Fonterra is adding value – director

“That is 380 million LMEs more than last year,” he told the Northland Dairy Development Trust annual meeting.

LME is a standard measure of the milk quantity used to manufacture dairy product such as powders and cheese, based on the fat and protein used in the end product, he explained.

“The volume we have to supply to competitors under the Dairy Industry Restructuring Act is reducing, so instead of handing it over to them virtually at cost we are able to add value to those volumes ourselves,” he says.

“We have reduced the volume sold on the Global Dairy Trade platform which enables us to achieve better margins.

“In ingredients we are growing value to make full use of our capacity to switch production to highest returning products. Food service growth continues so we are sending higher volumes of milk into higher value products such as cream cheese for bakeries, slice-on-slice cheese, mozzarella for fast food chains and speciality creams for restaurants. We have sent one billion additional LMEs into consumer service in the last two years.”

Dairy has a natural affinity in all these three areas and the Anchor Professionals brand brings together all Fonterra’s products.

“We offer a network of specialist chefs and application kitchens so food professionals can use, taste and understand our products and how they can use them profitably,” Monaghan says.

“Many are developed for professional kitchens, such as the creams that won’t split at high temperatures, pre-grated mozzarella or pre-sliced cheese for burgers. We expect to be selling one million tonnes of dairy products to the food service sector by 2023 and those products will absorb over 20% of our New Zealand milk pool.”

It is important to recognise the scale of this business, he says.

“In the last financial year in ingredient exports we supplied 3.5b LMEs -- of the total [worldwide] demand of 6b -- and 80% of that volume came from NZ milk.

“In consumer and food services, growth volumes are significant. They have gone from volumes of 0.4b LME in 2013 to 1b last year. The market opportunity sits at 30b LME.”

In the 2016 financial year consumer and food service volumes grew 48% in greater China.

“We are also growing in advanced nutrition with products like Anmum.”

Fonterra has its own farms in China in two hubs which will ultimately produce 400m LMEs.

Currently the milk produced is sold on contract but in future more volumes from the farms will flow through to its own products in a vertically integrated business.

China’s own milk production is significantly smaller than demand.

“So opportunity remains for both exports to and sales in that market. We expect that gap will widen over the next decade and that represents more opportunity,” he says.