Fonterra is big but Mataura (nutritionally) aims to be world’s best

Earlier this week Point of Order  drew  attention to  the   contrasting fortunes of   key  components  within New Zealand’s  dairy  sector,  which  by any account is  a  mainstay of  the country’s  export industry.  In that instance  it  was the contrast  between  the  report  of rising revenue  and  profit  of  specialist  milk supplier  A2 Milk  and  the slide  in  Global Dairy Trade auction prices likely to lead to  another  downgrade in the  milk payout  for Fonterra   suppliers.

The  contrast was  heightened  later in the week, first  with  speculative reports that Fonterra is putting  up for  sale  the  iconic icecream company Tip Top  (which could yield $400m to  reduce debt)  as well  as  its South American  operations.

Then came news of the opening of  a  new $240m plant  near  Gore in Southland.

Agriculture Minister Damien O’Connor, speaking at the official opening, said the Mataura Valley Milk plant is a base for further development opportunities for NZ and for the farmers that supplied milk.

“It pushes the opportunity for NZ dairy to a new level and I guess others will catch up”.

Mataura Valley Milk general manager Bernard May said the plant was part of a strategic plan to invest in the world’s most advanced production technology, people and systems to deliver world-class nutrition.

“We’re keeping our milk price above the competition allowing our farmer shareholders to develop a culture of excellence that our nutritional customers can engage with.”

May reports  the plant is running at capacity, processing about 700,000 litres of milk a day, and the first shipment of wholemilk powder left in early November.

“The plant is performing at peak milk processing capacity in its first year with no major issues.

Nutritional product trials begin in mid-December, with the first commercial production set down for February.  A rigorous testing process follows, with first nutritional products likely to be leaving the plant in April.

The vision is to be the world’s best nutrition business, May says.

Mataura Valley Milk announced the project was going ahead in 2016, after a $200m cash injection by the China Animal Husbandry Group (CAHG), a Chinese state-owned enterprise.

CAHG has a 71.8% stake in the site with 20% held by Southland farm suppliers.  The remainder is held by Hamilton-based milk powder company BODCO and Mataura directors.

Mataura Valley Milk will be the brand for its products, despite the involvement of BODCO.

The project   stems    from  one of  Southland’s legendary  figures, Ian “Inky” Tulloch,  who  10  years ago had  the idea of converting 50 acres of land and some disused sale yards at McNab into a milk plant.

Three years ago he travelled to China to sign with Chinese Animal Husbandary Group investors, signalling the plant would become a reality.

Yesterday he cut the ribbon at the official opening of the plant.

Specific requirements  have been developed for Mataura Valley suppliers including the elimination of palm kernel extract (PKE) as a supplementary feed for dairy cows.  May says consumers were at the forefront of the decision, with buyers wanting palm oil eliminated from their milk formula.

“We’ve got to get the supply chain right from the farm to the consumer”.

But  if  it  is   good  news  at  the  high end of  the  dairy  sector, there’s  less to  cheer about at  the  other end.

The ANZ  Bank – in  its  review  this  week  – noted dairy commodity prices have moved in a downward trajectory since the beginning of the 2018/19 season, putting pressure on returns at the farmgate level.

A stubbornly strong NZ dollar is also negatively affecting returns.

“While higher commodity prices and a lower exchange rate are forecast to materialise before the end of the season, it is now unlikely these movements will come soon enough to support our previous milk price forecast. We have therefore revised our milk price forecast for the 2018/19 season to $6.10/kg milksolid(MS) (previously $6.40)”.

ANZ  economists  say the  revised forecast assumes an improvement in dairy commodity prices in the second half of the season.  Whole milk powder prices are forecast to average 6% higher than today’s prices across the remainder of the season.

To reach the lower end of Fonterra’s current $6.25/kg MS forecast, dairy commodity prices would have to average 10% higher than current prices.

Farm profitability for the current season has been revised down due to the fall in the forecast milk price and lower returns for cull dairy cows. Upwards pressure on farm working expenses has also been assumed, primarily due to the tight labour market and higher compliance costs.

Next season’s milk price is expected to be slightly stronger than the current season – assuming some recovery in dairy commodity prices alongside a weaker NZD. However, the majority of the improvement in income is expected to be offset by higher farm working expenses

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