Dialogue: Winning at home and away

By CRAIG NORGATE*

Deregulation of the Australian dairy industry has led to almost weekly speculation on Fonterra's intentions across the Tasman.

Almost all the speculation has been false - all smoke and no fire is how we have described it - but it is true that we continue to have a keen interest in opportunities in Australia.

Australia is a challenging dairy market. It is fragmented, highly competitive, and has been undergoing intense change since it was deregulated.

Fonterra already has four key assets across the Tasman: our minority shareholdings in Bonlac and National Foods, our 50 per cent interest in Bonland, and our majority interest in Peters & Brownes.

All four are important assets and the benefit of improving their performance is two-fold. The stronger they become, the better that is for New Zealand dairy farmers and for the Australian industry.

Australia and New Zealand are both key consumer markets for Fonterra. They are high income by world standards, they are open to us, and we know them well. In the last year, 25 per cent of our sales were in Australia and New Zealand.

And with consumers continuing to seek more natural, wholesome and tasty foods, our dairy products can be positioned as a simple solution to meet the needs of increasingly demanding consumers. We expect continued, profitable growth in the region.

As consumer markets, however, Australia and New Zealand are limited by their relatively small populations. They account for only 1 per cent of world dairy consumption and it is forecast that demand in the two countries will grow by less than 1 per cent a year over the next five years.

For us, Australia and New Zealand punch above their weight commercially but they need to be seen in context with markets such as the Americas which account for over a quarter of the world's dairy consumption and include some of the fastest-growing markets in the world.

The efficiency of milk production here and in Australia is one of the most important attributes for Fonterra. While our production base is still relatively small from a global perspective, our countries offer some of the world's best conditions for milk production and our world-class farming practices on both sides of the Tasman mean we can convert grass into milk more cheaply than anyone else.

Production continues to grow strongly, with recent annual growth of 5 per cent in New Zealand and 7 per cent across the Tasman.

Unlocking the full value of this milk is our priority and there are synergies between Australia and New Zealand that we can leverage in this process.

Two key components of milk are protein and fat, with the former being far more valuable for New Zealand, and the key to increasing our returns per kilogram of milk solids produced.

New Zealand has already established itself as a world leader in whey, casein and protein research, manufacturing and marketing. We have developed a wide range of higher-value dairy ingredients and protein-based applications. We have placed milk proteins into a seemingly unrelated range of new products, including new-age sports and nutritional beverages, specialised baby foods, meal replacers, functional foods and clinical nutrition. To maximise the value of our intellectual property, we need more protein.

The challenge is that with protein comes milkfat, and markets for fat are some of the more difficult to find and develop.

With trade restrictions, most fat-based products have to be sold in markets such as Russia, Iran, Egypt and Algeria. Every year we face the challenge of finding new markets to sell this component of milk.

Growth in domestic milk supply therefore needs to be carefully considered. If growth is uncontrolled, the New Zealand industry risks finding itself with more product than it can sell.

In this context, Australian acquisitions and joint ventures make good sense. The Australian companies are focused on developing their strong brands in cheeses and yellow fats domestically and internationally where appropriate. The New Zealand industry can help with this effort for a return for New Zealand dairy farmers and Australia.

Another key business driver for a growing presence in Australia is access to locally sourced protein to other parts of the world. The same business strategy can be applied to opportunities to work with other dairy industries around the world.

The formation of Fonterra is key to this process. A single company is attractive as a joint venture partner and has greater ability to make strategic acquisitions. Two competing New Zealand companies could never have offered the same benefits to potential partners or have been able to finance a global acquisition strategy.

Within five years, Fonterra will be one of a number of strong competitors in Australia. The combination of our industry's intellectual property and access to the Australian industry's production base will ensure increased returns to farmers on both sides of the Tasman.

* Craig Norgate is chief executive of Fonterra.