The Commerce Commission has released its draft report following a review of Fonterra’s base milk price manual for the 2021-22 season.
It's no exaggeration to say it's been a challenging season.
We've seen a fundamental imbalance in global supply and demand, driven by the lifting of production quotas in Europe and ongoing Russian trade sanctions, pushing more product onto the market.
The Middle East was a major destination for cheese, but imports have fallen this season because of low oil prices.
China's economy has softened, and last year global dairy prices hit their lowest levels in over a decade.
Locally, a prolonged El Nino has seen Australia enter a period of drought, and as production costs have increased, milk collection has dropped.
At Fonterra Australia we've encountered challenges with a fire at our Stanhope plant in December 2014.
Milk that would ordinarily be going into high value cheese is instead going into skim milk powder.
The key to tackling these challenges is having the right strategy. Rather than trying to do it all, processors need to focus on their strengths.
Fonterra has global scale, and we are able to leverage that scale to focus on areas where we have a comparative advantage.
In New Zealand, we can produce commodity powders more efficiently than anywhere else in the world. A number of our NZ sites are capable of producing at least 1000 tonnes of powders every day.
Compare this with our largest powder site in Australia, Darnum, which can produce a maximum of 300 tonnes of powder a day running at full capacity.
There is no sense in replicating what we have in NZ here in Australia. We need to focus on our strengths, which is why our focus is on higher value-added products – cheese, whey and nutritionals, complementing our retail and foodservice businesses.
Milk costs more to make in Australia, so we need to squeeze value out of every drop to generate sustainable returns. Cheese, whey, and nutritionals deliver on that investment. We can make these products efficiently, and generate a higher return.
Our A$120 million investment to rebuild our cheese capability at Stanhope is central to this strategy.
Whey and skim from cheese production will go into our nutritionals at Darnum and Dennington, so we won't be wasting a drop.
It will complement our consumer retail and foodservice businesses, with the fats from milk production at Cobden going into Western Star butter.
The Australian market is ideally placed to concentrate on value-added products; however it doesn't mean focussing exclusively on boutique products and ignoring bulk.
Bulk to boutique is not an either/or prospect. We can leverage our presence in bulk to expand into boutique, de-risking our investment.
On the bulk side, Fonterra's joint venture between our Darnum site and Chinese food manufacturer Beingmate connects us to 80,000 points of sale in China.
Beingmate is one of China's largest infant formula companies, and we've bought a 20% stake in the business, setting up a distribution channel that will reach millions of Chinese families. It allows us to reach Chinese consumers directly and efficiently, delivering a high-value, high-quality product.
We've been able to parlay that into the boutique.
We've made an agreement with boutique infant formula producer Bellamy's Organic, utilising our manufacturing expertise to create their premium product. Because we can do bulk and do it well, it gave Bellamy's the confidence that we could deliver on boutique.
We've just launched Anchor Milk into Australia – it's a boutique product aimed at the more discerning milk drinker.
We know Australia is a crowded marketplace for milk, with over a dozen brands on the market. We're all looking for that edge to differentiate ourselves from every other milk in the dairy case.
Anchor uses microfiltration to create a superior fresh taste, with a longer shelf-life, and is a first for the Australian market.
Anchor complements the milk we're processing on behalf of Woolworths for their private label.
Boutique is not the panacea for current global dairy challenges – at least, not on its own.
It has a place in the market, but to be globally relevant, we need to have the bulk as well as the boutique.
For companies like Fonterra, bulk is our bread and butter, but boutique is the cream on top.