KEY POINTS:
Ironically it could be the weather which underscores the merits of Fonterra's move into Australia.
Australian farmers are sitting nervously on the cusp of an excellent season should the spring rains arrive or facing another disastrous year should the rains stay away.
Fonterra has adopted a business model
which spreads its geographic risk, but also uses the strength of its Australian offshoot in developing, marketing and supplying dairy products for domestic consumers.
Australia exports 40 per cent of the nine billion litres of milk produced each year with the balance consumed domestically, and if it is once again thrust into drought and associated water restrictions, Fonterra's New Zealand business can pick up any export shortfall.
At their most optimistic, Fonterra executives expect Australian production this year to be between 9.3 and 9.5 billion litres, up slightly on last season.
Other than the weather, thereis also attrition of dairy farmersin Queensland, New South Wales, northern Victoria and Western Australia because of diffi-culties with access to waterand an ageing population.
New Zealand and Australia are treated by Fonterra as one market managed from Melbourne, where Fonterra's Australia-New Zealand managing director John Doumani oversees a $3.3 billion business.
"We are principally a consumer business and our success going ahead is about our ability to compete with consumer goods," he said.
Fonterra inherited a 25 per cent stake in Bonlac in 2001, took it to 50 per cent in July 2003, before buying it outright in September 2005.
The company operates 11 plants in Australia, has 2000 contracted suppliers in Queensland, New South Wales, Victoria, South Australia and Western Australia, and is second in size to Murray Goulburn.
Last financial year Fonterra Australia increased its operating profit 47 per cent to $79 million and still paid what Doumani called a competitive milk price.
Farmers are contracted suppliers rather than shareholders as is the case in New Zealand, and last year Fonterra launched a regional growth initiative, paying a premium to new suppliers in the first year to those who committed their supply to the company for three years.
This allowed Fonterra to increase the volume of milk it handled by 200 million litres.
Fonterra owns Australia's leading cheese brands which have 30 per cent market share - Mainland, Bega and Perfect Italiano - and the leading dairy and margarine spreads, with 18 per cent market share.
In New Zealand Fonterra Brands leads the market in every category and Doumani said what tended to work in one market worked "90 per cent of the time" in the other.
Fresh dairy products remain the gap in its portfolio outside Western Australia, but Doumani told reporters in Melbourne that rather than further cluttering an already saturated market, Fonterra was sitting back waiting to pick up existing businesses.
But the reality is it needs to pick up a significant national player in the fresh milk sector to make significant headway in Australia.
Doumani wants to build on dairy's health and nutrition values and develop new and tasty convenient dairy products.
Part of the strategy to achieve that was to introduce innovative dairy products to young people so they remain consumers throughout their life.
Fonterra Australia has developed high-protein food bars, called munchables, which it will target at the snack market, and Anlene Milk, a calcium-rich product aimed at young to middle-aged health-conscious people.
Independent dairy consultant Steve Spencer, a director of Freshlogic, said the Australian retail market was changing, with the food service and specialty food sectors growing at the expense of supermarkets.
This reflected changing Australian demographics, with a growing urban population, and changing buyer behaviour, with people shopping more but buying fewer products. Dining out has also become a way of life and people were spending more money in specialty shops.
Fonterra Brands managing director Aidan Coleman said that while the New Zealand and Australian markets were similar, ethnicity meant there were some differences in taste.
Coleman said Mainland was the largest cheese brand in Australia, generating sales of $200 million a year with the cheese produced in New Zealand.
Fonterra also manages the sales and distribution of 35,000 tonnes of Bega cheese on behalf of a small 100-supplier co-operative company in Victoria, while its third main cheese brand, Perfect Italiano, was targeted at Australia's sizeable Mediterranean community.
-Otago Daily Times