Fonterra is on its way to becoming Australia’s biggest dairy processor since flagging it will buy up to 2.5 billion litres of milk in 2017-18, up from its current 2 billion litres, pipping Murray Goulburn. The group holds its annual meting Friday and is expected to reveal the outcome of its recent $1 billion-plus auction.
It is believed that Murray Goulburn farmers will be presented the case on why it is no longer viable to retain a co-operative structure.
Troubled Murray Goulburn has been seeking a buyer of its assets in recent months, and New Zealand’s Fonterra outed itself as an interested party in September. Bega Cheese was also in the running, but told shareholders Thursday it was out of the race. Other potential buyers included French-based Parmalat, and two Chinese firms, Mengniu Dairy and Yili Group.
Fonterra Australia chief executive Rene Dedoncker told The Australian Financial Review the group had sent Murray Goulburn a “reasonable articulation” of what the future dairy industry would look like with the two companies merging. But Mr Dedoncker did not sign a confidentiality agreement, leaving him at arm’s length of the process.
“There has been some interaction, but a light touch. We have not had any finality to that,” he said.
“But this is not just a corporate decision, the farmers have to vote. My job is to grow the industry. The attraction to MG is together, we get economies of scale and create something really powerful for agriculture in Australia that satisfies competition and is good for farmers.
“We have indicated we would be up for partnering with MG but if not we will continue to creep our milk volumes here anyway and invest. The big idea is to be a massive milk pool to take to Asia.”
About 60 per cent of Australia’s total milk pool of nearly 9 billion litres per annum remains in Australia. But Mr Dedoncker said there is huge opportunity to grow in Asia, which is hungry for dairy. Fonterra tops more than half the pizzas in China with its mozzarella, and the group is having trouble keeping up with demand.
“There is interest in Oceania dairy because it’s a trusted source, and it’s clean, green, grass-fed – it is growing enormously,” he said.
Fonterra’s interest in Murray Goulburn is a strategic play driven by the need to grow its milk pool to meet the additional 10 billion litres per annum the world is demanding. Euromonitor estimated the global milk pool would reach 465 billion litres by 2020, from about 406 billion litres in 2015.
Fonterra Australia’s milk collection rose 23 per cent in September to 34.2 million kilograms of milk solids as it attracted new farmer suppliers after Murray Goulburn troubles. Fonterra plans on adding an additional 200 to 250 farmers through next year as its stretches to meet its 2.5 billion litre goal by June.
“We have a wait list,” said Mr Dedoncker, who spends about 40 per ent of his time out visiting farms, plants and industry bodies. “There are nervous farmers looking for something solid.”
Over the past 18 months Fonterra added an extra 75,000 metric tonnes of processing capacity. It has spent about $40 million on robotics and packaging line, and is going to expand its operations in Tasmania and Victoria. It will be making a triple-digit capital investment across all sites.
Mr Dedoncker admitted just over a year ago he was “ducking boots” with frustration and anger boiling over from farmers following a milk price scandal that prompted the resignation of then Murray Goulburn managing director Gary Helou and chief financial officer Brad Hingle. Fonterra, the world’s largest dairy exporter, also suddenly and retrospectively cut the prices it paid farmers in May 2016.
“Farmers are frank and they don’t forget,” Mr Dedoncker said when asked if Fonterra had rebuilt trust with farmers. “And we will never forget either, that defines who we are now.”
Making tough calls but keeping farmers informed has helped rebuild confidence, he said.
“We have reduced the shocks out of the system and the surprises, and are over-communicating, and putting real face in front of farmers consistently,” Mr Dedoncker said. “Our farmers are telling other farmers that this is working.”
Mr Dedoncker said Fonterra is focused on its strengths: cheese, whey which goes into nutritionals and fat products like butters and creams. Its diverse earnings are split across supermarket brands like Western Star and Mainland butters, food service, and ingredients such as providing milk powders to Nestle or Kraft, which helps mitigate risk.
He added that Fonterra’s return on capital, shareholder returns, and farm gate milk price are all positive indicators that the business is in a strong position.
“Globally we will look at opportunities as they present themselves, and we are doing that in South America, we will do it in milk pools that are attractive,” he said “Australia is attractive, but not under any conditions, they have to be right.”