Independent dairy companies offer farmers an attractive option

Ask a New Zealander to name a dairy company and the one they are certain to come up with is Fonterra.

But beyond that, many would be stumped for an answer. There are in fact at least a score of independents, processing 18 per cent of New Zealand milk, a share that has steadily increased over the 18 years Fonterra has been in existence.

Open Country Dairy (OCD) farmer supplier Chris Lewis speaks for many when he says farmers opt for an independent over Fonterra because it’s an easier way to get ahead.

“The independents are especially useful for farmers wanting to buy their first farm. The average farmer at the moment would be paying $600,000 for shares to belong to Fonterra.

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“When you’re buying your first farm, that’s a lot of money. It’s like buying you first house – you put everything on the line to make it happen, so farmers look at other options. They might say to themselves ‘I can buy that piece of land even though I might get a slightly lower milk price’,” Lewis says.

He maintains that if Fonterra had performed well, there would have been little room for the independents to take hold. He himself shifted from the dairy giant some time ago.

“The tanker comes every day, they test the milk and you get paid on the 15th of the month. They’ve [OCD] helped by letting us invest money into our business and take control of it. We always run the ruler over it to see if we’d be better off back at Fonterra. Some years we’d be better off, some not, but over the long term we’ve been very happy.”

The independents are a varied group, some focusing on commodities such as milk powder or added value products such as infant formula, and perhaps even branded goods. Some dabble in all three.

They may have a domestic focus, but the big players target the lucrative export market – in fact 96 per cent of New Zealand dairy is sent overseas, making the country the world’s biggest exporter.

But where the independents have had the biggest impact on the dairy scene over the last two decades is when they have competed with Fonterra for farmers’ milk.

Chief among those have been Open Country Dairy, Synlait, Westland, Miraka, Oceania and Tatua. Together their annual revenue is more than $3 billion, compared to Fonterra’s $18b.

The remainder – niche companies such as Fresha Valley, Kiwi Organic, Kawerau Dairy, Lewis Road, Barry’s Bay, Spring Sheep Dairy, Kingsmeade, Blue River Dairy – are either supplied by Fonterra farmers or have their own sheep flocks or goat herds.

Separate to these is Goodman Fielder, once a Kiwi company but now Singaporean-owned, which has been given the privilege of receiving Fonterra milk at cost, plus a processing charge because its products are largely made using Fonterra’s plants.

As Fonterra’s chief domestic competitor with household brand names such as Meadow Fresh, Puhoi, Bouton d’Or, Chesdale and Ornelle, its job has been to keep the dairy giant honest.

Analyst Geoff Taylor of TDB Advisory, who keeps a close eye on the industry, says the single defining characteristic of the most successful companies is they cleave closely to one way of operating.

“The successful ones aren’t defined by a particular product mix but by sticking to their knitting. The two most successful are Tatua and Open Country Dairy.

” Tatua has persisted with high value specialty ingredients and hasn’t tried to grow its milk supply, and they’re very small. Interesting it’s OCD that is a good performer, outdoing Synlait in terms of capital employed. It bookends the other end of the spectrum in that it is a commodity-based provider.

“It’s those in the middle who have attempted to be all things to all people that have underperformed. It says something about size also, it’s not just the little companies outperforming, OCD is a very large business, about 10 times the size of Tatua,” Taylor says.

Change is on the horizon in the shape of a refashioned Dairy Industry Restructuring Act, the law which brought Fonterra into existence, and it will have an impact on the independents.

When the dairy giant had 96 per cent of milk supply in 2001, the Labour Government straitjacketed it to ensure Fonterra did not take advantage of its near-monopoly position.

It therefore:

* Forced it to give milk to new companies for three years, on a diminishing scale;

* Made Fonterra accept back farmers who had left the co-op for a competitor.

Lewis says Federated Farmers (he’s their dairy group chairman) takes the view the strictures have run their course. A strong Fonterra is in the interests of the industry because it sets the benchmark against which they have to judge themselves.

Commentator and Fonterra supplier, Craig Hickman, believes there is no need for more independents.

“We’ve got enough stainless steel in New Zealand. We’ve got a static if not declining milk pool and if more processors come in they need to come in with their own business model. They need to stand on their own two feet. Currently they can come in and are guaranteed milk while they get started – if that’s not a subsidy I don’t know what is.”

