Product mix based on profitability
Despite high fat prices it is now more profitable for Fonterra to make whole milk powder than butter and skim milk powder, co-op chairman John Wilson says.
Bonlac Supply Company (BSC) deputy chairman Aubrey Pellett says it has talked to Fonterra about its 1300 farmer suppliers investing in the co-op’s Australia’s business. Bonlac has a milk supply agency agreement with Fonterra; any Australian farmer supplying Fonterra automatically becomes a member of Bonlac.
Pellett told Dairy News at this month’s Australian Dairy Conference that any co-op ownership proposal would need to be economically viable for farmers.
“The mindset here is different from across the ditch; in NZ farmers are encouraged to invest in co-ops.
“Farmers on both sides of the Tasman have a range of choice, so the co-op proposal should not be just emotionally attractive but financially attractive too.”
Bonlac’s milk supply agreement with Fonterra expires in December 2019; a broad concept of investing in Fonterra’s Australia operations has been discussed and Bonlac believes it is worth investigating further.
Bonlac meets monthly with Fonterra and discussions are continuing, says Pellett.
“There is no proposal on the table for Bonlac to evaluate; it’s just a concept at this stage. The boundaries are still being worked through and our understanding is that it will be an Australian opportunity.”
Pellett, a Kiwi with banking background, took up dairy farming in 2001. After 12 months on a Canterbury farm he moved to Gippsland in 2002, milking 450 cows.
Personally, Pellett supports the idea of Australian farmers holding shares in Fonterra Australia.
“I would like to see membership of the co-op enable you to capture some of the value-add component of the total dairy market.
“Also there is security in farmers sending milk to a globally connected dairy player.”
But not all Bonlac members are enthusiastic about becoming Fonterra Australia shareholders.
“There’s a range of appetites out there: some farmers are very enthusiastic, some a lot less enthusiastic and others will look to wait until they can assess the opportunity,” says Pellett.
Owning shares in dairy co-ops hasn’t always worked for Australian dairy farmers: two years ago the country’s biggest processor Murray Goulburn was forced to reduce its forecast milk price and claw back money advanced to suppliers. MG is now being sold to Canadian processor Saputo.
Pellett says there are many examples of dairy co-ops not being successful in Australia, “as opposed to NZ where dairy co-ops are held up high; they are very successful and dominant in a small country”.
“This side of the Tasman is a totally different environment: farmers here have a lot of choice about where they want to supply their milk.”
MG's loss is Fonterra's gain
Fonterra Australia has benefitted from rival Murray Goulburn’s recent financial woes.
Bonlac Supply Company deputy chairman Aubrey Pellett says it had 1000 members supplying Fonterra two years ago; today it has 1300.
“Fonterra has definitely seen an increase in farmer numbers and milk volume,” he says.
Bonlac members farm in four regions of Victoria and Tasmania.
While milk production is up in Victoria and Tasmania, farmer confidence still remains low, but has improved.
“Farmer confidence across the industry is not great; a lot of people had higher expectations of where the milk price [would be],” says Pellett.
“Because of what happened two years when dairy companies cut prices and milk payout forecasts, and because of the recent climate challenges, farmers were hoping to see a higher price to restore confidence.”
