The number of dairy factories sprouting in Waikato has got to the stage that farmers are concerned the industry has reached a tipping point.
They fear further growth could lead to overcapacity – too many milk processing sites – and dairying will follow the path of the meat industry, which over the past decade has been plagued by plant closures and job losses.
Fonterra has eight factories in the region, Open Country Dairy has a site at Waharoa and another at Horotiu, north of Hamilton, to be opened in August. Joining a swollen list is Tatua Co-operative Dairy Company, Miraka and Yashili New Zealand each with one factory.
Rounding off the established processors is the Waikato Innovation Park and the Dairy Goat Co-operative, both located in Hamilton and processing non-bovine milk.
The newest players looking to move in are Synlait, which has conditionally bought 28 hectares of land in Pokeno, North Waikato, subject to approval from the Overseas Investment Office and Happy Valley Milk, which has land resource consent approval for a new dairy factory in Otorohanga.
Fonterra Shareholder’s Council chairman and Waikato farmer Duncan Coull says it is becoming a national issue for the industry. It is bigger than Fonterra and an industry-wide discussion is needed to find a way to save it from itself.
“Do farmers really want to reach that tipping point because once that tipping point is reached, there is no turning back. We need to start asking ourselves the question as farmers what we want the industry to look like going forward.
“If farmers continue to allow capacity to be built and continued to supply that capacity, be very careful what we wish for, we are another red meat sector waiting to happen and we are another Australian dairy industry waiting to happen.”
Coull says the dairy industry’s value was in 50 years of providence built into their farming systems, which no other country in the world has.
“We are giving that away when we are supplying a competitor on a contract basis for nothing.”
Fonterra’s share of the national milk supply sits at about 82 per cent. If this is further eroded and the protection offered to farmers from the Dairy Industry Restructuring Act (Dira) is removed, the co-operative’s position of setting the benchmark for the milk price will be brought into question, Coull says.
“If we have excess capacity in the country, every time we have dilution of that asset given that we have a static milk supply, it affects everyone, whether you are Fonterra or OCD.”
He says the future control of the industry sat in farmers’ hands.
If processing overcapacity occurs and farmers lose control of the dairy industry structure, they risk passing on the rewards of a value-added economy to others, becoming price takers rather than makers.
The red meat sector was the perfect example of what happens when there is overcapacity. It raises the question whether farmers enjoy the downstream value from more competition.
“I could argue that the answer is no,” he says.
Tighter regulatory and environmental controls around changing land use means farmer suppliers for these new plants will come from existing farms, not new dairy conversions.
Federated Farmers dairy chairman Chris Lewis also fears the region may have reached “peak plant capacity”.
“Farmers like a bit of competition and Synlait is a good company. But within Waikato there will be no more dairy conversions, and farmers I know aren’t adding to their herds.
“We are all aware of the environmental impact of dairying, and there is also competition for land from housing and horticulture.”
New roading infrastructure is being built through rural land and some land blocks have been switched from cows to horticulture, he says.
“There’s a lot of competition for good land and if the most profitable land use is something else, they will change from dairy and put it into something else, that’s the economics of it.”
Synlait chief executive John Penno says the dairy industry is already at overcapacity and the vast bulk of the processing technology built in recent years has been large-scale milk powder plants producing dairy commodities.
“There’s no question in my mind that overcapacity across the industry exists. But the real question is, is it the right capacity? What is the total capacity is the wrong question.”
Synlait does not operate in that market and builds plants focusing on high-end, value-added products.
Waikato is the least competitive region in New Zealand with Fonterra’s market share of the local milk supply the highest in the country and farmers like to have choice, he says.
He cannot understand comparisons to the meat industry. Extra competition will drive the milk price up, not down, because more people are be bidding for a finite amount of products and the profits from this will go back to farmers.
“Farmers want high price, and the way to get a high price is to have lots of people who want your product you produce and in the case of dairy farmers, it’s milk.
“I can’t see how farmers will lose if there are people rolling up their gate and try and convince them to send them their milk.”
The last thing farmers want is for no competition because it would mean the product value is leaked from the farm further up the supply chain.
“It means that the processing companies have to be very efficient and innovative or they don’t survive.”
Agriculture Minister Damien O’Connor says he is aware of the issue and plans for it to be a discussion topic during the upcoming Dira review.
O’Connor says he has had many discussions with dairy industry people on the matter the past few weeks.
“I’m hoping that the review will look at the whole dairy industry and that any changes to the legislation as a result of that will protect New Zealand’s long term interests from a sovereign, from a commercial and from an environmental and social perspective.
“Any future discussion of the dairy industry will cover all of these issues and that we can set the review up to do this in an efficient way and deliver the right outcomes and we as government will be listening carefully.”
Former Tatua Co-operative Dairy Company chief executive Paul McGilvary doubts the industry is in any danger of overcapacity. He would be surprised if Fonterra built a new greenfields site in the North Island, saying it is more likely they convert existing plants into producing more added value products.
In the South Island, he believes Mataura Valley Milk will be the last factory to be built for a while.
“I would be very doubtful if there is an explosion of stainless steel. The permits you require to have a plant is quite difficult and as a startup trying to supply the market fresh, I think they would have real issues in terms of the economics of that.”.
If the Dira review sees rules around Fonterra supplying other milk companies reinstated, then it – combined with the co-operative losing milk to OCD and Synlait’s new Waikato plants – may cause Fonterra difficulties.
“I would imagine that if they lost milk in the North Island to the likes of Synlait and OCD and they had to give [for example] 50 million litres of milk to other processors under the [Dira] review, then I imagine they would take that opportunity to close some of the plants that were reaching the end of their life anyway.”
By: GERALD PIDDOCK