February 22, 2012

 

 

Sir Henry van der Heyden, chairman of Fonterra, gave his thoughts on the bright outlook of New Zealand's dairy industry by 2020 with the farmers reaping the benefits of more milk being produced offshore.

 

He was talking to around 100 people at Federated Farmers' annual Dairy Council conference held in Palmerston North at the end of last week.

 

"There are about 7.02 billion people in the world now. Each day another 200,000 are on the planet. So every single month there is an addition equal to New Zealand's population.

 

"New Zealand production is a drop in the ocean. The world needs 160 billion litres of milk and New Zealand's total production is four billion litres."

 

In 2020, he sees the strengths of Fonterra being that it is farmer owned, has resources such as land and water to grow pasture and that farmers in New Zealand can make milk at a lower cost than anyone else in the world.

 

"Fonterra has global scale and as production grows it can't afford to lose that."

 

Other countries produce more milk than New Zealand, but most of it is consumed internally. Because New Zealand exports milk [as milk powder], Fonterra has about 30-40% of the global trade in dairy products.

 

"To capture some of the [additional] volume, New Zealand will have to source more of its milk [for export markets] offshore. We can't afford to be irrelevant when it comes to market position."

 

But Sir Henry said that while more milk would come from abroad, profits would be returned to dairy farmer shareholders and New Zealand milk would remain the priority. Demand for dairying is coming from the developing world, with China, India and Indonesia leading the charge. "We export 20% of volume to China. That is up from 2-3% we used to export. We need to invest to protect those interests. China is a must win and we need to move there."

 

Sir Henry said liquid milk was largely driving growth and it made sense to produce milk in China. "In five to 10 years you will see Fonterra become more active in China." He said that despite the San Lu melamine in milk scandal, Fonterra lost no customers. Sir Henry also talked about the Dairy Industry Restructuring Act, or DIRA, which is in the throes of being revamped.

 

The ministry's proposal is out for consultation now, and people can put in submissions. It was a tight timeframe, Carter said, to allow for changes to be made in Parliament, and to have it in place for the next dairying season.

 

"There are several things in the DIRA proposal that are giving us [Fonterra] heartburn," Sir Henry said.

 

'Virtual processing' would not be OK, he said. "That would allow someone to buy milk from us and on-sell it to an independent processor. Anyone buying milk from Fonterra should have the processing ability on the ground."

 

But he said Fonterra was comfortable selling milk to independent processors that were not exporting against the co-operative.

 

"And we would be OK about selling milk to independents, but on the same milk curve as we [Fonterra] get it. That's fundamental." At the moment, independents are able to take little during the milk peak and more at the extremes.

 

"We could cope with providing the additional 200 million litres to independents in the proposal, if the other things are met." The eligibility proposal for Fonterra providing raw milk to competitors is defined at three years for independent processors. Rather than going 'cold turkey' it would be better to have a tiered approach to phasing out milk, he said.

 

This would give independents more leeway, and it would allow Fonterra to have more processing available for the extra milk. Sir Henry claims New Zealanders will be subsidising increasingly foreign-owned dairy processors if the proposed changes are introduced.