Tuesday, 30 June 2015 10:37

Staying the course in value add

Written by 
Anchor milk from Fonterra’s UHT plant in Waitoa. Anchor milk from Fonterra’s UHT plant in Waitoa.

In recent months we’ve seen speculation from some commentators on the uncertain future of co-operative dairying in New Zealand – in which private companies and foreign investment trumps generations of local market expertise and value add is lost in the margins. 

There is no question that a fight is on for share of New Zealand milk, and while there are new players entering the market – many backed by foreign capital – having the balance sheet to build a dryer will only ever be half the equation. 

When it comes to high volume commodities such as whole milk powder, adding value is reliant on a secure, high volume of milk. With scale in milk supply comes lower cost of production per litre, greater efficiency and more value out the back end when that product reaches the market. Driving value for farmers by leveraging scale – one of Fonterra’s competitive advantages – is where we excel.

Those who cannot compete at scale typically see their margins in commodities becoming increasingly unsustainable and, as a result, burn capital in their attempt to pay a competitive milk price that attracts and retains supply.

We add further value by driving every last cent out of the cost of processing. This focus on efficiency has seen our skim milk dryers, for example, running 20% more efficiently than comparable plants in the US, despite their lower energy costs and, in many cases, lower wage costs.  

At our Studholme site in South Canterbury we have been able to achieve a 25% increase in efficiency on the previous owner’s output by implementing our systems and processes and maintaining stringent cost and quality control measures.

Continuing to identify and generate value in commodities is vital. We are confident that growth in demand for milk powder, which sits at around 5%, will bounce back. Our competition sees it too, which is why they are building their dryers here in New Zealand and chasing supply. 

We’ll meet that growth and get every cent of value out of our powders with new high efficiency dryers at Pahiatua and Lichfield which are on track for completion in the coming seasons. 

Investing ahead of the milk growth curve gives us greater flexibility to take advantage of relative market prices, especially around the peak of the season. It also gives us options in the products we can make, meaning we are more agile in meeting product trends and changes in customer demand. 

On top of this, we’re growing our consumer and foodservice businesses, whose revenue has increased from $4.6 billion in 2003 to $6.3 billion in 2014. Whereas two years ago, foodservice accounted for less than 5% of our global milk pool, it now represents more than 8% of an even larger milk pool. 

The co-operative’s goal is for 40% of sales volumes to be made up of these value added products by 2025, and we are investing to meet this target with recent expansions in UHT, cream cheese and mozzarella processing, and the doubling of our slice-on-slice cheese manufacturing later this year. 

At this difficult time for New Zealand dairy farmers, we will take nothing for granted and will continue to fight for every dollar. We’ll achieve that through a focus on operational excellence and by staying the course on our value add strategy. Our farmers understand better than anyone the benefits of our scale, particularly when times are tough, and it’s that scale and efficiency that will unquestionably see us through.

• Robert Spurway is Fonterra’s managing director global operations.

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