Project will identify marketing potential of regenerative agriculture

Earlier this year before lockdown B+LNZ announced its intention to conduct research into consumer attitudes to red meat produced using regenerative agriculture practices. This project has now been bolstered by an injection of financial support from MPI’s Sustainable Food and Fibre Futures fund and the involvement of the wine industry’s Bragato Research Institute which is keen to discover any potential for improving vineyard management, as well as evolving brand messaging across the wine industry.

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Fonterra’s restructure more about poor strategy than milk price

When Fonterra was formed back in 2001, there was a great sense of optimism about the potential for a New Zealand dairy company to compete on a truly global scale. The industry’s infighting and parochialism would be a thing of the past and the clear intention was to use the greater efficiencies and scale to create a substantially better performing business model.

Tatua result and forecast cast doubt on Fonterra’s strategy

Tatua’s amazing final payout of $9 a kilo of milk solids, trumping Fonterra’s $8.40 (admittedly after adjusting the milk price calculation) is just one element of an impressive performance by one of New Zealand’s most consistent performers.

 

The forecast of $6.50 for the current season compares with the recently adjusted $5.30 announced by Fonterra. It may not survive the vagaries of the season, but then neither may Fonterra’s significantly lower number.

 

Tatua also announced an increase of 10 in supplying dairy farms, rising from 109. Presumably the company won’t have any trouble filling this new requirement, because being selected as a Tatua supplier must be a bit like being picked as a permanent member of the All Blacks. The only problem is to qualify the farm has to be in a very small part of the Waikato within reach of the plant.

 

At a time when Fonterra’s sheer size casts doubts on its ability to add value to its product range, not least because its cooperative members expect maximum payouts, Tatua is a great example of a small niche company which has built its business on value added products.

 

It is not easy to be in Fonterra’s shoes: it must collect, convert into product and market the output of more than 10,000 dairy farms. Tatua in contrast has only a fraction of this number of farms and, if it needs more milk at any time, it can apply for an allocation under the provisions of DIRA. Synlait is an example of a well structured niche player in the South Island which has been successful because, not in spite of, its size.

 

But the suspicion remains, Fonterra’s scale may be both an advantage and a curse. It is very difficult to convince members they should be willing to forego payout in exchange for investment in brand building, but that may be just what the company should do, if it wants to compete with the big consumer goods companies like Danone and Nestle.

 

In the interest of ensuring above board milk pricing and the preservation of fair competition between dairy companies, Fonterra must calculate its milk price based on the milk price manual. This involves using a basket of commodity reference products such as whole milk powder and skim milk powder and their by-products, but excludes lower value products such as cheese. These price calculations are closely linked to Fonterra’s monthly global dairy trade auctions which have incidentally been dropping like a stone in recent months, since unrest in the Ukraine, resulting Russian trade embargos on European product, and a slowdown in China purchasing.

 

However the fact remains, Fonterra is heavily bound and constrained by commodity markets and their price structures. Fonterra claims with justification that it is a major world supplier of ingredients, not so much a branded goods marketer. But a report just released shows Fonterra to be lagging way behind its major consumer goods competitors in spite of its production capacity.

 

It has become axiomatic for the dairy industry to be held up as a model of how an agricultural industry should be in contrast to the meat industry. The cooperative nature of dairy, purely because a dairy farmer’s milk must be collected every day, has compared very favourably with the competitive nature of the meat industry. Higher payouts have merely served to confirm this viewpoint.

 

But it looks as if the dairy industry has its own particular problem which is how best to convert what it produces into something worth more than just a commodity.

Fonterra problem highlights danger of being a one trick pony

It’s a change for the dairy industry to capture the negative agricultural headlines instead of the meat or kiwifruit sectors. Unfortunately for everybody in New Zealand the dairy industry has become such a critical and large part of our economy that the whey protein botulism scare has already caused, and will continue to cause, major concerns for our global dairy trade.

 

Only last week Fonterra was again the star of the economy with a $3 billion boost to farmers’ earnings because of a 50c lift in the payout. Yet this week the company’s very scale has been called into question. People are now asking whether Fonterra can survive its third health scare in five years.

 

Even if this is unnecessary scaremongering, another question which would have been unthinkable a week ago is being asked. Is Fonterra too big for the country or, to quote the Waikato Times, its gumboots? This ought to make those calling for one mega meat company hesitate for a moment, before they find that they are asking for something which may contain the seeds of its own destruction.

 

Fonterra is one of New Zealand’s few businesses of global scale, if not the only one, so it seems unduly critical to question its size. After all if only we had some more companies like it, it wouldn’t stand out as such an exception. Within the dairy industry worldwide, Fonterra is only one of a number of big companies, alongside Nestle, Kraft, Danone and others, but there are some key differences which make its and New Zealand’s position more sensitive to problems like this.

 

In spite of having substantial parts of its business in South America, Australia and China, it remains essentially a New Zealand company, synonymous with this country. The vast majority of the milk it processes comes from its New   Zealand farmer shareholders.

 

Unlike the other major dairy companies listed, Fonterra is not particularly well diversified, deliberately so. It has specialised in being a supplier of ingredients to food manufacturers rather than creating consumer products and brands, apart from its domestic brands like Anchor and Mainland. To the outside observer this has appeared to be both a successful and logical strategy less demanding of scarce resources than trying to match global FMCG companies like Nestle, Kraft and Danone.

 

Another weakness is the increasing importance of China as a market with its special emphasis on infant formula. Each of the three health scares, Sanlu melamine scandal, DCD residues in milk and the latest possible presence of botulism, is seen as a serious threat to the lives of Chinese children. Each time New   Zealand dairy produce and its clean, green image have been compromised.

 

Fonterra’s handling of its public relations has not been as surefooted as it should have been. The melamine problem was not Fonterra’s fault, but the last two issues have both suffered from inexplicable delays in fronting up and admitting there is a problem. With DCD the repetition of the phrase ‘there is no food safety risk’ tended to be swamped by the perception of a cover-up because, between Fonterra and MPI, disclosure was delayed for four months.

 

But this latest scare has been traced to a problem with a pipe more than a year ago and tests have been going on for several months until the problem was disclosed last Friday. The Chief Executive Theo Spierings has flown post haste to Beijing to manage the Chinese fallout, leaving the Gary Romano, MD of New Zealand Milk Products to handle the constantly moving PR situation.

 

This may be the most appropriate division of responsibility and, to be fair, Romano has always been available to talk to the media. But there has been contradictory information emerging at various times and MPI’s Acting Director General has also been making statements without having all the information he might have wanted.

 

In addition Fonterra’s Chairman John Wilson has been conspicuous by his total silence which has led to calls for his resignation from some dairy leaders.

 

The overall impression is of a company which is in complete control neither of its production processes nor its public relations. This is not good for New Zealand, quite apart from the damage it will have done to Fonterra and its customers, and raises questions about the appropriateness of one company being allowed to have such a disproportionate impact on the country’s global reputation.

 

Fonterra is by no means the only business to suffer damage to its business or its reputation. Danone subsidiary Nutricia and many other manufacturers of infant milk formula, indeed all New Zealand dairy related businesses, will be adversely affected.

 

The question has to be asked whether it’s good for New Zealand to be so reliant on the dairy industry and also whether Fonterra itself is in danger of becoming a one trick (or product) pony.