Why we need to shake up the milk business

The truck delivering milk, cream, cheese and butter to my local café needs a paint job. Its back door bears the slogan: “Anchor: Proudly 100% NZ owned & operated.”

No, it ain’t. Not since the dairy co-operative Fonterra sold its consumer brands -- Anchor milk and butter, Mainland Cheese – to the French company Lactalis for $4.2 billion, in a deal in late October that was approved by an 88 percent majority of Fonterra’s 8265 dairy farmer shareholders.

This can be seen as a resounding vote of no-confidence in the management of the co-op – basically rubber-stamping Fonterra management’s own candid confession that they have been unable to generate an acceptable return on the venerable consumer brand assets, so what the heck, take the money and let someone else have a go.

Of course, the money is not insignificant, amounting to a tax-free $400,000 Christmas present for each dairy farmer shareholder.

But the farmers’ delight may be short-lived. They have voted to forever forgo the quite considerable profit stream that was delivered by the consumer brands in New Zealand and in Fonterra’s vast overseas markets (excluding the Chinese market, which was ring-fenced out of the sale to Lactalis).

And dairy farmers may eventually lose more than that. The domestic New Zealand market for dairy products is quite small, accounting for just 12 percent of Fonterra’s current revenues. Lactalis has factories all over the world. After a statutory six-year period, the French company can choose to withdraw its processing operations from New Zealand. We could then be getting our Anchor butter and Mainland cheese from France, or perhaps Australia, made from milk from French or Australian cows.

I’m always sad when a solid Kiwi-based business is sold off to foreigners. But we have to be realistic. Indeed, should Fonterra divestments go further? It’s just lopped off one fifth of its businesses – what about the rest of it? The co-op’s executives have promised that freeing up capital and managerial attention from consumer products will enable them to unleash their “ingredients engine” –ingredients, such as milk powder, protein concentrate and casein, being the bulk of the co-op’s surviving business.

Is there honestly any reason to take this seriously? The Fonterra bureaucracy is notoriously bloated. One hundred and thirty of its managers are paid more than $500,000 a year. Twenty are paid more than $1 million a year. If not one of these managers has managed to wring an acceptable rate of return out of their illustrious consumer brands portfolio – well, can we reasonably expect anything different in the future for their other products?

Frankly, Fonterra is a major disappointment. It was set up by a monopoly-loving government 25 years ago with high hopes of it becoming an industrial champion -- perhaps even rivalling the Swiss dairy colossus Nestle.

The reality has been different. From 2003 to 2025, total revenues grew – in today’s dollars -- from $21,950m to $26,450m: that’s just over 20 percent growth, or slightly less than 1% per annum. This pushed us down the pecking order internationally, as other big companies, including Lactalis and Nestle, grew faster.

But even more worrying is what Fonterra has done with the milk. How much value does it add?

In 2003, Fonterra’s revenue earned per kilogram of processed “milk solids” - the fat and protein that is the valuable part of fluid milk – was, in today’s dollars, $19.12. In 2025, the ratio was just $17.53. Value productivity has fallen!

This can’t be excused by unfavourable world market conditions. The United Nations Food and Agriculture Organisation (FAO) publishes a world dairy price index from prices for butter, cheddar, skim milk powder and whole milk powder – products which make up 70 percent of our own dairy exports.

In real terms - that is, on top of inflation – the FAO index increased by 60 percent from 2003 to 2025. Prices for some other ingredients, such as rennet casein, may not have risen, but, overall, there has clearly been a value bonanza out there in which we have evidently not shared.

“Unleashing the ingredients engine” will need a major overhaul of the works. The industry already has a fringe of small dairy companies, but these have not managed to eat away at Fonterra’s market share by more than 1 percentage point per year.

A fundamental shake-up of Fonterra itself is needed, including fewer million-dollar executives spread over a number of large independent milk processors competing for the farmers’ milk.

It’s time for government to restructure the 2001 Dairy Industry Restructuring Act that established Fonterra, in the long-term interests of all New Zealanders, including dairy farmers. It would be so good to see more variety in the paint jobs applied to those dairy product delivery trucks.