Hard going for independent dairy firm

SUPPLY CHAIN: To convince farmers to leave the security of Fonterra to supply Open Country Dairy, the newcomer has had to create a good track record.
SUPPLY CHAIN: To convince farmers to leave the security of Fonterra to supply Open Country Dairy, the newcomer has had to create a good track record.

You would think that making it to 10 years, and No 2 spot, in the Fonterra-dominated, give-no-quarter New Zealand dairy industry would be something to talk about.

Typically, Open Country Dairy wants to do nothing of the kind.

Its leaders sounded dismayed that someone had noticed that in June, when the 2013-2014 dairy season kicks off, the exporter that began life as a tiny cheese company in the Waikato, will be entering its 10th year.

Chairman Laurie Margrain explains the shyness as the company "just wanting to get on with business".

"We don't talk much about what we do. We just get on with it."

Industry players would call it the "Talley effect".

Nearly 55 per cent of the company is owned by Motueka's fiercely private Talley family, owners of Talley's Frozen Foods and majority shareholders in the Affco meat company.

It's said that clams are garrulous creatures compared to the Talleys, and while Margrain is approachable, he doesn't really see why it is necessary to put Open Country under a spotlight just because its 10th anniversary is coming up.

But the spotlight is deserved because the journey has been bumpy and challenging, and because in industry opinion, it's extremely doubtful a start-up like Open Country could be launched in today's dairying environment.

Open Country was the first independent (non-Fonterra) cab off the rank in 2001 when dairy exporting was deregulated under the Dairy Industry Restructuring Act (DIRA), which also shepherded in the industry mega-merger that formed Fonterra.

Founded by former National Cabinet ministers Wyatt Creech and John Luxton, with Duncan Milne, Jim Bentley and Frank Dunlop, Open Country Cheese started production at Waharoa in the Waikato in 2004.

The site has since gained whey, anhydrous milk fat and whole milk powder plants.

By 2007, Talleys had acquired the majority stake, the company became Open Country Dairy, and the expansion pace was picking up.

A whole milk powder plant was developed at Awarua in Southland in 2008, followed by a third whole milk powder plant in Whanganui in 2009. Together, the trio of plants can process 900 million litres of milk a year, making the company New Zealand's second-largest dairy processor, exporting to 45 countries.

Margrain says Open Country has about 600 farmer-suppliers. Late last year he revealed it was stepping up skim milk and milk fats production capacity at Waharoa, and taking on up to 30 more Waikato and Bay of Plenty farmers.

Along the way, an outside capital injection has been offered from Singapore food company Olam International, which today owns 24.99 per cent. The next biggest shareholder is Dairy Investment Fund with 10.14 per cent, with Balle Bros Holding at 4.5 per cent and minority stakeholders together claiming 6 per cent.

Of course, Open Country is still a minnow compared to industry goliath Fonterra, which 12 years after deregulation, still controls nearly 90 per cent of all milk collection, processes about 16 billion litres of milk a year and has more than 10,000 farmer suppliers. But there's no denying Open Country has established itself as a credible member of the $12 billion New Zealand dairy industry.

As Creech says, Open Country is not much more than "a nuisance" to New Zealand's biggest company and the world's leading dairy exporter, but from its earliest days, it has never been afraid to take on the juggernaut via competition watchdog the Commerce Commission, and the higher courts.

During its earliest days it challenged Fonterra over milk transport costs and the commission came down in its favour. Then when it tackled the big co-operative over how it worked out the price of regulated milk it was obliged to supply independents, a parliamentary review committee took its side.

And Open Country has relentlessly stalked Fonterra over its default role as the national milk-price setter, holding it to account at every step in pursuit of a fair milk price for the industry - a battle that is far from over.

But even an industry hero has to make money to survive - and Open Country has made no secret of its struggle to be consistently profitable year-on-year in the face of volatility in world commodity and financial markets, and milk prices pressuring processing margins.

In February last year the company posted a $29.5 million loss for the year to July, a performance Margrain called "extremely disappointing".

The loss was three times greater than the exporter recorded in 2010.

But it is understood that the company had a strong 2012 and has made profits, albeit small, from its early years. The day it starts to return its cost of capital is close to dawning.

Insiders make no bones that the journey has been tough.

"It's been a graft, and will continue to be a graft. It's not easy. The environment is tougher and a lot more volatile than anyone would have imagined 10 years ago," says one.

"The blend of volatility, regulatory risk and the global financial crisis and no-one foresaw the changes in DIRA, the raw milk regulations, milk-price methodology and the introduction of TAF (Fonterra's share trading among farmers).

"You enter a business on one regulatory premise and find it can change overnight."

Independents such as Open Country are also up against Fonterra's lobbying might, and have the challenge of convincing farmers to leave the security of the co-operative fold and join a newcomer. Not requiring farmers to buy shares like they must to supply Fonterra has helped lure supply, but farmers have been wary.

"The only way you can convince farmers is with track record. And OCD has got some runs on the board now," says an industry commentator.

Waikato dairy farmers Boyd and Robyn Houghton are Open Country pioneer suppliers, though they still supply Fonterra from one of their farms.

"We've had no problems at all. They've been more than helpful, they pick up the milk on time, and their quarterly payment system helps with cashflow. They're very good to deal with and you can go right to the top easily. Laurie Margrain is very approachable," Boyd Houghton says. The couple were approached to supply Open Country nine years ago and were persuaded to cash up their Fonterra shares and switch. The cash enabled them to develop their farms which carry 2000 cows.

Creech, who says it was always the hope of the founders to build a commercial dairy company, is not surprised Open Country has endured despite the rough spots.

"The kind of people behind it were the kind who would persist through the challenges it would inevitably face.

"Fonterra has high status among New Zealanders and in the dairy industry, so you were challenging Fonterra. There were always going to be challenges."

Industry players say Open Country's trade mark has been doing things differently.

"It doesn't have a one-size-fits-all mentality," says one.

But industry watchers agree it would be even harder to launch an Open Country today and say that's not a positive sign.

"The regulatory regime today is vastly different than 10 years ago. It shouldn't be so much more challenging." says one.

"Competition brings innovation and a real focus to the business."

Waikato Times