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Fonterra Closes Its Doors to the Dairy Industry

Australia 27.05.2024
Source: The Sydney Morning Herald.
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One of the nation’s largest dairy processors is pulling the plug on Australia. But it’s just the latest domino to fall in a sector that has been dwindling for decades, writes Jessica Yun from The Sydney Morning Herald.
Fonterra Closes Its Doors to the Dairy Industry
Western Star butter, Perfect Italiano, Mainland and Bega cheese: the brands Australians have loved and eaten for decades are up for sale. 

Fonterra, the New Zealand-based processor behind the dairy products, has announced it is looking to exit Australia, and has put the retail brands and its assets – eight manufacturing facilities – on the market to focus solely on their food service and hospitality business. 

For many in the industry, the announcement is not a surprise. 

‘‘ Fonterra has been talking about the potential of divesting all or part of the Australian business probably for the last two years,’’ said Dairy Farmers Victoria president Mark Billing, a fourthgeneration dairy farmer. 

‘‘ If I was supplying to Fonterra right now, I’d just be a little bit concerned about what’s the future for the company, what’s the future for the milk pool that I’m supplying into.’’ 

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Today, the dairy industry is dominated by the big four: Bega, Saputo, Fonterra, and Lactalis. Together, they represent more than 80 per cent of the nation’s milk processing. 

For many dairy farmers, Fonterra’s news is bittersweet: the New Zealand giant has left a sour taste in many mouths. In 2016, Murray Goulburn (which was taken over by Saputo the following year) unexpectedly slashed the price it paid for milk in a move that outraged farmers – and was mimicked by Fonterra a week later. 

‘‘ They were paying reasonably well at the farmgate, but 2016 brought a lot of that goodwill undone,’’ said Billing, whose family stopped supplying Fonterra 18 months after the move. 

‘‘ There is a bit of angst out there with some people who got burnt by Fonterra. Farms went to the wall, families were put under a huge amount of pressure.’’ 

The milk price cuts led to the creation of the ACCC-enforced dairy code of conduct and sparked a class action against both processors that was eventually dropped for Murray Goulburn but led to Fonterra paying out 350 farmers in a $25 million settlement. 

Industry observers expect that Fonterra’s competitors Saputo and Bega, which licenses its brand to Fonterra, are best poised to take a look under the hood. 

But acquisition may not be straightforward and could require the approval of the Foreign Investment Review Board (FIRB) and the competition regulator. 

‘‘ Bega and Saputo are potentially going to have more headwinds around regulator approval because they’ve already got big market share,’’ said Rabobank senior dairy analyst Michael Harvey. 

‘‘ It’s a big transaction. It’ll fundamentally change the look and shape of the industry ... It would be one of the biggest acquisitions or sale of a dairy company since Murray Goulburn was sold to Saputo.’’ 

Over the decades, farmers have faced multiple setbacks in the form of natural disasters such as drought and flooding , the effects of climate change and supply chain complications that emerged from the COVID-19 pandemic that pushed up the price of essential input costs such as feed, electricity, fuel and fertiliser. 

All this has dampened the ability of farmers to invest in their operations: the average cost of a natural disaster comes to about $1.4 million per farm, according to a recent farmer wellbeing survey by Norco and the National Farmers Federation (NFF). 

‘‘ Business in Australian dairy is not easy,’’ said Norco chief executive Michael Hampson. ‘‘ It’s not a high-margin game by any stretch of the imagination.’’ 

Grocery retailers have also played a role in keeping consumer milk prices low. Supermarket giants Coles, Woolworths and Aldi introduced $1-a-litre milk around 2011, and the price of private-label milk didn’t budge until 2019. 

In 2016, many Victorian dairy farmers exited the industry after the federal government’s response to that year’s drought was to initiate a water clawback plan in the Murray-Darling Basin, impacting water availability for farmers. 

The result has been a shrinking milk pool and dwindling exports. In 2004, Australia’s dairy industry produced 11 billion litres of raw milk, which fell to 9.3 billion in 2014, according to data from the Australian Dairy Products Federation (ADPF). The current season is estimated to fall around 8.3 billion. 

In the past 18 months, more than 10 dairy processing facilities have announced closures. Norco is now the last fully farmer-owned dairy co-operative . 

Hampson says farmers are only one group of stakeholders among several that these corporations must juggle. 

‘‘ For all these other [entities], it’s about offshore shareholders ... and obviously requirements to pay dividends to those people, which means the motivations at play aren’t necessarily what they used to be 25 years ago, about supporting the farmer. It’s about corporate profits ,’’ Hampson said. 

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Billing worries about what will happen to rural communities and jobs if Fonterra’s manufacturing sites are shut down. 

‘‘ Cobden, Stanhope, Darnum [in Victoria] would nearly fall off the map, I think, if those processing sites didn’t exist. They’re large employers of those regional areas,’’ he said. But he sees an opportunity for brands such as Western Star butter, born in western Victoria nearly 100 years ago, to be returned to Australian hands. ‘‘ It’s an iconic Australian brand. It’s like Vegemite.’’ 

All eyes will be on June 2, the deadline for when processors have to announce the minimum prices they will pay farmers for milk. 

‘‘ As a dairy farmer, we are price takers,’’ Billing said. 

‘‘ We need to have competition in the processing market so that we are not beholden to a single big player, particularly if it’s a multinational. 

Billing and Hampson are unanimous on how consumers can help local farmers. 

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