Prime Movers sector report: Dairy

Competition has forced changes on Gisborne Milk Co-operative. "We're isolated," says chairman Stuart Bell, "which is why we are moving out of our area."

It is also why one of the few town milk companies to survive domestic-market deregulation has moved quietly into the added-value market to expand its base. As well, at least two farm conversions to dairying in its tight supply area and increasing inquiry from outside are leading Gisborne Milk to consider taking more milk from beyond its traditional boundaries.

Bell agrees that following the path of the added-value dairy industry leader, Waikato-based Tatua, is the way Gisborne town milk farmers will move.

Mega dairy co-op Fonterra accounts for 96 per cent of New Zealand's milk production, this year prompting Dr Alan Frampton, chairman of the high-profile independent Tatua, to float the idea of an association to represent small dairy companies. He predicted Fonterra's share of milk production would decline as the number of small dairy companies increased.

An association of independent companies, in Bell's opinion, "is a great idea. But I think the Commerce Commission would probably frown on it because of domestic-market pricing."

In fact, domestic-market pricing is already a sore point for Gisborne Milk. With a small regional population, the company is up against the domestic-market biggies - New Zealand Dairy Foods and its Anchor brand, and Fonterra's Mainland subsidiary with MeadowFresh.

"The domestic milk industry should concentrate on better profits and not let the large customers [the supermarkets and fuel company chains] keep winding prices down," Bell says. "Gisborne Milk will concentrate on producing a quality product at a reasonable price. But we are forced into a wider market area because of the national pricing deals."

The large operators are buying their market share with refrigeration equipment, discounted prices and branding, and positioning two in-house brands in an outlet so that no one else gets a look-in. Bell believes the strategy will force out some small milk companies but given the discontent he perceives in the Fonterra stable, he also thinks new companies will be formed.

Gisborne Milk is one of the biggest of a second tier of more than 70 dairy companies which are involved in manufacturing and marketing milk-based products.

Dominating the top tier of independents are the two farmer-owned co-ops - Tatua and the South Island's Westland Milk - which remained outside the mega-merger forming Fonterra. Tatua, with 9.3 million kilograms of annual milksolids production, and Westland's 27.8 million kilograms, account for close to 4 per cent of annual national milk supply. Both companies primarily export.

Tatua, with a track record of close to 20 years' investment in an innovative product range, continues to deliver its farmers a considerable premium over their Fonterra counterparts, forecast for the season ending in May at an average $118,000 higher.

Meanwhile, Westland is rapidly moving down the high-tech path of Tatua, employing former Tatua personnel.

Towering over the competitive domestic market are New Zealand Dairy Foods and Mainland.

Fonterra inherited Mainland from one of its formation companies, Kiwi Dairies. It is now a key player in the Australian market as part of Australasian Food Holdings which rolled in Fonterra's Bonland Dairies (Victoria), Peters and Brownes (Western Australia) and Tip Top.

Dairy Foods - formerly owned by the other company that formed Fonterra, New Zealand Dairy Group - and its North Island shareholders was sold last year to Rank Group, controlled by New Zealand's richest man Graeme Hart.

More recently Hart and his private listed vehicle, herb and yeast company Burns Philp, took over Sydney-based food company Goodman Fielder. Dairy Foods is expected to provide the third leg of a specialist food company.

On the second level of the independent dairy company hierachy, more than 70 companies operate primarily in the domestic market, most boutique cheesemakers or in the fresh and cultured (fermented) milk areas. A handful have inherited milk supply from farmers who have remained with companies supplying town milk. But most rely on raw milk from Fonterra. About 20 companies operate in the fresh and cultured milk and cream business.

Gisborne Milk, owned by 17 town milk dairy farmers in a 170km radius of the Gisborne plant, has been in business since 1944.

The company is working on broadening its product range, at present 80 milk and cream products, fruit juice and filtered water. It is also developing a cultured milk range - including cream cheese, sour cream, yoghurt bases, a low-fat cheese spread and cultured buttermilk - aimed especially at the hospitality industry.

Gisborne Milk has also been part of a battle against alleged anticompetitive behaviour by Mainland and Dairy Foods through Tussock Milk to which it supplies milk.

Tussock, founded by Karaka (Auckland) farmer Julian West and Rotorua investor Keith Simmons, entered the Auckland milk market in January last year and subsequently complained to the Commerce Commission, alleging that the big companies were giving backhanders to shopowners to keep them stocking their milk brands.

Another cultured milk operator eyeing the deregulated New Zealand market is Australia's National Foods (ironically key to rationalisation of its dairy industry). With the Yoplait brand in New Zealand and a plant at Palmerston North, the company said last August that it was reviewing opportunities for brand or manufacturing development here.

About 20 specialty cheese companies flourish. A prime mover is Kapiti Cheese at Paraparaumu with turnover near $20 million and a new plant which has expanded production capacity 400 per cent.

While 85 per cent of Kapiti's sales are in New Zealand, exports have risen, largely in Asian markets.

Proprietary operators dominate the 15 companies which manufacture a range of milk powder-derived products, including Healtheries of New Zealand; Unitech Industries, Auckland; Alaron Products, Nelson; and Canpac International, Hamilton.

The remaining members of the second tier include eight icecream/frozen milk manufacturers and seven companies working with butter- and fat-blend products, for example Bakels Edible Oils.

A key player in the icecream market is Chateau Creme Delight, 100 per cent owned by Swiss company Movenpick. While Movenpick recently sold its worldwide icecream business to Nestle, it has retained Chateau Creme Delight because it wanted to increase its presence in the Asia Pacific region. Before that the Movenpick brand was marketed by Tip Top (now owned by Fonterra) under a licence agreement.

Facts:

Export Value: $7.1 billion

Milk Volume: 12.9 billion litres

Key Markets: US, Europe, Japan

Number of farmers: 13,649

Major areas: South Auckland, Taranaki, Northland

Area farmed: 1.4 million ha