16 November 2001

Dairy giants join forces

The Fonterra-Nestlé alliance will make a big presence in

the world dairy scene, writes Hugh Stringleman

NEW Zealands big new farmer-owned Fonterra dairy co-op has announced its arrival on the world scene in dramatic fashion, by way of an alliance with the worlds biggest dairy processor, Nestlé.

After regulatory approval, the Nestlé-Fonterra alliance will seek joint venture opportunities in the Americas with liquid milk and milk-based foods. However, the two companies will still compete with each other in other markets.

Fonterra was formed by a merger of the countrys two biggest processing co-operatives, New Zealand Dairy Group and Kiwi Co-operative Dairies, and pulled in the New Zealand Dairy Board, the former export monopoly marketer.

Now the biggest company in New Zealand, Fonterra earns 20% of the countrys annual export income and represents 7% of gross domestic product (GDP). New Zealand exports 35% of internationally-traded dairy and 95% of all production is exported.

Legislation governing the formation of Fonterra sets a progressive removal of the single-seller powers and promotes deregulation of the industry, so that other companies may establish milk supply contracts within New Zealand and undertake product processing and export marketing.

Fonterra has 14,500 farmer-shareholders and the vote in June on the merger proposal received 84% approval. The company will remain a 100% farmer-owned and governed co-operative.

In the dairy production season to May 31, 2001, New Zealands milk production from 3.5m dairy cows was over 12bn litres, containing 1.04bn kg of milk solids. These were processed into milk powders, butter, cheese and other products at 24 sites throughout the country.

Fonterra has a forecast turnover of NZ$12.5bn (£3.5bn) in the current financial year, split between two big operating divisions. Both divisions are represented worldwide by more than 10,000 staff members, most of them indigenous employees marketing New Zealand dairy products in 120 countries.

The biggest division, NZMP, includes the dairy ingredients business, processing facilities, quality assurance, transport, the global operations division and a number of specialist units for lactose, whey, ethanol and flavourings.

New Zealand Milk, meanwhile, contains the former Dairy Boards consumer products business, NZ Milk Foodservice, and the further processing activities of NZDG and Kiwi. It has also been enlarged with the addition of Australasian Food Holdings.

Fonterra is expected to seek more dairy industry investments and alliances in Australia, where the domestic market is much larger than New Zealand and where the pattern of dairy production and processing is very similar.

The leaders of the New Zealand dairy industry spent three years working to bring Fonterra about. They argued that the increasing globalisation of food retailers such as Wal-Mart/Asda, and the aggressive expansion of dairying giants such as Nestlé, Parmalat, Arla, Danone, Unilever and Kraft, made it essential that New Zealand (and probably Australia) merge all industry structures and efforts.

Agreement was reached between NZ Dairy Group and Kiwi last December to go ahead with the mega-merger. It then had to gain the backing of the government, exemption from Commerce Commission scrutiny over export trading activities and the resounding yes vote from farmer-shareholders.

Fonterras goal is a turnover of NZ$30bn (£8.6bn) by 2010. To do this, it plans further alliances with international dairy and food companies to gain increased throughput and maximum leverage from its global marketing muscle.

NZ dairy farmers are enjoying

good returns.