Fonterra still coy about Australia

By PHILIPPA STEVENSON agriculture editor

It was inevitable that chief executive Craig Norgate would field a question about Fonterra's investment in Australia at the latest dairy industry forum.

The question first arose before the ink was dry on the merger of the New Zealand companies that created Fonterra in October 2001.

It's been repeated often, but the company remains determinedly coy.

Fonterra might regard Australia's 19 million consumers as part of its home market, but it is not about to reveal the household budgeting plan.

Typically, Norgate told the Dairy 2003 seminar in Hamilton 10 days ago that the two countries' industries needed to work closely together or "the farmer will be the loser in the market".

But, he said, there was nothing compelling for Fonterra to do right now: "We can make far more money focusing on our business here."

The same day, Fonterra chairman Henry van der Heyden told the Business Herald the company would not actively pursue a potential $62 million windfall by selling its 18 per cent shareholding in Australia's largest listed dairy company, National Foods.

Fonterra bought its stake at about $2.33 a share. National Foods' shares are riding high, up to $3.56, on speculation of industry consolidation.

"We're looking at the opportunities, but it is not number one priority," van der Heyden said.

Industry consolidation has proceeded slowly in Australia, possibly because it is the only place in the world where separate processors focus primarily on either the domestic or export markets.

Elsewhere, they tend to be more balanced as a result of being focused on both markets, making it easier for companies to negotiate deals.

A Rabobank report on the global dairy industry in June 2001 identified Australia's longer milk supply season as an attraction for Fonterra.

The company has the world's largest cheese and milk powder processing factories, but they run at full capacity only two to three months a year.

"Working together to meet the demands of the world market is logical, since both countries are net exporters with small domestic markets," Rabobank said. "New Zealand and Australian dairy companies have a competitive advantage in that they are able to supply milk relatively cheaply during the northern hemisphere winter. They are actually competing with the international companies operating in the markets of their major customers rather than with each other."

In January, Australia's two largest dairy producers, Murray Goulburn and Bonlac, said they were exploring a merger, a transaction which could be completed by mid-year if due diligence goes well and the consumer watchdog, the Australian Competition and Consumer Commission, allows it.

The merged company would account for more than 70 per cent of Victorian milk production, and more than 80 per cent of Australia's dairy exports. Two-thirds of Australia's milk is produced in Victoria.

The talks are Murray Goulburn's third bid to get a deal with Bonlac. The last attempt, in 2000, ended with Bonlac selling Fonterra a 25 per cent stake.

Fonterra has said it supports the merger talks, but has not said what it would do with its stake in the merged company.

Fonterra's biggest business in Australia is Australasian Food Holdings, a merger of Fonterra's consumer food companies on both sides of the Tasman - Mainland, Bonland and Peters & Brownes in Western Australia which includes Tip-Top.

In a review of National Foods and the Australian dairy industry last month, Deutsche Bank concluded that a merged Murray Goulburn and Bonlac would not significantly affect National Foods' future because it was not a major exporter of processed milk products, their main product.

Neither would the merger resolve speculation about domestic market consolidation. The bank picked that a break-up of National Foods was "more logical" for the company than outright acquisition by any other party, including its three major shareholders - Fonterra, France's Danone and Australia's Dairy Farmers. All three took their stake to bring structural change.

Australian farmers have increased production per cow, and milk volumes have continued to rise by about 4 per cent a year. But milk drinking has fallen about 1.5 per cent a year, making more available for manufacturing and export - though the drought has had an impact this year.

Last week, Norgate said Murray Goulburn had indicated that production was down more than 23 per cent.

Australia's steadily declining drinking milk market was a concerning trend for National Foods because milk sales made up about 67 per cent of its total sales, Deutsche Bank said.

Also, the shift towards supermarkets as the main retail outlet for milk meant supermarkets had a stronger position when negotiating with suppliers such as National Foods.

Deutsche Bank said the major trends in the Australian industry were likely to be further production increases against a continued decline in milk consumption, rising house brand milk sales, and more supermarket sales.