In the shadow of a snow-dusted volcano on New Zealand's North Island, a sprawling expanse of stainless steel vats, chimneys and giant warehouses stands as a totem of the tiny nation's dominance in the global dairy trade.
The Whareroa factory was until recently the largest of its kind, churning out enough milk powder, cheese and cream to fill more than three Olympic-sized swimming pools a week.
The plant has helped make owner Fonterra Cooperative Group the world's top dairy exporter and its farmer-suppliers among the greatest beneficiaries of China's emerging thirst for milk.
Now, faced with reduced Chinese demand that's eroded milk prices and helped drag 80 percent of New Zealand's dairy farmers into the red, the 44-year-old factory has come to symbolise Fonterra's struggle to climb the value chain.
While a global shift toward more natural foods has spurred even Coca-Cola to develop new milk products, Fonterra's business remains largely wedded to commodities traded on often-volatile international markets.
That's frustrated the ranks of the cooperative's 10,500 farmer-shareholders, who are set to receive the lowest return in nine years for the milking season just ended, and turned Fonterra's strategy into the subject of national debate.
"Fonterra hasn't taken the opportunity to put itself in a position to really weather these storms as well as they should be able to," said Harry Bayliss, 63, a former Fonterra director who still supplies the cooperative from farms about 30 kilometres west of the Whareroa factory.
"What the board has focused on in the last 10 years haven't been areas that have created real ongoing value for the shareholders or the company."
Auckland-based Fonterra has responded by selling assets, cutting jobs and closing a factory to improve efficiency and strengthen its balance sheet.
"We have confidence in the long-term fundamentals of dairy, and we remain focused on securing the best possible returns for our farmers by converting their milk into high-value products for consumers around the world," Chief Executive Officer Theo Spierings said in a statement Thursday that announced a 10 New Zealand-cent dividend payment and reiterated a forecast for improved earnings.
Forged in 2001 from the merger of New Zealand's two largest dairy companies and the agency that controlled the nation's dairy exports, Fonterra was promoted as a means of creating critical mass for Kiwi farmers. A kind of Nokia Down Under, it was to drive innovation and thrust the country onto the world stage by taking on the likes of Nestle SA and Kraft Foods Group Inc.
Yet, even with a near-monopoly over New Zealand's milk output and an empire spanning Australia, the Americas and China, Fonterra is more likely to supply those companies than compete with them on supermarket shelves.
"The idea was to move New Zealand's dairy industry up the value chain, and push hard to become a global brands company," said Oyvinn Rimer, a research analyst at Harbour Asset Management Ltd. in Wellington, who has tracked the cooperative for about five years. "It just has not happened."
Fonterra hasn't taken the opportunity to put itself in a position to really weather these storms as well as they should be able to.
Every six hours, a train pulls in to the Whareroa factory, near Mount Taranaki in the small town of Hawera, to pick up five containers of Fonterra product -- milk powder makes up almost half.
The commodity, with a six-month shelf life, has been New Zealand's core farm export for more than 20 years. In fact, the South Pacific nation supplies about two-thirds of the whole milk powder traded internationally.
"The problem is we put all our eggs, or nearly all our eggs, in that whole milk powder basket," said Keith Woodford, an honorary professor of agri-food systems at New Zealand's Lincoln University, who has followed Fonterra since its formation. "We locked ourselves into this one product and Fonterra lacks the capital at hand to now change direction quickly."
Prices for whole milk powder, an ingredient in everything from cookies to ice cream, have dropped by half over the past three years as purchases by China, the biggest buyer, dwindled amid a glut in global dairy supplies. That dragged down the fortunes of export-dependent dairy farmers worldwide, but especially in New Zealand, where they rely on China and other major markets to buy about 95 per cent of their output.
"In my 35 years of farming, this is by far the worst downturn that we've been in," said Phil Nixon, 59, a second-generation farmer whose 350-cow herd supplies the Whareroa factory. While Nixon is "very, very passionate" about Fonterra, he says the cooperative has been a frequent source of frustration. "I'm damn sure that with everything efficient, they could return us more than what they have," Nixon said.
