Cultured organics make export gold

BY RICHARD WOODD

The 20kg blocks of cheddar cheese from Organic Dairy, Okato, are on the water, bound for overseas ports.

One 20-tonne container load left for South Korea on November 6, two to Sydney on November 15, and this week more goes to a Middle East buyer.

"November 6 was a very significant day for us. People wondered why I was rushing about taking photos with a big smile on my face," says Patrick Geals, chief executive of the new co-operative.

"It's been a long, hard road, with many obstacles, but the team stayed together and we have got there. Now we're looking for more organic milk, preferably from Taranaki."

Organic Dairy is a subsidiary of the NZ Organic Dairy Farmers' Co- operative, which has invested $7.5 million in setting up a new plant at Okato, part of it in the old Okato dairy factory.

"It's a showcase factory. It will be one of the largest organic cheese factories in New Zealand in terms of production capacity," Mr Geals says.

Since its formation in 2004, the co-op's shareholder numbers have grown to more than 50. It now has 27 milk suppliers, supplying 16 million litres of milk, representing almost a third of New Zealand's top-quality milk from USDA standard-certified organic farms.

The factory has a processing capacity of 23 million litres of milk in a season, to produce about 2000 tonnes of cheese. The company plans to double its production by next season, provided it can secure enough milk.

Everyone in the milk business has to compete with the Fonterra price, even for organic milk. So Fonterra's recent notice of a 95c a kilo rise in the milk solids payout (most of which will be paid before Christmas) was not welcomed by Organic Dairy.

"We'll obviously have to review the situation," Mr Geals says. "Talking to industry observers, a number of things are going on. Fonterra clearly wants to sweeten up their suppliers in order to get acceptance of the capital restructuring proposal. I'm also told they had a reasonable forward-cover position.

"The exchange rate is not going the right way for us, but there is no doubt that commodity prices are going up. Just as an example, when the season started, the spot price was US$2500 a tonne for cheddar cheese and that's now US$3800. The skim and whole milk powders are going through the roof. All of this bodes well for all dairy companies in New Zealand.

"At Organic Dairy, we're counting on having more revenue to offset what we'll have to pay for the raw product."

The details of how much Organic Dairy pays is available only to suppliers or investors.

"We are not too keen on disclosing exactly what that mechanism is, but it's a combination of payout and a dividend later as this place becomes profitable," Mr Geals says.

"They have to have faith in what we're doing. The objective is to at least keep pace with Fonterra.

"What we're focused on is high- value cheese. We're very confident we can make this place profitable and produce dividends which will top up the payout."

The plant was designed with the capacity for organic butter making, but Mr Geals has been thinking about using it for mozzarella cheese.

"There's a big demand as the pizza market grows and an increasing demand for organic mozzarella.

"I'll put the options to the directors on what the plant will cost and the return on capital, with a recommendation and it will be over to the board. Currently, I have a gut feel for mozzarella, but it's not based on any figures."

While the business is 100 per cent co-op owned, it has accepted external investment in the form of an unstated amount of convertible notes - a loan that can be converted into shares at the end of the season.

"The dairy industry is capital- rich and that gives us confidence to plan for growth.

"What we're offering to suppliers is the benefits of being an organic dairy farmer, belonging to a small, dedicated company that actually listens to all its shareholders and which is focused on added value and is going places.

"Yesterday, we had key US customers here. These people know their cheese and factories and they were blown away by what they saw. They tasted some of our cheese and all got the thumbs-up for clean, fresh flavour, firm texture."

The company employs 31 people, is advertising for more and will eventually have five in Auckland in space subleased from its international sales agent Global Dairy Network, set up by one of Mr Geals' former Fonterra colleagues.

"I was three years at Fonterra running one of their international business units, Health and Nutrition, which is all about high- value ingredients in the infant formula [except China]. Before that, I was managing director of Novartis, a pharmaceuticals company.

"This place is a tribute to the foresight and dedication of what I call 'The Magnificent Seven', a small group of enthusiastic dairy farmers who are committed to sustainable organic farming, to leaving the soil and pasture in a better state than when they found it.

"In essence, they decided they could convert their organic milk into high-value organic food.

"In the US, the growth annually had been 20 per cent plus for organic dairy. I was there in June for an organic congress and they were saying it was still 12 per cent despite the recession.

"What's driving it is essentially the baby boomers, who are well- educated, have high incomes - high disposable income - and tend to live on the coasts, where the wealth is. And they've been committed to the organic lifestyle for some time.

"But a new demographic emerging is their children, who have left the nest, and even those who are not wealthy are prepared to make sacrifices to maintain an organic lifestyle.

"In Korea, it's slightly different. The average child per family is about one and the Asian lifestyle is to pander to that sole child, so there is a big growth in organic cheese demand for that reason.

"We'd be very proud to see our products on New Zealand shelves, but it's a small population and right now our aim is to export everything we make, in 20-kilogram blocks for someone else to cut and package, or to be used in bulk processing. Maybe one day we'll have our own table brand."

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