The New Zealand dairy giant says the global market for organics has changed, seeks to limit losses.
New Zealand-based dairy leader Fonterra announced today it will restructure its organic operations.
Fonterra’s Group Director Supplier and External Relations Kelvin Wickham says the co-operative remains committed to the organics market, but as growth in this market has significantly slowed since the global financial crisis, Fonterra needs to make changes to its organic operations.
Fonterra is meeting with its organic farmers this week to take them through a four point plan to bring the loss making business into a break-even situation. The plan includes:
1. Concentrating Fonterra’s North Island organic suppliers in one hub around its key certified organic processing site, Hautapu. This will reduce the number of Fonterra’s organic suppliers.
2. Reducing the amount of product processed at Fonterra’s other two certified organic sites, Waitoa and Morrinsville.
3. Prioritizing the organic product range to focus on cheese which provides the best returns.
4. Focusing on emerging Asian and Australasian organics markets where there are stronger returns and growth potential.
Wickham says the first two points will mean considerable transport and manufacturing cost savings for Fonterra’s organic business.
“Our organic farmers are currently spread right across the North Island. This means substantial transport costs for the business,” he says. “In addition, focusing most of our organic product through a single site will mean we are able to create efficiencies of scale in processing the milk.
“We understand the big commitment many of our farmers have made to the organics program and that this transition will not be an easy one to make,” adds Wickham. “The decision to reduce our organics operation was not taken lightly but we need to get the business back into a break-even situation. We will honor all of our organic contracts through to their formal termination dates, which in some cases are four-five years away and we will work with our farmers as they make the transition out of the organics program.”
The organics market was hit hard by the global financial crisis and market indications are it will not recover to previous levels, Wickham says.
“All categories felt the effects but particularly the category in which we sell – packaged dairy foods – where prices and volumes are still below 2008 levels,” he says. “Research shows people are now less willing to pay the premium for organic products. In addition, consumers are gaining more confidence that everyday products are being produced more sustainably and are more acceptable so they no longer see the need to pay the premium for most organic products.”
The way Fonterra’s organics business is currently structured means it is making a loss, and these losses are forecast to continue if the co-operative doesn’t make changes.
“In order to stay in organics, we have to recognize that the global market for organics has changed,” Wickham says. “This four-point plan is designed to bring our organics business out of loss.”