 2012, building new plant and creating more jobs in Waikato, Manawatu, Canterbury and Southland. This means we can be more flexible with the products; we make a switch to the products that are most profitable.

“Our new plants are highly efficient in quality and cost. We have matched production in the highest value customer demand or taken advantage of reduced costs especially at the peak of the season.

“We were able to switch production away from the powders and related product streams of butter and anhydrous milk fat that make up the farmgate milk price while margins for these products were lower.”

Food service operations go from strength to strength, supported by the way Fonterra sells to this market segment, he says. “We target three areas: quick service chains like McDonalds, bakeries across Asia and China and companies specialising in Italian cuisine.”

While the higher forecast milk price has been good news for farmers, lower milk collection is still tough on farmers in some regions, notably Northland.

“We want to shift more volumes of milk into higher value products. We have a $35b revenue goal for 2025.” Food service alone will be a $5b business by 2023.

NZ cannot satisfy the total dairy market of 406b L and growing at 2.3% a year. Dairy demand is forecast to grow to 465b L by 2020. That is why their strategy includes partnerships in Australia, Europe, Chile and China.

“China is our largest market; it remains a land of opportunity. We are well positioned in this market with our Anchor, Anlene and Anmum brands and our ingredient exports.”

Prospects are good, he says. “The countries that don’t have enough milk will always look to the countries that have more milk than they need to close the gap.”

We are the biggest in the globally traded market – a 66b L market growing at about 5% a year.

“That’s why we are optimistic about the future. Global trends are in our favour… more mouths to feed, urbanisation and growing incomes encourage greater dairy consumption. There are great opportunities from paediatrics through to active ageing trends to tap into with our dairy knowledge and market reach.”

He does not believe NZ has reached peak milk and there will be further advances in technology, breeding and onfarm practices. But the growth will not be the 4-5% of some previous years; long term they expect to see production growth of about 1%.