Rich pickings await Fonterra

Related tags Dairy Milk

International dairy specialists have rated New Zealand company
Fonterra's alliance with food giant Nestle a "spectacular" teaming
among companies targeting the rich American market.

International dairy specialists have rated New Zealand company Fonterra's alliance with food giant Nestle a "spectacular" teaming among companies targeting the rich American market.

The co-operative's traditional strength in raw milk supply is also seen as a powerful attribute as growth in world dairy demand outstrips industry capacity.

In a report on the world's top dairy companies, Rabobank food and agribusiness specialists Adrie Zwanenberg and Mark Voorbergen said the United States dairy market was one of the most attractive in the world. It was large, still growing and had prices better than many other markets. It had also undergone a wave of consolidations.

"From January 1998 through to March this year, the US dairy industry was involved in 143 merger and acquisition transactions, or one every 11 days,"​ said the Rabobank report.

"Of these transactions, 127 took place in the US and 16 were deals outside the US by US companies."​ Like dairy companies worldwide, US companies faced changes and challenges that were forcing them to reconsider their strategies.

"Such a process may result in the need to increase the scale of operations in manufacturing and/or marketing."​ The most important drivers of the global dairy industry were the growing demand for dairy products, an increasing number of consumer requirements, increasingly powerful customers, concerns about the milk supply and changes in dairy policies.

Rabobank said foreign companies had teamed up to become stronger against US competition.

"A spectacular example is the alliance between Nestle and Fonterra, called Dairy Partners Americas."​ The two companies planned to create joint ventures in the dairy business in North, Central and South America, covering a wide range of dairy products.

But "the main aim ... is to improve the product-market combinations in which both companies are relatively weak."​ Nestle executive vice-president Carlos Represas told the Business Herald soon after the alliance was agreed to in March that Fonterra brought to the deal a world-recognised competence and excellence in animal husbandry, milk production and transport.

Nestle's desire to secure milk supply is mirrored worldwide, and Rabobank's report shows that companies such as Fonterra - often criticised for its milk supply emphasis - have a vital role in the global industry.

"While world demand for dairy products is growing at two per cent per annum, it is proving very difficult to increase world supply by any more than one per cent per annum,"​ the bank said.

"Farmers in the more efficient areas have been able to increase production, but this is often offset by the effect of unfavourable weather conditions in other regions, or of farmers leaving the industry because of low domestic milk prices.

"This has created a concern among dairy companies generally about securing sufficient quantity."​ Rabobank said alliances aimed at securing raw milk supply were very characteristic of the US dairy industry.

"Almost all US milk-processing companies depend on other companies for their milk supply.

"On the one hand, this creates a concern among dairy companies with regard to securing a sufficient quantity of milk and, on the other hand, provides the milk-collecting co-operatives with a chance to play a crucial role in the industry despite the fact that they are not leaders in the processing and marketing of milk."​ Dairy Farmers of America was the champion in milk brokerage, collecting more than 20 billion kilograms of milk, or 28 per cent of total US milk production, but processing less than 20 per cent in its own factories.

Most of the milk collected was sold to other independent milk-processing companies such as Dean Foods.

The report said the US dairy market's growth was generally estimated at one per cent because of growing consumption of cheese and health foods.

"US demand for fluid dairy products is suffering under competition from other beverages that also deliver the nutrition that the dairy industry thought was unique to their products."​ Rabobank said consumers all over the world, and particularly in America, were raising their expectations.

"They want more, better, newer and healthier products. Motivated by new product launches, they are also demanding functional foods and convenience products.

"And they want these products available every day, year-round. Moreover, consumers are becoming increasingly critical of the way their food is produced."​ The main buyers of dairy products included food retailers and wholesalers, the foodservice industry and food processors, who were consolidating on a global basis and tended to be larger than dairy industry players.

Co-operative dairy companies continued to play a crucial role in the world dairy industry, Rabobank said.

That was evident in a number of ways: firstly that the world's top 20 dairy companies included eight co-operatives; and secondly that one third of the 592 dairy mergers, acquisitions and alliances that had taken place throughout the world since January 1998 were initiated by co-operatives. It should also be noted that Dairy Farmers of America was the key milk supplier to many dairy companies in the US and had a 50 per cent equity stake in the rising industry star, National Dairy Holdings.

Related topics Processing & Packaging

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