Fonterra is looking to eke more value out of New Zealand milk as it faces a future with fewer cows.
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123RF Dairy cow numbers are in decline after a period of big expansion.

As part of its strategic reset under chief executive Miles Hurrell in 2019, Fonterra shifted its focus away from expanding its milk pools overseas to concentrate on enhancing the value of the milk produced by its 10,000 farmer shareholders at home.

“We were growing at that point a global milk pool and so we were trying to say ‘all milk is equal’,” Hurrell told a media briefing at the co-operative’s research and development centre in Palmerston North in June.

The focus now was on “the white gold that we have here in New Zealand”, he said.

Fonterra has had to rethink how it grows profits as the rapid expansion of dairy farming comes to an end. Cow numbers more than doubled over the last 40 years, but the environmental cost of the rapid change means cow numbers are expected to decline in the future. The Climate Change Commission suggested dairy cattle numbers could fall 13 per cent from 2019 levels by 2030.

“Our milk is no longer growing so it gives you the ability to be a bit more choosy,” Hurrell said.

“If someone doesn’t want to pay the price now, or they don’t see the value in the New Zealand provenance and what we offer, well thanks but no thanks, there are markets out there that can.

“That’s a completely different way to approach the world. It’s quite a nice place to be.”

Hurrell rejected the suggestion that Fonterra was a commodity producer, which he said was “far from accurate”.

The co-operative opened its doors to its 94-year-old research centre to media in June for the first time since Fonterra was formed in 2001, to showcase the work it’s doing on innovation, sustainability and efficiency which it is betting will drive future profitability.

Researchers at the centre are looking deeper into the nutritional and functional properties of milk to see how new products can be created for the co-operative’s markets around the world.

“We are consistently learning new things about milk,” said the centre’s head Mark Piper. “It’s far, far more complex than people would give it credit for.”

That’s sparking the development of new high-value products for the elderly, infants and sports and active lifestylers.

Fonterra innovation in the laboratory - from left; Hemang Bhatt, Donna McBride and Leena Kishor explain the research and development behind products developed for the Chinese market, including tea macchiato, ambient cream, egg tarts and cream cheese lollipops.
STUFF Fonterra innovation in the laboratory – from left; Hemang Bhatt, Donna McBride and Leena Kishor explain the research and development behind products developed for the Chinese market, including tea macchiato, ambient cream, egg tarts and cream cheese lollipops.

The co-operative’s foodservice business in China has been its standout performer in recent times thanks to innovative dairy products created at the Palmerston North research centre.

Hurrell said the co-operative is hoping to replicate that success throughout Southeast Asia over time in line with the expansion of a wealthier middle class who can afford higher value products.

Fonterra is constrained from expanding in high-value markets in Europe and the United States due to tariff and non-tariff barriers.

To get around those, the co-operative is increasingly looking to commercialise its intellectual property.

Last year it struck a deal with Fortune 500 company Land O’ Lakes to sell its dairy products to hospitality businesses and major fast food chains throughout the US. As part of the deal, Fonterra’s specialty cooking cream was to be made in the US using local milk combined with Fonterra’s secret dry ingredient formula sent from New Zealand.

Hurrell noted the return on capital for such deals is “infinite” as it requires no additional investment in manufacturing plant.

”We see that as another wave of value for us in the next few years,” he said.

Consumers are increasingly focused on sustainability and researchers at the centre are working on ways to bolster its credentials by improving its packaging, moving to renewable energy, and to reducing carbon emissions on farms.

Fonterra is scheduled to release its annual profit result for the year to the end of July on September 23.

THE Dairy Industry Code of Conduct has brought about a “significant culture change” within the dairy sector and helped increase competition at the farmgate, according to Australian Competition & Consumer Commission deputy chair Mick Keogh.

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