Business

Saturday September 5, 2009

Fonterra sees huge growth potential in Asia

Stories By M. HAFIDZ MAHPAR


GAVIN Vanner, 41, a second-generation dairy farmer in Taranaki, New Zealand, believes in working hard. He started from the bottom and worked his way up. Today, he owns a 377ha farm with 880 cows.

“There’s a certain core of New Zealanders that got it in their heads that you can’t start where we (he and his wife) started, with dirt on our hands and coming through to farm ownership. Most of them just want to go straight to farm ownership,” he says.

Gavin Vander at his farm.

“I started on wages, and I bought calves and reared them until I had a herd. When I was only on wages, it was pretty tough. But if you don’t make sacrifices, everyone would do it.”

Vanner, who lost 10kg when he first took over the farm two years earlier, is full of optimism and enthusiasm as he details his plans for the farm. You can tell he has what the locals call “milk in his veins.”

Vanner is one of 10,500 farmers in New Zealand who supply raw milk to Auckland-headquartered Fonterra, the world’s largest milk exporter and processor.

You may not have heard of Fonterra, but you may know some of its products: Anlene, Anmum, Fernleaf, Anchor and Tip Top.

Fonterra is a cooperative but likes to refer to itself as a company. As a “company”, it is the biggest in New Zealand, posting revenue of NZ$19.5bil (RM46.8bil) in the 14 months to July 31, 2008. That’s about four times the revenue of the biggest listed firm in the country, Telecom. For the first half of FY09, Fonterra’s revenue was NZ$8bil.

Fonterra is pursuing a capital reform plan for more capital for business growth as well as to take away share redemption risk (Fonterra’s farmer shareholders can sell back their shares to Fonterra at any time, and it may put a big dent in Fonterra’s capital).

The cooperative’s initial proposal last year, which involved forming a company outside the co-operative with publicly listed shares, was shot down by Fonterra’s farmer owners who feared the loss of control and ownership.

But Vanner is a believer in Fonterra’s plans. “We’re looking after our business here (in New Zealand), and it’s their job to grow the business throughout New Zealand and the world. New Zealand is not big enough for Fonterra to grow anymore than what it is,” he says.

“We voted those guys (the Fonterra board) to do their job and they do it very well, so there’s no point in us (farmers) worrying about what they’re actually doing, to a certain extent. They don’t worry what I do on my farm.”

If all the farmers hold Vanner’s view, Fonterra Co-operative Ltd chief executive officer Andrew Ferrier would’ve been a happy man.

Fonterra requires at least 75% support from the shareholders, and by Ferrier’s estimate, the board already had the support of more than 50% but still short of the number to change the constitution (the proposal was never put to a vote).

Ferrier says Fonterra will have a round of meetings with farmers this month to explain further the capital restructuring plans.

Interestingly, Fonterra’s existence itself is due to to the farmers’ foresight of the business situation.

Speaking in Auckland, Ferrier tells of how the dairy industry has consolidated over the years, from 400 dairy cooperatives 80 years ago to less than a handful now, with Fonterra accounting for more than 90% of New Zealand’s dairy supply.

He praises the foresightedness of New Zealand dairy farmers as “impressive” in terms of recognising that when they were so far from their export markets, they needed strength in numbers.

“That’s what makes us world-class, not just that we have good pastures in New Zealand. We also have the critical mass to be very important to customers all over the world,” Ferrier says.

Fonterra’s core strategy is to ensure that it remains efficient and sustainable and has low cost so that dairy farming exists for generations to come.

But being a global supplier, the dairy giant also has joint ventures with farmers in other countries (though not in Malaysia). This ensures uninterrupted supply even if there is a problem with, say, animal health in New Zealand.

“The Asia/Middle East (AME) market is a region where we are strong, since it is traditionally supplied by New Zealand dairy products,” Ferrier says.

For the first half of its financial year ended July 31, Asia, Africa and Middle East revenue grew 53% to NZ$1.2bil – a much faster growth compared to all other regions.

About 25% of Fonterra’s dairy exports goes to the AME market. Its consumer business alone is worth NZ$2bil in revenue annually (it also has an ingredients business).

“We see the region as a strong region economically with good growth prospects. Dairy consumption per capita has a long way to grow,” he says.

In Malaysia, per capita consumption is just under 40 litres per year.

“Although worldwide dairy demand growth might be 1% or 2%, in the Asean region we’re seeing 4% to 5% as consumers are increasingly becoming aware of how nutritious dairy products are,” Ferrier says, adding that Anlene, its brand focusing on bone health, is growing much faster.

On the challenges in Asia, Ferrier says the high dairy commodity prices in its last financial year reduced demand for dairy products temporarily in most Asian markets in late 2008 and early 2009.

“The big challenge in Asia is to re-ignite demand for dairy products now that dairy prices have got low again, and we’ve started seeing signs of that happening recently,” he tells StarBizWeek. While Fonterra’s market share in the region has grown, the entire category has declined because consumers are buying less milk and yoghurt.

In the consumer business, its revenue was flat to marginally down. “This year we’re expecting growth,” Ferrier says. “We’re already starting to see it occur again, so I think we’ll get back on track.”

Related Story:

Fonterra makes Malaysia an innovation hub

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