Open Country Dairy chairman Laurie Margrain says action is needed now on New Zealand's electricity supply. Photo / Supplied
New Zealand seems to have “sleepwalked” into an energy crisis, says the chairman of Open Country Dairy, the second-biggest player in New Zealand’s $26 billion dairy export industry.
Laurie Margrain says the crisis is not coming — it’s here.
An example of its arrival, he says, is that Open Country has had to incorporate standby coal-fired boilers into its big new Southland alternative-powered cheese factory because of the “certain” risk of insufficient electricity generation.
“We aim to be out of coal-fired energy by the end of 2025 and indeed will be. But as we move to more-efficient and lower-emission energy such as electricity, we’ll be reliant on New Zealand producers burning coal to provide it.
“In converting our coal-fired burners to either burn waste product, wood pellets or replacing them with electric energy-producing options, we are doing all that is currently possible today,” says Margrain, in his 18th year as independent chairman, as the Talley’s Group-owned export manufacturer celebrates its 20th year of operation.
“The harsh reality, though, is that we are required to keep coal-fired boilers on standby for the certain situation whereby there is insufficient electricity generation to meet New Zealand requirements. This is not news to many, but it does seem to escape closer scrutiny.
“The reality is we can only do what we can do on the emission front without jeopardising our economy. The country needs to stop talking about this and do something about it now.”
Low-profile Open Country is an independent success story that grew out of the 2001 export industry deregulation that spawned the Dairy Restructuring Act. The legislation enabled the creation of sector heavyweight Fonterra from a mega-merger of farmer co-operatives and the Dairy Board.
Open Country is wholly New Zealand owned. It exports milk powder, cheese, milk fats and milk protein products to 60 countries under a business-to-business model. Its farmer-suppliers are not required to buy shares to supply milk.
In an interview with the Herald, Margrain departed from Open Country’s usual public reticence to discuss its resilience in a tough export industry, his views on good use of capital and why paying shareholder dividends isn’t, the need to attract investment for NZ Inc, how Northland gets the investment cold shoulder, and the company’s latest show of confidence in the dairy industry with a multimillion-dollar cheese processing development at Awarua near Invercargill.
The former president of Business NZ and the Employers and Manufacturers Association says a tight focus on financial discipline has enabled Open Country to grow its milk supply from two farmers to “well north of 1000″, and from a small cheese plant to four large milk processing sites in the North and South islands.
“Our commitment to the ultra-efficient application of capital, world-class efficiency and constant improvement in productivity has never wavered. Making sure we understand our own and New Zealand’s sustainable advantage and sticking to what we know and understand has stood us in good stead,” he says.
“Capital is a valuable resource and utilising it well is critical.”
For Margrain, paying dividends isn’t the best use of equity.
“This really depends upon your view of investment intentions. We would subscribe to the view that strengthening the balance sheet, reducing debt and adding value to the business is hugely more attractive than returning equity to shareholders.
“After all, returning equity via a dividend stream could be construed as management being unable to add value to shareholders’ investment and hence returning the equity to said shareholders.”
Margrain says Open Country seeks to create more value for all stakeholders and to enhance its sustainable competitive advantage.
“We return suppliers’ (farmers) cash to them enormously faster than is the industry norm and we do that by managing debt very prudently, managing our balance sheet aggressively and making plant investments with equity rather than loading up on debt. This seems elementary to us, but we stress that other industry participants may well have alternative views,” he says.
“You cannot improve New Zealand’s dismal record on productivity without investment, and dividend streams ahead of prudent investment seem counterproductive.”
How this policy reaps rewards is unknown: Auckland-headquartered Open Country, like its parent company Talley’s Group, does not share financial information.
Appointed managing director of Masport Australia aged 35, Margrain went on to chief executive roles in several manufacturing export companies in New Zealand and Australia before taking up governance roles, including with Open Country.
As a business association leader, he says he’s always encouraged governments to focus not on creating jobs and regional opportunities or talking up value-add exports, but on creating the settings that will attract capital investment here.
“Governments don’t create jobs, businesses do. Governments should be focused on settings that attract capable individuals and capital that flows around the world to destinations that are receptive and to an environment that encourages initiative rather than stifles it.
“We have for far too long looked to political leaders to grow the economy, improve productivity, encourage upskilling and improve our world competitiveness. This is never going to happen, and hasn’t happened.”
Northland is an area particularly deprived of infrastructure investment capital, Margrain says.
“Northland has the potential to expand the so-called ‘golden triangle’ in a hugely tangible manner, and yet we have overseen a slide into social and economic decline. Infrastructure investment will unlock Northland in the way that Tauranga has done for the Bay of Plenty.”
Open Country’s commitment to New Zealand is evident, says Margrain, in its investment in manufacturing sites over the years, most recently in a new butter plant at Waharoa, Waikato — the site of the company’s first cheese business in the early 2000s.
The butter plant will be finished about August next year. Meanwhile the company has committed to a major cheese manufacturing development in the next three to four years at Awarua that Margrain says will provide work for hundreds during construction. He declined to reveal the cost of the two projects, understood to run into tens of millions.
He’s firm on how far farmers can sensibly be asked to go on environmental measures.
“We ask and require that our suppliers all comply with regulatory obligations, meet market requirements as they become apparent and generally be good custodians of their farming operations.
“Our farmers are the best in the world today and we do not expect or seek outcomes that are ahead of what the market will pay premiums for.
“There can be no question that constant improvement in all aspects of sustainable farming is necessary, but ‘sustainable’ must also refer to fiscal sustainability and this is always top of mind for us.
“We produce food that the New Zealand economy thrives on and that the world needs. Reducing food output as a price for meeting standards that are not reflected in premiums or consumer demand seems incongruous to us.”
Dairy industry history is littered with failures and close shaves and some smaller participants are reported to be, or thought to be, financially challenged.
Is that due to the global economic crunch and volatile prices and markets?
Margrain doesn’t think so.
“At the end of the day the market is the market. That’s what we all deal with in this industry and you can’t beat the market. So no, we don’t believe failures can be sheeted back to global economic challenges.
“Of course, there are challenges that stretch us, but a prudent business strategy has to allow for the fact that markets are not stable. The world can be, and is, an unstable place and we need to control our own destiny. Managing businesses is a lot about managing risk. You have to manage the landscape, you need to have a plan C, and probably D.
“Very little that happens in business hasn’t happened before.”
On the financial viability of dairy farming given the perceived break-even payment point for an operation is $9/kg milk solids and farmgate payouts are forecast to be lower than that, Margrain says payout history from agri-bank NZAB provides context.
“The farmgate milk price of 2007-08 [season] was $7.59. Adjusted by the annual rates of inflation since then, that would equate to [a payout of] $11.34/kg now.
“With last season looking [to pay] in the high $7s and this season something in the low-to-mid-$8s you can see the problem. Costs are way more likely to have followed inflation than revenues [market pricing] have, so we have a situation where many suppliers are working hard simply to wash their face [break even] as we say.”
But Margrain says the average cost of production is a “difficult number to apply”.
“Recent figures would suggest [it’s] around the $9/kg level and yet very, very many would suggest that’s on the high side. From evidence, we see the number is very often lower than that, but in reality, profitability is low or non-existent.
“That is a concern for all New Zealand. Nevertheless, we have great confidence in the future of the New Zealand dairy industry and intend to continue investing prudently and always with an eye on delivering value to shareholders, suppliers and customers.”
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the $26 billion dairy industry, agribusiness, exporting and the logistics sector and supply chains.
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