Farm Ireland

Wednesday 22 November 2017

Fonterra chairman predicts bright future for industry

Henry van der Heyden tells Caitriona Murphy that a loyal shareholder base can help Ireland emulate New Zealand's top co-op, while environmental issues will be part of the sector's future

Q How confident are you regarding the outlook for the global dairy sector over the next three years?

A Given economic uncertainties around the world, it never pays to be overconfident, but we think the outlook is steady for dairy. It has performed well in recent times despite some tough economic conditions and we expect that to continue.

Q In terms of milk price, what level of volatility do you foresee during this period?

A Volatility is a given and you can never rule it out. It is something we will always have to live with, taking into account that something as simple as climatic conditions can have a big influence on supply.

Q Noting the recent announcement by Fonterra of its joint venture with First Milk in Britain, and its increasing global investments, should Fonterra be considered as a potential suitor for an Irish dairy processor?

A We are always on the lookout for good investment and partnership opportunities around the world, but for obvious commercial reasons we never signal what or where those opportunities are.

Q Is Fonterra interested in the Pfizer Nutrition business in Limerick?

AAs I said, we never signal any investment intentions.

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Q How would you advise the Irish dairy industry to develop in coming years if it is to emulate New Zealand's dairy growth?

A It would be a bit arrogant for me to be telling the Irish industry what to do. I think it is in good hands. We have achieved our growth by growing a loyal shareholder base, paying attention to every step in the supply chain, so we're more able to match customer demand with supply and looking for opportunities to grow our global supply base to complement New Zealand milk to grow.

Q Increased dairy consumption in both China and India has been a key factor in sustaining global dairy prices. But is it sustainable?

A I think so. A lot of this increased consumption is driven by a growing middle class. If you look at China for example, the ranks of middle class are expected to reach around 600m in the next 12 years and the World Bank is predicting that the size of the middle class in developing nations will triple by 2030, to 1.2bn. India's middle class is growing rapidly and this is a country which has always consumed dairy and is now finding it difficult to fulfill demand, so there are opportunities there.

Q Because China has no real tradition of dairy consumption, would an economic downturn there have a disproportionate impact on sales of dairy produce and could this seriously undermine global dairy markets?

A In China, there is a slogan, "three glasses of milk a day means health in the city and wealth on the farm". What that means is that the government there has backed dairy as a way to lift nutritional levels while providing better incomes in rural areas. So, while dairy has not been a traditional food, it is quickly becoming part of the local diet.

An economic downturn in any country does often flow through to consumer spending, but as China is increasingly concentrating on meeting local demand with local milk, it is hard to see that a downturn would seriously undermine global markets.

Q What's your reaction to those that criticise the Global Dairy Trade auction as being too Fonterra-centric and therefore not representative of global demand?

A That's not a comment we hear much these days, though it was levelled at us when we first started the auction, mainly because a lot of competitors didn't like the price transparency. I think the proof of its success lies in its performance. Around 24pc of our total ingredients sales went through the platform in the last financial year. In three years, we have achieved sales totalling more than US$3.5bn [around ¤2.5bn]. This year, we increased the frequency of trading events to twice monthly, expanded the range of products from four to seven and saw Dairy Farmers of America sign up to trade product on the platform. The results speak for themselves.

Q What is Fonterra doing in terms of making dairy farms and dairy products more attractive in the face of increasing environmental demands?

A On-farm, we work very closely with our farmers and help them where we can to farm more sustainably. For example, we run checks on farm effluent systems every year and work with the farmers if we think they are at risk of not meeting local council compliance rules. Initiatives like this have a direct relationship to water quality in dairy regions and we're seeing a number of councils reporting improved compliance and commenting on our positive contribution. On-farm work certainly contributes to consumer confidence that dairy is produced sustainably.

Q Do dairy processors and milk suppliers need to improve the environmental image of the industry?

A The environmental image of the industry will always be connected to environmental performance. We're certainly conscious of that, hence the work on-farm. We also have a number of programmes in the business aimed at reducing energy consumption, reducing waste to landfill, minimising trucking movements by using rail and also supporting environmental initiatives such as planting programmes in dairy catchments. You can't improve the environmental image of the industry without showing real progress in areas like this, so that's where we concentrate.

Q Aside from environmental constraints, what are the biggest challenges facing the dairy industry worldwide?

A One of the biggest challenges is the security of the supply chain. End users of our products, whether they are ingredients customers or fresh dairy consumers, need to be confident that the products they buy are safe. The only way to ensure that is to have control of the supply chain from milk collection through to the end user and to have built-in quality checks and traceability. There will always be people wanting to cut corners to make money, so the challenge for the industry is to ensure we maintain control and rigidly adhere to quality and food safety requirements.

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