Milk payments to farmers dropped to an estimated $3.90 a kilogram of milk solids for the year ended May 31, half the record $8.40/kg paid two years earlier. While the current season's price is predicted to increase to $4.25/kg, at that level it will still be about 20 percent below what farmers need to cover their costs.
S&P Global Ratings downgraded Fonterra to A- in October, four rungs above junk, citing its "peak capital expenditure," as well as global market volatility. Capex exceeded operating cash flow by $948 million in the year ended July 31, 2015, as dairy prices plummeted.
The problem is we put all our eggs, or nearly all our eggs, in that whole milk powder basket.
Earnings are forecast to improve as the milk glut abates, reaching 50-to-60 New Zealand cents a share in the current financial year, Fonterra said in an August 1 statement, from an estimated 45-to-55 cents a year earlier. This shows the company is making "good progress in continuing to increase value through our consumer and foodservice businesses," CEO Spierings said at the time.
The relatively wide earnings range indicates Fonterra remains sensitive to commodity-price variability, said Arie Dekker, head of institutional research at First NZ Capital Securities in Auckland, in a report. "Ultimately, investors are looking for more consistent results."
Farmers, too, want more. Some sold their equity in the cooperative and switched to supplying competitors. Fonterra's share of New Zealand's milk supply has dropped to 84 per cent from more than 95 per cent in 2001, according to Wellington-based Infometrics.
Laws passed at Fonterra's creation aimed at safeguarding competition in New Zealand's dairy industry compel the cooperative to collect fresh milk from any farmer who wants to supply it. That guarantee has contributed to a quadrupling of the nation's milk supply since 1984. Kiwi farms are forecast to produce about 22 billion litres (5.8 billion gallons) of milk this year -- almost four times the production of Ireland, which has a similar climate and population size, according to KPMG.
Collecting this "huge wave of milk," as Fonterra director David MacLeod calls it, has become less economic as a 22 per cent increase in land used for dairy farming in New Zealand since 2008 forces the cooperative to travel further from its factories to pick up supplies. The legislation, which also requires Fonterra to sell milk at regulated prices to smaller processors, is currently under review, with the government proposing that Fonterra no longer be obliged to collect output from dairy startups.
"It will give us more options," said Rob Spurway, Fonterra's chief operating officer for global operations, in an interview. "We can invest more in the value-add areas in the business rather than simply coping with large volumes of milk."
As it is, Fonterra creates less value from raw milk than Danone SA, Nestle and the majority of its global competitors, according to estimates compiled by the International Farm Comparison Network this year.
"Danone and Nestle, they just buy milk as they require," CEO Spierings said in an interview at one of Fonterra's cheese plants in June. "We are a cooperative, we have to take all the milk. We have to take it in and we have to create value off everything -- we will never be the same."
Having a strong position in an important sector like dairy is valuable to New Zealand.
Geography is a challenge, too. While New Zealand has a temperate climate and abundant rainfall, making it ideal for dairying, it's 2,500 kilometres from Australia, its closest major market. Going abroad hasn't been without difficulty either.
In Australia, where Fonterra is facing a backlash from its farmer-suppliers over milk-price cuts, it is selling its loss-making yogurt and dairy desserts brands to the local unit of Italy's Parmalat SpA, after shedding a 9 percent stake in Bega Cheese in October.
A key part of Fonterra's current strategy is to expand supply to 30 billion litres by 2025 in as many as six so-called global milk pools. That includes China, where the company has two farming hubs that posted a $29 million first-half loss before interest and taxes.
Fonterra is now counting on an investment in Beingmate Baby & Child Food Co -- which has about 7 per cent of China's baby food market -- as a salve for the collapse of its former partner Sanlu Group amid a food scandal involving melamine-tainted infant formula in 2008.
Some farmers are wary of developing an over-dependence on China.
China's consumers "are great for New Zealand -- they're great for the world," said Dave Ellis, whose farm in South Canterbury on the South Island is one of Fonterra's biggest suppliers. "But we've gotten very reliant on them."
The broader issue for Fonterra, said Ian Proudfoot, global head of agribusiness for KPMG in Auckland, is the need to extract more from its milk.
"Having a strong position in an important sector like dairy is valuable to New Zealand," he said. "The challenge for us, though, is we've got to ensure that's a high-value position and we're not just sweat-shopping out low-value commodities."