Fonterra CEO Theo Spierings says stable milk prices are achievable should there be no drastic change on the global front. Fonterra is a multinational New Zealand-based cooperative owned by 10,500 farmers and their families.
“If there are no drastic changes around the world — borders closing or massive geopolitical issues — I think we will have two, possibly, even three years of relative stability of milk prices from where they are right now.
“I always look at WMP because that’s the most important for us, and that’s around US$3,000 [per tonne currently], and this is the right kind of price level,” he tells The Edge.
Based on data from Global Daily Trade (GDT), where the commodities are traded internationally, WMP was traded at US$3,233 (RM13,995) per tonne as at May 2, up 49% from US$2,176 per tonne a year ago.
WMP is one of the five commodities used in calculating the farm-gate milk price, which is the base price that Fonterra pays for the New Zealand milk supplied to the cooperative. The other four commodities, which make up the milk price model, are skim milk powder (SMP), butter, anhydrous milk fat (AMF) and buttermilk powder (BMP).
Though GlobalDairy Trade Holdings Ltd, which operates the GDT, is owned by Fonterra, the operations of the former are independent of those of the dairy giant. Fonterra is one of the key suppliers to GDT, alongside other dairy companies such as DairyAmerica Inc, Europe’s Arla Foods, India’s Amul and Murray Goulburn of Australia.
“Fonterra [collects] 85% of all New Zealand milk. We have very strict antitrust regulations, so what we did was we launched the GDT [whereby] we have a Dutch auction system around dairy commodities, and the five key commodities traded on the platform set the milk price.
“We do have some influence on the GDT as we are the key supplier, but [on whether we have] influence over milk prices the answer is no … we are impacted by the volatility of milk prices like everyone else, and if we had influence over prices we would have never allowed that kind of volatility [in the first place],” he says.
Spierings also corrected a common misconception that higher milk prices would mean an increase in prices for Fonterra’s products.
“For our ingredients, yes, that has to follow the GDT prices, but for our brands, I really want prices of our brands to follow inflation of the respective export markets of Fonterra, because if you follow the extreme volatility of dairy commodities, you will price yourself out of the market one day,” he says.
Malaysia is Fonterra’s largest market in Southeast Asia in terms of both its consumer and food brands. These include brands such as Anlene, Anmum (Materna, Lacta and Essential), Anchor, Fernleaf, CalciYum, Chesdale, Mainland and Perfect Italiano. Malaysia was also the launch pad for two of its three global brands — Anlene and Anmum — as both brands were first developed and launched in the country 25 years ago.
Through its Anchor Food Professionals range, Fonterra also supplies more than 5,000 food and beverage establishments in Malaysia with food products such as butter, cream cheese and culinary cream.
The group’s two Malaysian manufacturing units — Susumas and Dairymas in Shah Alam — produce more than 46,000 tonnes of products each year, including its dairy brands. Fonterra’s Global Business Service Centre — its first corporate shared services centre outside of New Zealand — is located in Puchong, Selangor.
At present, China is Fonterra’s largest export market for its consumer and food brands followed by the US.
“All in all, we have invested more than NZ$2 billion [RM5.9 billion] in China over the last four years, which was used for farming, launching our Anlene, Anmum and Anchor brands there, and investing in Beingmate, which is a local infant nutrition player,” Spierings says.
Fonterra now has a presence in about 160 countries. On whether the group would consider new markets, Spierings cites East Africa and Iran.
“In fact, we have entered East Africa through Ethiopia, and we think East Africa over time could become as vibrant as West Africa. We are also looking at Iran — an 80 million market [population] with rapid development and a very strong dairy culture.
“But, before going into any new market, we always [abide] by our Fonterra strategy — to optimise New Zealand milk, we export 95% of the milk collected from our farmers.
“So our position is, if we cannot sell New Zealand milk in a [foreign] country, why would we go in with money from our farmers who provide both milk and capital to us? If we can’t sell their milk and we ask for their capital, it is unfair,” Spierings says.
Fonterra Co-Operative Group and Fonterra Shareholders Fund are both listed on the New Zealand Stock Exchange. Farmers are required to hold shares in the co-operative in proportion to the volume of milk produced each season, and they are also allowed to hold shares not linked to milk supply within certain limits.
However, only supplier farmers can be shareholders in the cooperative. Investors who are not suppliers can purchase units in the fund.
“The strength of the cooperative model is, you are guaranteed milk supply which is [the lifeline of our company], and capital comes into the company,” Spierings says.
Fonterra has forecast a payout to its farmers — consisting of milk price plus earnings — of NZ$6.45 to NZ$6.55 per kg of milk solids as at March 22, from a forecast of NZ$4.75 to NZ$4.85 per kg of milk solids on Aug 1 last year. The improvement in forecast follows the gradual rebalancing of supply and demand.
For its financial year ended July 31, 2016, Fonterra reported net profit after tax of NZ$834 million (US$571 million), on the back of NZ$17.2 billion revenue.
Source: The Edge Malaysia
Link: http://www.theedgemarkets.com/article/fonterra-foresees-stable-milk-prices-ahead