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.
In its half year results, released last month, the co-op announced that the Australian business’ earnings – before income tax (EBIT) – dropped $84 million compared to the previous year.
The Darnum plant in Victoria was caught up in the false botulism scare as some of the contaminated whey protein concentrate (WPC80) ended up at the plant for processing.
Darnum was forced to stop making infant formula and switch to skim milk powder; lower returns for skim milk powder caused revenue to plummet. The co-op also lost 17% market share in the yoghurt sector.
Fonterra chairman John Wilson told Rural News the Australian business has been frustrating for the co-op and farmers.
However, he says Australia remains a fundamental market and work is continuing to turn the business around; business performance is good but product prices have let it down.
“The Darnum plant has been processing a significant amount of skim milk powder; this year is frustrating for us and farmers – skim milk powder prices are down. That has meant our returns relative to… our product mix and relative to the milk price set up in Australia has not been efficient. It’s not through a lack of business performance but just through the price of products.”
Wilson hopes the joint venture with Chinese infant formula maker Beingmate will turn around Darnum’s fortunes.
Fonterra is taking up a 20% stake in Beingmate; the joint venture will buy the Darnum plant to make infant formula for the Chinese market.
Wilson says Fonterra is refilling the Darnum plant to resume making nutritionals. “Because of the specialist nature of nutritionals, you don’t just fill it up straightaway again,” he says. “That’s why the Beingmate partnership is so important.”
On the yoghurt front, Fonterra bought Tamar Valley Yoghurt in November 2013. Wilson says the business is doing well but the “low innovated yoghurt” sector needs fixing.
Despite a drop in earnings, the Australian business had some successes during the six months. Fonterra is now the number one supplier of products to supermarket giant Coles, up from being ranked number 33 last year. It also signed a new private label contract with Woolworths, the other big supermarket operator in Australia.
The chilled spread and cheese businesses lifted market share by 22% respectively. Operating costs have dropped 22% over the last two years, saving $35 million.
Wilson says Australia remains a fundamental part of Fonterra’s strategy. “There are huge opportunities for us in Australia. We are tidying up our business; there are some highlights and some lowlights, unfortunately the lowlights outweigh the highlights.”
Unlike in New Zealand, Fonterra is not the price setter in Australia; farmer co-op Murray Goulburn is the biggest player.
Wilson says MG’s product mix is nicely aligned with the market while Fonterra’s is not.
However, the Australia market remains a difficult place to trade for all processors. There’s excess processing capacity, as milk supply has dwindled from 12 billion L to 9bL in recent years.
The manufacturing/processing sector is deeply fragmented; Fonterra is one major foreign-owned processor alongside Saputo, Kirin Holdings and Parmalat.
Australia also has a tight and competitive retail sector.
Fonterra Australia
- Operates 10 manufacturing sites
- Processes 1.7 billion L of Australian milk
- Milk is turned into whole, skim and nutritional milk powders; cream; milk and whey proteins; and award-winning cheeses, spreads, yoghurts and dairy dessert brands like Mainland, Perfect Italiano, Bega Cheese, Ski yoghurt and Western Star butter.