If the independents had to accept “every drop of milk people wanted to supply them” their farmer payouts would drop. In addition, they pick up milk from a small area, reducing transport costs, whereas Fonterra tankers sometimes have to travel long distances for milk, Hickman points out.

Open Country Dairy

With about 1000 farmer suppliers, OCD is far and away the largest of the independents, although small by comparison to Fonterra with 10,000.

It is the most comparable company to Fonterra, and has done remarkably well through being focused mainly on exporting milk powder and cheese commodities.

Owned 76 per cent by the Motueka-based Talley’s Group, which has forged a multi-foods empire including meat, seafood, and frozen vegetables, it was founded in 2001. It has processing plants in Waikato and exports to 64 countries.

Its return on capital over the last five years has been 11 per cent, second only to Tatua.

Miraka

Based just north of Taupo, Miraka has two key points of difference to other companies: it is owned by a group of Māori trusts and incorporations (with some foreign investment), and uses renewable geothermal energy to process its products.

Chief executive Richard Wyeth, who has been with Miraka since its 2011 launch, says its strategy has been to build a strong foundation on commodity products – mainly whole milk powder – creating strong relationships with customers overseas and then making specialised powders for which it gets a higher price.

In 2014 it started to process UHT milk, signing a sales agreement with Chinese company Shanghai Pengxin which meant it could run its lines at full capacity. The third tier of its strategy is to create consumer brands, which it has done with Taupo Pure.

“We’re relatively small so we can do things the bigger companies can’t do. We market to about 23 countries, with China making up a reasonable portion, but also regions such as South America, Middle East and Africa. We couldn’t do without China but it’s commercially prudent to have a diverse portfolio of customers,” Wyeth says.

Of its 104 suppliers, 20 per cent are Maori. It averages between 10-15c above Fonterra’s milk price. Dividends are paid back to the Maori shareholders who invested capital to build the plant.

“We haven’t taken on a lot of suppliers in the last few years, we’ve got a waiting list that’s reasonably long but we’re at capacity from a processing perspective,” Wyeth says.

Tatua

Morrinsville-based co-op Tatua has not been an overnight success. Created 105 years ago, it was originally a cheese plant but later branched out into higher value products such as caseinate and high value ingredients.

Chief executive Brendhan Greaney says the reason why it has done so well for its 113 farmers is because it has shifted from relying for income on commodities towards value-add ingredients and nutritionals.

“The percentage of our business that is value add is now 60 per cent. We make customer-specific products, and while we have products on supermarket shelves, that’s a small part of what we do, we really are an ingredients supplier to other manufacturers.”

Last year its revenue was a record $364m; in 2017 its return per kilogram of milksolids $22.16 , far outpacing every other company.

Tatua is not overly reliant on one single market. Australia and NZ make up 24 per cent of exports, Japan (20 per cent), China (16 per cent), the United States and Europe (20 per cent), with minor amounts of product sent to the Middle East, South America and South-East Asia.

Regarded as a maverick, Tatua chose not to join the merger that created Fonterra. Its farmers have been rewarded with consistent high prices year after year.

The legacy created by founder W H Milliken continues with his descendants still supplying milk to the co-op.

​Synlait Milk

The 39 per cent Chinese-owned company was set up in 2007 and in recent years has been in expansion mode, having moved into Waikato from its Canterbury base. This year it posted revenue of more than $1b for the first time.

It has taken on 56 farmers in Waikato to add to the 200 it has in Canterbury. Historically it has paid farmers on a par with Fonterra but topped that up with premiums for those who supply it with A2 milk or participate in the “lead with pride” programme.

Since it listed publicly in 2013, Synlait has shifted more volume to infant formula base powders, canned infant formulas and cream.

Yili

China’s largest dairy producer owns Oceania Dairy near Waimate and Westland Milk.

Oceania’s milk powder is exported to its parent company in China where it is made into infant formula. Being owned by the Chinese Government, its finances are quite opaque, although it aims to pay farmers about the same milk price as Fonterra.

Earlier this year Yili bought Hokitika-based Westland Milk, whose 430 long suffering farmers overwhelmingly decided they had enough of a succession of poor payouts. The plant produces commodities such as powder and butter, through to powdered yoghurt and UHT milk.