New Zealand's biggest company, by far, is a dairy co-operative.
With $14 billion USD ($20.6 billion NZD) total revenue in 2021, Fonterra Group is the country's
juggernaut.
A dairy company does way more than milk.
And over the years, Fonterra has evolved and grown along with the New Zealand dairy industry
to become a globe-spanning food giant.
In this video, we are going to look at New Zealand’s biggest exporter and a cornerstone
of its economy.
The Wikipedia article on the company gives a good start on its history.
New Zealand has a competitive advantage in milk production.
The grass grows there at high quantities for nine months of the year, which makes cattle
grazing cheaper than in other locations.
The United Kingdom established its New Zealand colony as a friendly economic frontier that
can produce and ship dairy and meat products back to the imperial homeland for its urbanizing
population to consume.
These dairy exports first began in the 1840s, with a shipment of cheese to Australia.
Volumes significantly increased with the introduction of refrigeration in the 1880s.
Now you can ship perishable goods thousands of kilometers to Britain and the rest of the
global market.
But mostly Britain.
From the very beginning, the country’s dairy industry has been mostly made up of cooperatives.
Cooperatives are owned, controlled and run not by external shareholders but rather the
operators.
So the dairy farms themselves.
The first dairy cooperative was established in 1871.
Fifty years later in 1920, some 600 cooperatives owned 85% of the country's dairy processing
plants.
The New Zealand government felt that having so many individual cooperatives would make
it difficult for them to sell and market their product.
Thus in 1923, they established the Dairy Produce Export Control Board to control all dairy
exports and gain economies of scale.
This organization would later become the New Zealand Dairy Board or the NZDB.
It held a legislated monopoly with the exclusive right to market all export dairy products.
The cooperatives would handle the collection and processing of the milk.
The NZDB would do shipping, packaging, transportation, quality control, promotion and so on.
Over the years however, this scattered industry had undergone several waves of consolidation.
By 1935, those 600 cooperatives had merged and turned into a little over 400.
In particular, World War II and the UK's demand for imported foodstuffs supercharged the New
Zealand dairy economy.
The Kiwis provided 70% of Britain's cheese and 91% of its butter spreads during the war.
The British would continue buying New Zealand goods after the end of World War II.
This guaranteed market fueled that industry's growth.
However, new technologies in dairy processing and transportation encouraged yet another
bunch of mergers.
By the 1960s, those 400 co-operatives would become 180.
And so on.
Then in 1973, the United Kingdom entered the European Community.
The Britons had previously guaranteed access to New Zealand's milk and meat exports at
good terms.
But the EC move significantly curbed New Zealand's privileged place in the British market.
To prevent a collapse, the New Zealand government increased their support of the agricultural
sector.
By 1984, such support made up about 30% of total sales.
But this approach was not working.
The New Zealand economy was struggling with high inflation, high debt, high input costs,
and uncompetitive goods.
The government responded with a strong reform program across all industries - removing the
industry's protections and exposing it to the global market.
As expected, the New Zealand agricultural industry suffered greatly.
Previously, dairy farmers sold their milk to the NZDB at a bundled price that did not
reflect a proper return on investment.
Government subsidies encouraged the overuse of fertilizer and the cultivation of land
that had been unsuitable for sheep and beef.
So as a result, the country had over-produced on milk.
When those policies went away, many farmers went bankrupt or had to sell their land to
stay afloat.
Land prices dropped - farm prices reached a 23 year low - and profits shrank.
But the upside was that the market shrank to a more manageable size.
The dairy industry's new round of consolidations allowed the remaining farmers to achieve scale
and become more efficient.
Farms transitioned to "portfolio" approaches - no longer exclusively relying on dairy farming
by cultivating different crops and offering new services like tourism and recreation.
The NZDB however retained its monopoly on dairy exports.
But in the wake of losing its privileged status in the UK market, the board decided to pivot
and diversify into international markets.
This is challenging.
The richest and most developed countries have very protected dairy industries.
For instance, tariffs on milk imported to Japan or Switzerland ranges from 360% to 800%.
Milk in general is a low margin commodity.
So even relatively low tariff rates can have devastating consequences to the bottom line.
The New Zealand government has gone to bat for its dairy industry, consistently negotiating
multi-lateral trade agreements with this in mind.
New Zealand's participation in the big export market would eventually lead to its big final
restructuring in 2001 with the creation of Fonterra.
At the end of the 1990s, there would only be four cooperatives left in the New Zealand
dairy industry: New Zealand Dairy Group, Kiwi Dairy, Tatua and Westland.
The latter are very small, so we are basically talking a duopoly.
By now the NZDB's legal monopoly of the dairy export market was becoming a bit of a problem.
It made sense back when there were hundreds or even dozens of small farms.
But now the industry had vastly consolidated.
And the big two cooperatives were getting antsy and impatient with the NZDB.
They wanted more say in the production, processing, and marketing side of the industry.
For instance, milk itself is a low-value good.
So you can make more profit by processing it into yogurt which can sell at a higher
price.
But conflicts sprouted up about to whom the benefits of such sales would go to - the NZDB
itself, or the individual cooperative that supplied its milk?
Outside observers also felt that the NZDB's export monopoly position hindered domestic
competition too.
New Zealand's domestic dairy consumption was small.
So any new cooperative needed the export market.
But this was gated by the NZDB and its shareholders - in other words, potential competitors.
This tension within the industry grew to the point where its contradictions could not be
sustained any longer.
Finally in 2001, a merger was proposed between the two largest cooperatives and the NZDB
itself.
The cooperatives' shareholders approved the merger.
