By Miles Hurrell, chief executive of Fonterra
The relatively steady improvement in Global Dairy Trade prices over recent months will be of some relief to dairy farmers across New Zealand, but staying prepared for potential volatility is critical.
In Rabobank’s recently released annual outlook, it has suggested currents of change will likely run deep for our agriculture industry this year, highlighting China’s economic recovery and geopolitical tensions among key contributing factors.
On dairy specifically, the report states that “current fundamentals provide the perfect ingredients for price volatility to be a key theme in 2024”.
One thing Fonterra is monitoring particularly closely is the disruption to shipping lines in the Red Sea, which began late last year following Houthi attacks in the area.
Last month, major carrier Maersk warned customers that its lengthy detours – most notably going around the Cape of Good Hope – could extend into the second half of this year.
The Suez Canal issues are made worse by the fact that there have been blockages through the Panama Canal due to drought.
What’s important for any exporter in times like these is controlling the controllables and playing to your strengths.
In Fonterra’s case, we can provide reassurance to our farmer owners that we’ll keep getting their milk to market because of the Kotahi joint venture we established with Silver Fern Farms just over a decade ago. We were able to form this logistics company thanks in large part to our scale. With around 95% of our product going overseas, Kotahi helped our co-operative’s supply chain remain resilient through covid and so far it’s proving invaluable again in light of recent events.
We’re also working to provide farmers security through this period of volatility in other ways. Our scale and optionality enable us to move our farmers’ milk within and around the diverse range of products we make, and the countries in which we operate, to get the best value and therefore maximise the returns we deliver to them.
Last year, this helped us achieve an impressive return on capital of 12.4%, and we’re currently looking at an FY24 forecast earnings range of 50-65 cents per share. The profits Fonterra makes ultimately flow through regional New Zealand, as farmers have shown to spend almost 50 cents of every dollar they earn in their local community.
Our farmgate milk price – from which most other processors in this country set their price – also benefits from our economies of scale and efficient operations. Most recently, we’ve seen increased demand for our product from the Middle East and southeast Asia help to offset reduced demand from China.
Beyond this, we’re always looking at the tools and solutions we can put in place to help farmers with cash flow or earn more for their milk.
For example, this season’s new advance rate schedule enabled us to get cash to farmers sooner, and we also offer our fixed milk price tool for farmers to give farmers certainty of the price they receive for a portion of their milk, should they want it.
Meanwhile farmers who achieve our Co-operative Difference framework this season will receive an additional 1-2 cents per kilogram of milk solids supplied, with key customer Nestlé providing the funds for this as one way to recognise farmers who are making continuous improvement with on-farm sustainability.
Looking out past this year, we are excited about the future of the industry and the potential of our co-operative. Overall demand for dairy continues to grow, with trends towards more Westernised dining, rising incomes and recognition of the nutritional value of dairy helping to lift consumption.
We aim to grow our share of sustainable NZ milk, and this is helped by the fact that our new flexible shareholding capital structure makes it easier than ever for new farmers to join.
We’re further strengthening the partnerships we’ve built with some of the biggest multinational companies across the globe and continue to innovate alongside them across the Ingredients, Foodservice, and Consumer channels.
We already differentiate ourselves with our reputation for lower-emissions, safe and high-quality dairy, and we see the potential to derive further value by meeting the evolving sustainability needs of our customers.
But probably our most important point of difference – and the thing that motivates me the most to ensure we continue making progress – is that we are a co-operative.
Our heritage is based on the foresight of Kiwi dairy farmers who knew they were stronger together. This is hugely important, particularly if you look at the struggles that dairy farmers have faced in some countries where there isn’t a strong co-operative like ours.
We want to be here for generations to come, riding the different waves of change that come and go and providing our farmers with the security that helps them get on with doing what they do best.
It’s perhaps best summed up by one of our farmers from Waka Dairies in Dannevirke, Michael Phillips: “We currently have a competitive edge because of what we do on farm and because of what Fonterra does above and beyond that.”
