Why Fonterra accepted defeat in the dairy aisle
OPINION: Fonterra's sale of its consumer dairy business to Lactalis is a clear sign of the co-operative’s failure to compete in the branded consumer market.
The two largest milk processors — Fonterra followed by Open Country Dairy — are reporting strong growth in production.
Fonterra says good weather and early calving, mainly in the South Island, is helping milk supply. In August alone the co-op’s South Island suppliers produced 26 million kgMS -- 13% more than the same month last year.
The co-op last month revised its forecast payout by up to 50c/kgMS; Fonterra milk collection across the season was forecast to rise 3%, from 1525m kgMS to 1550m kgMS.
Fonterra chief executive Miles Hurrell says global demand is simply not matching current increases in supply. Europe, US and Argentina are also recording strong milk flows, he says.
Open Country Dairy, which has four plants, reports strong milk supply in all regions.
OCD chief executive Steve Koekemoer says factories are now running flat-out to process the volume.
“The new Horotiu factory is already processing near capacity and the Wanganui factory is breaking its production records this season with all the new farmers who have come on board.
“Awarua and Waharoa [plants] are nearing peak.”
Last week’s Global Dairy Trade (GDT) auction result recorded a 0.3% drop in the price index; whole milk powder price slipped 0.9%.
RaboResearch analyst Emma Higgins says all things considered the latest GDT event was not a bad result for farmers.
WMP softened a little by -0.9% to US$2729/tonne and SMP held its ground at the average price of US$1977/t. Fats recovered some lost ground, with butter lifted 2.4% to US$4114/t and AMF lifting 1% to US$5,106/t.
Higgins says while the GDT index average moved fractionally lower by -0.3% to US$2885/t, the results followed Fonterra lifting expectations of milk collections this season.
Putting Fonterra’s forecast into perspective, she noted that a similar 3% lift in total NZ milk collection would bring record supply to close to 1.9b kgMS, just pipping the highest milk flows seen in the 2014-15 season.
“We’re still comfortable with our RaboResearch forecast for around a 2% increase in national collections and anticipate NZ milk supply tightening in the first half of 2019 due to strong comparables and changes to Fonterra’s regulations for suppliers using PKE.”
Although Fonterra last week lowered its forecast farmgate milk price to $6.25 - 6.50/kgMS, RaboResearch is still comfortable with their forecast of $6.65/kgMS for the 2018-19 season.
“Ultimately, we see milk supply growing only modestly over the coming 12 months, as tight onfarm margins and lingering weather effects play out. But as we highlighted after last GDT Event, while we anticipate these supply conditions will provide some upside to commodity prices, NZ’s peak milk flows need to be worked through first, as evidenced by last week’s GDT results.”
Koekemoer says OCD still believes prices will hover around the current levels as markets digest the additional supply out of NZ.
“This also means we are not expecting a significant decline.”
Organics plunge
Open Country Dairy is taking a plunge into organics.
Chief executive Steve Koekemoer says the company is nearing its first processing date in November after two years of transition onfarm and a major site upgrade at Awarua to process organic milk.
“It is an exciting venture for our organics team focussed on making this a success for the business and our organic farmers in Southland.”
Koekemoer expects OCD’s first branded organic products to hit the shelves in early 2019.
“We are enthusiastic to see this sector grow as we prepare for our launch,” Koekemoer says.
