The country’s second biggest dairy manufacturer and exporter Open Country Dairy believes New Zealand milk production growth has peaked and a long run of muscular annual rises is over.
By: Andrea Fox
Source: NZ Herald
Chairman Laurie Margrain said the privately-owned company did not believe overall milk production would rise much higher than it is today.
“There will be seasonal variances due to weather of course but it’s not realistic to think New Zealand milk production will go through the growth curve it’s had in the past 10 years.”
The plateauing is a result of environmental regulations and market conditions, Margrain said.
“Dairying has to be economically sustainable as well as environmentally sustainable and that tends to put up some natural barriers. But we as a company will continue to grow and the industry itself will get better – it has to – at both protecting the environment and lifting production per animal in a more sustainable manner. But we are not talking about a lot more pasture and more animals, it’s about operating smarter and more efficiently.”
Industry figures support his theory.
Total New Zealand milk production for 2017 to the end of December was 21.46 million tonnes; for 2016, 21.17 million tonnes; for 2015, 21.53 million tonnes.
DairyNZ senior economist Matthew Newman agreed dairying growth had slowed after steady annual rises in the past two decades, due to land use changes and consequent constraint on the number of cows milked.
“Since 1990 milksolids growth has been about 4.4 per cent a year. We expect it to be 1-2 per cent a year for the next decade.”
Also changing in the $12.4 billion dairy export industry is its players’ market share of national raw milk collection.
As Open Country Dairy’s seventh processing plant rises at Horotiu north of Hamilton, latest available figures show the 14 year old company, which started in the Waikato with two farmer suppliers, collected 7.1 per cent of the country’s raw milk to the end of May last year.
Industry heavyweight Fonterra, a farmer-owned cooperative, had slipped to 82.4 per cent from 96 per cent when it was created from a giant industry merger in 2001.
Another cooperative, Westland Milk Products, was third with 3.5 per cent, and listed Synlait Milk had 3.4 per cent.
Fresh collection figures are due out in May, when Fonterra’s market share is expected to ease again and the smaller companies’ to rise slightly.
Auckland-headquartered Open Country will start processing milk at its new Horotiu plant around the end of August or early September, Margrain said.
As usual, the publicity-shy company, majority owned by Talley’s Group, won’t divulge the capacity or cost of its latest build, but Margrain said it would be about the same size as Open Country’s original plants at Awarua in Southland, Whanganui and Waharoa in the Waikato.
The three sites have since added more processing plants.
Margrain said the Horotiu plant, next door to the Talley-owned Affco meat processing plant and headquarters, was “well on the way to signing up the milk to fill it”.
He would not say how many farmers now supplied Open Country nationally, but it’s understood to be about 1000. Most of these are farmers who have exited Fonterra, which claims to have about 18,000 farmer shareholder-suppliers. Open Country farmer supporters do not need to buy shares to supply, unlike Fonterra and other cooperatives.
Open Country started in business in 2004 processing and exporting commodities, mostly wholemilk powder. Margrain said today only a third of its production was commodities, with the balance being food ingredients.
“The products we make now are high-heat stable and customised. We now run six dryers around the country which have been specced up and added to make a range of products to meet what the customer and the market wants.”
Open Country’s milk payout forecast for the 2017/18 season, which ends in May, is $6.25-$6.55/kg milksolids. Fonterra’s forecast milk price is $6.40. Fonterra farmer shareholders and listed unit holders will also receive a dividend.
Margrain said the global milk price outlook for the next year looked “relatively stable”.
“The supply/demand matrix, within reason, looks to be in balance. For some months now we’ve been advocating the fact that we are in a relatively stable supply/demand situation and we see no reason for milk prices to climb dramatically nor to decline. But I have to qualify that by saying we can only guess because the market is the market is the market.
“Even when GDT [Global Dairy Trade auction] was declining slightly recently, supply and demand was telling us it was just blips and things have recovered since. We’re not big fans of GDT, which kind of tells the world what it can expect to pay and the real world isn’t like that. Prices vary according to market volume, quality of product and capacity to pay.
“But I think at the moment there is enough oxygen for farmers, processors, customers and consumers to all breathe at around about these current [price] levels.”
Open Country exports to more than 60 countries, with China its biggest single market and South East Asia its second, said Margrain, who last year stepped down as president of both BusinessNZ and after several years leading the Employers and Manufacturers Association.
He would not discuss Open Country’s export volumes other than to say they were rising each year and 98 per cent of production was exported, with small volumes of powder and cheese sold within New Zealand.
Owned 75.9 per cent by Motueka-based Talley’s Group and 15 per cent by Singapore’s Olam International, Open Country has more than 250 staff.
It has no employees outside New Zealand, selling directly to customers from here.
Its main concentration of suppliers is in the Waikato.
Company revenue for the year ended September 30 2016 was $818.8 million and profit for the period nudged $62m, according to Companies Office records.
Margrain said revenue was “irrelevant” in this business because of milk price vagaries.
“We’re in that kind of industry where the revenue number is not a good portent of how you’re doing because everything depends on the milk price.”
So what does the next five years hold for Open Country?
“We’re a significant player now and I know some people think we should exert more influence in industry areas than we do, that we should more publicly express our views.
“But our approach is to maximise payout to our farmers and if New Zealand production is not going to grow appreciably, then we will continue to keep our heads below the radar and maximise the recovery we get from milk.
“So our investment will be into higher value ingredients and finished products. We won’t be setting out to establish brands around the world. Our customers aren’t going to find themselves in competition with us in their [branded product] market.
“We’ll continue developing and cementing relationships with our customers and key routes to markets and paying our farmers competitively.”