Fonterra’s organic milk operation is another casualty of the GFC:
Fonterra’s Group Director Supplier and External Relations Kelvin Wickham says the co-operative remains committed to the organics market but as growth in this market has significantly slowed since the global financial crisis, Fonterra needs to make changes to its organic operations.
Organic milk attracted a premium for producers but enough consumers aren’t willing to pay extra for it.
Mr Wickham says the organics market was hit hard by the global financial crisis and market indications are it will not recover to previous levels.
“All categories felt the effects but particularly the category in which we sell – packaged dairy foods – where prices and volumes are still below 2008 levels.
“Research shows people are now less willing to pay the premium for organic products. In addition, consumers are gaining more confidence that everyday products are being produced more sustainably and are more acceptable so they no longer see the need to pay the premium for most organic products.
When budgets tighten luxury products are the first to go and organic milk is in that category.
A lot of the support for organic products is based on emotion rather than science and if consumers think or feel that ordinary food they buy is being produced in a safe and sustainable way they don’t need to spend more on speciality organic produce.
Fonterra is meeting suppliers this week to tell them its plan which includes:
Concentrating Fonterra’s North Island organic suppliers in one hub around its key certified organic processing site – Hautapu. This will reduce the number of Fonterra’s organic suppliers.
Reducing the amount of product processed at Fonterra’s other two certified organic sites – Waitoa and Morrinsville.
Prioritising the organic product range to focus on cheese which provides the best returns.
Focusing on emerging Asian and Australasian organics markets where there are stronger returns and growth potential.
Mr Wickham says the first two points will mean considerable transport and manufacturing cost savings for Fonterra’s organic business.
“Our organic farmers are currently spread right across the North Island. This means substantial transport costs for the business.
“In addition, focusing most of our organic product through a single site will mean we are able to create efficiencies of scale in processing the milk.
Carting milk the length and breadth of the North Island hardly fits the sustainable model. It’s a waste of fuel and adds substantially to costs.
“We understand the big commitment many of our farmers have made to the organics programme and that this transition will not be an easy one to make. The decision to reduce our organics operation was not taken lightly but we need to get the business back into a break-even situation.
“We will honour all of our organic contracts through to their formal termination dates, which in some cases are four-five years away and we will work with our farmers as they make the transition out of the organics programme.”
This decision will be hard for the farmers who’ve gone to the trouble and cost of changing to organic production but it will be better for the co-operative if the organic operation stops losing money.
It could also provide opportunities for boutique dairy producers who might be able to buy the organic milk and use it as a point of difference in markets which are less price sensitive.