Prime Movers sector report: Dairy

Dairy farmer David Sing supplies milk to both tiny Tatua and giant Fonterra. He gives agriculture editor PHILIPPA STEVENSON his take on the industry shakedown.

Dairy farmer David Sing has a foot in both camps - the high-tech, high-paying business exemplified by the small Tatua dairy co-op, and the commodity-buffeted colossus, mega co-op Fonterra.

David, the thoughtful son of respected 34-year Tatua director Kay Sing - its chairman for 18 years - runs two herds of jersey cows on 114 hectares at Tatuanui, near Morrinsville, made up of the farm his father settled in 1924, and a neighbouring property bought in 1981.

Sing, 45, and his nurse wife Claire, who was raised on a farm just 4km further along SH27, is like the rest of Tatua's 132 supplier shareholders and in spitting distance of its single factory.

Tatua's catchment is just 16km from border to border and it handles around 1 per cent of the nation's milk.

This year, from an 83ha farm on the opposite side of Morrinsville owned by a deceased estate, he is also supplying Fonterra. It has more than 13,000 suppliers nationwide, 29 factories, guzzles around 95 per cent of New Zealand's milk and is ranked the world's fourth largest dairy company.

Last dairy season, it paid more than ever to be a Tatua farmer. The company, which has topped the payout charts for many years, delivered its best-ever effort by paying farmers $6.80 a kilogram of milksolids, or around $63 million in total and an average of more than $474,000 for each supplier.

Fonterra paid $5.30, which meant its farmers banked on average $70,000 less.

Tatua chairman Dr Alan Frampton is confident his company will maintain the margin over the bigger co-op and though he says - diplomatically - that the businesses are now so different a payout comparison is not valid, the advice is unlikely to be heeded, especially by envious Fonterra shareholders.

Frampton's diplomacy is appreciated by Fonterra, which is less than a year old and suffering indigestion pains after industry heavyweights New Zealand Dairy Group, Kiwi Dairies and the statutory monopoly marketer, the Dairy Board, made a meal of merging to form the company.

Nevertheless, the lumbering Goliath is showing signs of taking on board the lessons of the clever wee David.

Fonterra chief executive Craig Norgate told shareholders at the annual meeting earlier this month that part of a developing seven-point strategy would be to "use our superb knowledge of milk to develop innovative specialty dairy products.

"This effort will address the needs of the most sophisticated ingredients customers in a manner similar to what Tatua has done, with great success.

"Moreover, it will strengthen our ability to continue to innovate in the development of new technologies that will make your milk more valuable."

Such talk is unlikely to faze Tatua. It's got a 20-year lead on Fonterra and, if results are any indication, has an even more superb knowledge of milk.

All of which makes David Sing quite happy that Tatua directors - his late father among them - had the foresight to independently go where few other New Zealand dairy farmers have gone before.

During the seemingly endless industry mergers that left just three standing - Tatua, Westland and Fonterra - there was a belief, especially by surrounding Dairy Group farmers, that Tatua would get run over, he said.

"The Dairy Group guys respected us, but thought that pretty soon we'd be taken over. Fortunately we had the right people at the right time. Alan Frampton was the guy who could negotiate us through it.

"It was still a leap of faith for shareholders, but Alan has respect in the industry and Tatua shareholders have grown up with what [the company] was doing."

It all started with the development of one product - the Dairy Whip aerosol cream-in-a-can - which gave the company just a small margin over other dairy companies.

It also showed the management it could look at other products, Sing said.

"The rest of the industry are like Texans - they like it big."

The industry made a fundamental error in the 1980s, he believed, when manufacturing companies, not their farmers, became the shareholders of the marketing NZ Dairy Board. Only Tatua maintained direct holding by its farmers in the board.

"We'd have a different industry now if farmers had owned the board. The marketer didn't have a say in the industry when it should have," he said of the structure which allowed manufacturers to manipulate a payment system for their benefit, rather than responding to the market.

The emphasis on size also brought about the rush to dairying in the South Island to the cost of those who had built up the industry, mainly farmers in the North Island.

Farmers - many from the north - had converted farms in the South Island, entered the system and paid nothing for it, he said, touching on a theme of wealth transfer which is a sore point with many northern farmers.

But Sing has put aside his reservations about how the industry arrived at this point and said Fonterra now had the opportunity to do well.

Market information should now go directly back to the farmer, though the effect would take a little while to filter through.

He was sanguine about the departure of Fonterra chairman John Roadley in the company's first year.

In the political minefield of dairy industry politics, Roadley had been a neutral figure, able to bring about the merger of bitter rivals, but not the man to run the company long term, he said.

Former Dairy Group suppliers miffed about an apparent dominance by Kiwi in the new company would feel a lot happier now that their former chairman Henry van der Heyden would head Fonterra.

After the long merger process - a drawn-out exercise which had cost the industry good people and much money - the industry was suffering a leadership vacuum.

But Sing takes comfort from his father's long observation of the leaders of fiercely parochial companies who went on to be Dairy Board chairmen.

"Dad said that he didn't always think people were right [for the job], but when they got to be chairman they started to think of the whole industry."

But it will not be just the people at the top who drive Fonterra.

"Fonterra will succeed because farmers will make it succeed. The beauty of the co-op is that we own the processing. In a bad year you take the hits, but a private company has to have its 10 per cent return [on investment] every year. Co-ops are the ideal form of business for farmers and provincial development."

Facts:

Export value: $7.1 billion

Milk volume: 12.3 billion litres

Key markets: US, Europe, Japan

Number of farmers: 13,892

Major areas: South Auckland, Taranaki, Northland

Area farmed: 1.3 million ha

Further reading:
nzherald.co.nz/primemovers