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.
Chief executive Steven Carden told Dairy News the change to farming systems will bring about an "appropriate stocking level".
"We are using this downturn in prices as an opportunity to drive a more cost efficient business. It is a learning platform for us as for the entire dairy sector. We'll come out a stronger business financially as a result, but at a $4.45 payout no-one is going to be making much money."
Carden says the change in farm systems has in the last two years cut Landcorp's production costs by at least 15%, and savings are continuing.
"We have substantial cost reduction underway with the rollout of an online procurement system that will take about $10m costs out of the business in the next five years.
"We also have our dairy group focused on a LEAN ['just in time', minimising waste] manufacturing system developed by Toyota. This is designed to drive efficiencies by developing new processes to streamline a lot of our dairy operations." The outcome is shorter milking times and staff finishing work earlier.
Carden says the low payout this season is prompting Landcorp to scrutinise all capital expenditure so that projects achieve cost savings or greater revenue.
As part of Landcorp's value add strategy under the PAMU brand, it is planning to set up two new organic dairy farms next year – one on the North Island central plateau and the other in Manawatu.
"The organic farms are being developed to produce product mainly for export but we are also exploring local opportunities.
"There are people sceptical about organics in respect of the science, but you can't dispute -- particularly in dairy -- that organics seems to attract substantial premiums. Whenever I go into a supermarket I see organics attracting a significant premium."
In value add, Carden says Landcorp is producing winter milk for Miraka and is tied into the A2 milk programme with Synlait.
The challenge of a poor punt
Finance Minister Bill English told the recent DairyNZ Farmers Forum that Landcorp will not get any new capital to spend on its farms, as the Government imposes on SOEs a more rigorous process for new investment.
English described Landcorp as a poor investment, facing the same problem as other dairy farmers – low milk payout.
"It is dealing with a significant drop in earnings against a base of debt which will be a stretch to manage," English told 800 farmers.
"It's a low returning investment; we have $1 billion dollars tied up in that organisation and it pays taxpayers very little and in some years nothing, so it's a poor investment."
Landcorp is bracing for an $8 – $12m loss this year, largely reflecting recent downward revisions to forecast milk payments.
Despite the loss, the Government is committed to retaining Landcorp on its $270 billion balance sheet.
