When it comes to adding protein to food products, dairy protein is often the choice because of its quality.
And it’s where Fonterra’s focus will be concentrated after the dairy giant sells its consumer arm – lumped together under the Mainland banner – to French dairy giant Lactalis for $4.22 billion.
Farmers approved the sale last year but the resulting tax-free $2.00 per share capital return, equivalent to about $3.2b, still requires 75% approval.
It goes to the vote on February 19 and Fonterra now expects the process to be complete within the first quarter of this year.
If all goes to plan, farmers will soon stand to pocket the Mainland windfall, plus the interim dividend, on top of a firm milk price of around $9.00/kg of milksolids.
Murray said the biggest challenge of the Mainland sale had been separating out the information technology side of the business from the broader group.
Andrew Murray, Fonterra’s chief financial officer.
Post-Mainland, Fonterra’s businesses will comprise its ingredients and foodservice arms.
Ingredients make up the co-op’s engine room – producing milk powders, proteins and specialty ingredients, dairy fats and cheese products.
Foodservice specialises in creams and cheeses for the restaurant trade, bakeries and for food manufacturers.
Murray said Mainland had already been operating “discreetly” from the rest of the Fonterra business for the last six to nine months.
The co-op has set itself a goal of achieving earnings equal to 2025’s by 2028, without the contribution of Mainland.
“It was a very deliberate call to make, because what people really wanted to understand was what would Fonterra look like without the consumer brands,” Murray said.
“This is the combination of the strategy that we’ve been putting into place for the last couple of years, because it means that we are a simpler, leaner organisation, and certainly less capital-heavy.
“That means that we’ll continue to execute on what ingredients look like, what foodservice looks like, and on the efficiency of our operations.
“Those three things together allow us to be able to say we will be back at those earnings in 2028, because it does, it gives us that opportunity.”
Market conditions
Global Dairy Trade (GDT) prices weakened off quite sharply towards the end of last year before bouncing back in the first sale of 2026.
This week, products trading on the GDT platform put on their strongest performance in almost five years with the index up 6.7% – the biggest rise since March 2021, when the first event of that month recorded a 15% gain.
Much of last year’s weakness was put down to stronger than usual milk production in New Zealand and in most other dairy-producing nations.
Murray said geopolitical uncertainty may also have played a part in last year’s sharp decline.
The prolonged US Government shutdown, which affected food-stamp payments, meant the US had more dairy product to export and that may also have weighed on prices.
While increased production globally had compressed prices, volumes were now starting to tail off, particularly now that the domestic season is past its peak.
“I don’t see it [the milk price] moving massively around now, in the absence of some other form of geopolitical shock that might encourage something in that way, so I think the fundamentals remain the same,” Murray said.
“I think ultimately, producers in Europe and the US will more quickly react to pricing coming down because they have more levers in their production that allows them to be able to do that.”
Advanced ingredients
Fonterra has been pushing hard on the advanced ingredients side of its business over the last few years.
In foodservice, China – where Fonterra has retained its Anchor Food Professionals brand – will remain a big part of the business, but Murray said there was a lot of opportunity in Southeast Asia – particularly in Vietnam.
In China, he noted population growth is slowing, but the dynamic of an expanding, wealthier middle class had not changed.
“China remains a big opportunity for further growth and there’s certainly plenty of that population we haven’t accessed yet.”
As far back as 2022, Fonterra has been talking about taking costs out of the business.
“We need to make sure that our cost base now reflects the fact that we’re a leaner and a simpler organisation, so we haven’t got the complexity of consumer in there,” Murray said.
In some countries, Fonterra might have a smaller office footprint without the consumer segment “so there is an efficiency play here that that we go after”.
The plan out to 2028 was to continue to improve the efficiency of the co-op’s manufacturing network, particularly with advanced technology, Murray said.
“We have a good, very high-scale manufacturing network, but there are definitely opportunities for us to be able to do that, and some of that will come with technology.”
Fonterra’s sale of its Mainland consumer business is expected to go through in the first quarter.
With the sale of the consumer business, Fonterra will be a much smaller entity, continuing a long-running trend.
Last year, Rabobank said Fonterra had slipped a notch to become the world’s seventh-biggest dairy company, while Lactalis retained its number one spot.
Just over a decade ago, Fonterra was in the top three.
Post-sale, Rabobank expects Fonterra’s ranking to drop to 10th, but Murray was unfazed by the prospect.
“I fundamentally believe that we’re still going to be selling the same amount of milk and we’re going to generate more profit for it.
“I don’t think that’s a bad place for us to be sitting.
“Do I think we have growth opportunities? I genuinely believe that we do, but we’re never going to be the size of a Lactalis because we are a slightly different model.
“And if I wanted to go and try and access other milk pools or something, it could be bigger, yes, but that’s not what we are and not who we are.”
Murray said Fonterra would like to increase its share of the New Zealand milk pool “because it will always be a little bit of a handbrake on us being bigger”.
“Fundamentally, we believe that a dairy co-op of scale is really important for the industry.”
Reference products
On the commodities side, Fonterra is perhaps best known for the reference products that “inform” the farmgate milk price – whole milk powder and skim milk powder, and their byproducts, butter, anhydrous milk fat and buttermilk powder.
Murray said Fonterra is doing a lot going outside of the reference products.
“We are really developing those strong customer relationships that allows us to build over time and be in a space where we can then choose to innovate with the customer.
“We can invest with the customer and so we get good long-term relationships because in ingredients, good long-term customers are really, really important.
“They allow us to be able to get close to where future trends are going and where future demand might be, which allows us to make sure that, you know, that we can service that.”
Fonterra will focus on making its factories more efficient. Photo / NZME
Non-reference products generate a return on capital of around 17% to 18% compared with 5% for the regulated reference products.
As Fonterra’s capital comes from its farmers, it needs to be as efficient as it can possibly be with it, Murray said.
Over time, the proportion has gone down from about 50/50 to 60/40 in favour of non-reference product.
For the consumer division, Fonterra’s return on capital never got above 10%, hence its sale.
Outlook
In terms of the outlook, Murray said the co-op is in a good place.
“The only thing that I would say is that there are geopolitical risks.
“If we see big events that either cut off trade access or cut off shipping lanes – if we see those sorts of things then we are in a different ball game.”
From here, Murray said Fonterra will be about delving more deeply into advanced nutrition and further into foodservice, while focusing on higher efficiency.
“I feel that what we have put in place is a very solid plan.”
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.
Stay ahead with the latest market moves, corporate updates, and economic insights by subscribing to our Business newsletter – your essential weekly round-up of all the business news you need.