KEY POINTS:
Here's the "face of the future" that Fonterra will ultimately have to battle to maintain its dominant position in international dairy trade.
It's not top-ranked Nestle, which sports annual turnover of €14.3 billion ($26.5 billion) - twice that of Fonterra, which ranks fifth among the world's dairy companies
on turnover. It's also not Dairy Farmers of America or Denmark's Arla - the two farmer co-ops with which Fonterra competes on the turnover rankings.
It is Mengniu - a dairy company in the Chinese region of Inner Mongolia which is not yet represented among the top 20, but which from a standing start in 1999 has already built sufficient momentum to challenge Yili, its fearsome competitor, as the top-ranked Chinese dairy company.
If any New Zealand dairy farmers are still in doubt that Fonterra needs to make radical changes to keep pace with the competition, they should get on a plane and fly to Hothot and see what Niu Gensheng is up to.
The $10,000 or so it would take to fly to China and spend a week in Inner Mongolia just might be the best investment they could make.
Niu, who came to New Zealand in the late 1990s to investigate our "best of breed" technologies and livestock, was bounced out of state-run Yili in the late 1990s after a power struggle.
He quickly got backing from three major private equity firms, bought our livestock, copied our factory technology, made deals with the state government's "poverty programme" to put dairy farming at the forefront of Inner Mongolia's economic development programme, bought into creative advertising, and adopted the frontier mentality that the established giants had buried.
From what he's told me over the years, he wants to "eat New Zealand's lunch".
This week Fonterra effectively admitted it stuffed up its original China play. It had taken the view that its commodity trade approach and investment in Sanlu (a state-owned enterprise) would enable it to break into the Chinese market and develop a substantial position.
But the Chinese dairy companies that are succeeding, such as Mengniu, have put liquid milk and UHT products centre-stage.
Right now Fonterra commands a substantial one-third share of the global cross-border trade.
It's a lofty position that New Zealand dairy farmers have come to appreciate - a commodity play that trades milk powder at one end of the value chain and the company's cheese and butter brands at the other.
But that's not where the growth is occurring in global dairy.
At a briefing on Monday, Fonterra released a compelling forecast. The growth in global dairy consumption will come with liquid dairy - not the commodities end of the spectrum. Liquid dairy is expected to grow by 3 per cent annually compared with the 1.5 per cent annual growth projection for the ingredients business.
But cross-border trade, the area Fonterra has made its own, will come close to flat-lining, with a projected annual average increase of just 1.2 per cent.
This compelling statistic ought to be lasered on to the foreheads of Fonterra's farmer shareholders - particularly any who want to kick up a fuss about the company's strategy.
If the growth is in liquid dairy then Fonterra needs to move offshore and invest more substantially in growth markets such as China, Latin America and parts of Russia. That takes capital.
While Mengniu is based in Inner Mongolia, its fast-moving dairy entrepreneurs regard themselves as much closer to markets than New Zealand's "remote" country. Notably, it has already embraced capital markets to finance its expansion and debuted on the Hong Kong stock exchange in 2004.
In comparison, Fonterra, whose farmer shareholders will not take a vote until September on whether to issue some investor shares, is basically handicapped when it comes to making seriously big investments
Chief executive Andrew Ferrier maintains that the company has $2 billion to $3 billion to finance expansion, which will be enough for the next three to five years. But this figure needs to be strongly interrogated given the previous misjudgments over where the growth would come in China, which is developing at a huge clip.
Mengniu has already moved straight to the future of building brands and is capturing the global trend towards localisation by selling liquid milk to its customers instead of reconstituted milk powder products. This will become more important as the "green" trend gathers pace.
It's also getting into the international brands business sponsoring the influential Boao Forum this year and the National Basketball Association (China).
What is Fonterra doing to promote its topline brands in the world's growth markets?
Fonterra chairman Henry van der Hayden says the company won't talk about the capital restructuring programme until the proposal is presented in September.
What he does need to talk about is the international environment.
Bring Niu down to talk at the shareholders annual meeting.
If anything will frighten them into the future, that would.
