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Fonterra Executive Says Global Dairy Market is Growing

November 4, 2010
 
 

‘Milk supply will be more closely linked to demand but on a global scale rather than a local one’

“We expect global demand for milk to continue to grow,” says Paul Campbell, general manager of strategy at Fonterra, a large dairy cooperative in New Zealand that markets globally. “Gross domestic product and dairy consumption are linked, especially in developing countries where people seek to add protein. Asia has continued to be a tremendous growth market. There are several countries with very wealthy populations.

“There has been a convergence of milk prices globally since about the year 2000, and especially since 2007,” says Campbell (see farm gate milk price chart). “We are now in a global marketplace. The marginal consumer and marginal producer can be anywhere in the world. Barriers to world dairy trade are falling. There are fewer regulatory issues and lower internal supports.

“It is really a different situation from 15 years ago. For instance, both EU and U.S. dairy stocks have declined,” he says. That’s one reason why the volatility of world milk price has increased as much as seven-fold since the end of 2006 compared with the previous decade or so (see month-on-month change chart).

This means milk supply will be more closely linked to demand -- but on a global scale rather than a local one. Fonterra is proactively seeking to be “the source of dairy nutrition for everyone everywhere everyday,” says Campbell. New Zealand, at 15 billion liters and the eighth largest producer, is quite small, but it exports 95% of its milk production, he says.

As a result, “Fonterra is taking a very long-term view to create sustainable cooperative performance for the next generation,” he says. “We are focusing on creating lasting customer partnerships everywhere in the world –and particularly in our ingredients business. Where it makes sense, we are sourcing milk from producers outside of New Zealand.”

Fonterra also has developed trusted consumer brands in New Zealand, Australia and Asia.

Campbell believes the United States, which has traditionally been more focused on its own domestic market will become a more significant player in the world dairy market. “The U.S. can respond quickly to rising demand because of its feed base,” he explains. “Countries that rely more on pasture, such as New Zealand,” are not able to push production as promptly.”

However, as the world market integrates, “there will be tremendous opportunities for both Southern and Northern Hemisphere producers to capitalize on their different seasonal production cycles.”

Managing Volatility

Every step in the supply chain requires new efforts to manage the new market volatility, Campbell says. Farmers must pay close attention to their balance sheet and are seeking new ways to stabilize their farm income. Co-operatives are using price pooling and forward contracting; developing more diverse product mixes; spreading sales and even sourcing geographically. Customers looking to manage their margin volatility are also spreading purchases geographically and adopting more complex forward purchasing strategies, in addition to hedging nondairy inputs.

Fonterra at a Glance
$12 billion revenue [ Note: this is USD]
3,000 customers in 140 countries
10,500 farmer owners (in New Zealand)
20 billion l/year milk (14 billion New Zealand)
23% of New Zealand’s export income
Strong consumer brands in New Zealand, Australia, Asia;

Fonterra is a dairy co-operative, 100% owned and controlled by its farmer suppliers, with an individual farmer’s ownership based on that farmer’s quantity of supply. Fonterra’s co-operative heritage goes back to the formation of the first farmer-owned and controlled dairy co-operative in New Zealand (1871). On formation (2001), the capital structure of Fonterra evolved from that of its legacy companies in that the value of its shares were based on a fair market valuation rather than valued nominally. In 2010, Fonterra’s farmer owners voted to move to a share that was tradable between farmers?maintaining 100% farmer ownership and control of the co-operative.
 
Global Milk Production Chart Caption: Global milk production is about 680 million metric tons, with the EU-27 the leading producer at 150,000 tons followed by India, which produces 105,000 tons of cow and buffalo milk; and the United States at 85,000. Below that level of production is a quite large gap to the next tier.

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