The government soon followed with the Dairy Industry Restructuring Act of 2001, removing
the NZDB's export monopoly and blessing the birth of the Global Dairy Company.
Or Fonterra Co-operative Group.
Today, Fonterra is a vertically integrated cooperative group with vast operations and
sales offices around the world.
96% of the milk that its 13,000 farmers produce is exported.
Together with producers in Australia and the European Union, Fonterra dominates the international
dairy industry.
The company has grown beyond being a simple export outlet for its New Zealand based farmers.
Fonterra has become a legitimate global food company on par with Nestle, Danone, and other
global giants.
This means being capable of offering and supplying a large variety of diversified food goods
to customers all over the world.
Thus, they create and sell a variety of value-added dairy products.
These include milk powder, cheeses, butter, cream, flavored milk, yogurt, and ice cream.
In search of additional growth, the company has started investing in and coordinating
production outside of its native New Zealand.
For instance, the company has invested substantial resources into Latin America, namely Chile.
Fonterra jointly owns one of the country's big dairy companies - invested along with
the investment arm of the Chilean Catholic Church of all things.
This is in part to guarantee regular milk supply during New Zealand's winter months.
And also to dodge trade barriers that prevent the entry of dairy products sourced out of
New Zealand.
2001 would be a special year for New Zealand milk for another reason: China entered the
WTO.
Ever since then, China has imported more dairy than it has exported.
Much of that imported dairy has come from Australia and New Zealand.
China has grown its own capacity for generating dairy.
For instance, since 2001 dairy production has surged from just 10 million metric tons
to 39 million in 2009.
This makes China the third largest milk producer in the world behind the United States and
India.
The Chinese are also frequent consumers of dairy, growing fast off a small base.
In 1996, they consumed about 8 kilograms per capita.
By 2006, that had grown to 25 kilograms, driven by trends in refrigeration and improving lifestyles.
Increasing Chinese consumption of infant formula over the years comes off a low base but is
also due to various economic trends that encouraged the use of infant formula over breastfeeding.
Chinese exclusive breastfeeding rates have drastically declined since 1996.
This is in part due to new mothers finding it challenging to continue breastfeeding after
returning to work.
And also in part formula companies very aggressively marketing infant formula to mothers despite
international recommendations not to do so.
Domestic suppliers were taking share and Fonterra risked being caught on the outside looking
in.
So in 2005, Fonterra entered into a JV agreement with leading Chinese company Sanlu Group,
taking a 43% stake.
The new company's revenues grew well and the company became a leading provider of milk
powder and infant formula.
You probably know where I am getting at here.
Melamine is a chemical used for plastics.
It has many useful industrial uses.
However, it is not suitable for consumption.
But because it is rich in nitrogen, it is sometimes added to food products to increase
the apparent protein content.
This is obviously illegal.
In September 2008, the Chinese government announced a major recall of milk products
found to have melamine in them.
The issue compounded when other dairy products - ice cream, yogurt, and just regular milk
- were also found to be contaminated.
Six babies died and 300,000 babies became ill.
The Chinese dairy industry took a massive financial hit.
Sanlu itself went bankrupt, was fined $7 million by the government after its bankruptcy, and
four executives were put on trial.
Fonterra lost its entire $150 million investment.
This was a horrible tragedy.
But it is a little ironic that the scandal - which Fonterra had been involved in, albeit
as a minority partner - would in turn spur sales of foreign imports - including Fonterra's
own New Zealand-sourced milk products.
Chinese dairy imports went from $871 million USD in 2008 to a billion dollars USD in 2009
and $2 billion USD in 2010.
Chinese dairy imports from New Zealand in particular grew very well.
2009 imports grew 82% from 2008, and 2010 imports grew another 122% on top of that.
Sales did take a bit of a hit from a 2013 recall when the company found bacteria contamination
in its whey products.
But today, Fonterra makes a great deal of revenue from China - contributing a significant
percentage of annual profit.
The country is very strategically important for the company.
New Zealand's domestic market for diary products is too small, so Fonterra needs to be able
to export into overseas markets in order to grow and allow their farmer-shareholders to
keep their jobs.
Fonterra wants to be able to compete on an even footing in a free, open market.
And that is not how I would describe the global agricultural market at all.
It is heavily distorted with subsidies to farmers, tariffs, and domestic politics.
Such things have been a consistent thorn in New Zealand's side during two decades of multi-country
agreement talks.
For instance, Japanese markets are consistently closed to outsiders.
Thus, New Zealand is a country very incentivized to strike individual free trade agreements
with other countries.
For instance, New Zealand is one of the few Western-aligned countries with a free trade
agreement with China.
New Zealand has also struck agreements with Hong Kong.
The Hong Kong, China - New Zealand Closer Economic Partnership Agreement is Hong Kong's
first outside of mainland China.
And interestingly enough, NZ has another FTA with Taiwan - the Economic Cooperation with
the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu.
Very carefully worded.
This is the case for every country with a big agricultural area.
But the New Zealand dairy industry's high dependence on export agriculture influences
how its host country handles its foreign relations with the rest of world.
As one might have noticed throughout Australia's recent tensions with China.
A second outcome of Fonterra's dependence on middle-income countries for the majority
of its export income is that the New Zealand dairy industry - for all of the marketing
about cleanliness and premium quality - needs to be a low cost leader.
Such low costs are hard to achieve in New Zealand - where few things are particularly
cheap and environmental regulations are somewhat strict - and so it has leaned heavily on its
farms outside of New Zealand.
This naturally causes tensions with its host government, upon which it relies upon for
opening up export markets.
In the years ahead, the company will have to work hard to correctly balance the needs
of the market, its host country, and its shareholder-operators.
While fighting off cow competition in the global marketplace.