Dean Best

BRICs and beyond: Fonterra looking to milk Brazilian dairy market

By Dean Best | 27 May 2011

Fonterra believes Brazils dairy market will be one of worlds "strongest-growing"

Fonterra believes Brazil's dairy market will be one of world's "strongest-growing"

With recent investment in China - and a possible venture in India in the pipeline - Fonterra, the New Zealand dairy giant, is no stranger to the BRIC markets.

And now, the world's largest dairy exporter is looking to expand its presence in a third market - Brazil.

Fonterra already has operations in Brazil through Dairy Partners Americas (DPA), its Latin American venture with Nestle.

DPA, which also operates in Argentina, Colombia and Ecuador, has manufacturing facilities in six states in Brazil, a market that accounts for 60-70% of the venture's sales - and a market that, according to Euromonitor, is set to see buoyant growth in dairy sales between now and 2015.

At present, DPA sources milk from Brazilian farmers and delivers it to the venture's plants to make the consumer brands it sells in the country, including Ninho and Chamyto.

Kevin Murray, commercial director for Fonterra's Latin American operations, says the DPA venture has already worked with Brazilian farmers to improve their efficiency.

"DPA has worked with suppliers to improve their on-farm practices. One of the benefits has been more consistent milk flow," Murray tells just-food. "DPA has also invested in managing the integrity and security of the supply chain from cow to customer."

However, Fonterra is set to buy an 850ha farm in the Brazilian state of Goais to set up its own dairy farm to supply the DPA venture.

Fonterra is at pains to say the farm, which will have two milking platforms for 3,300 cows, is a "pilot" project but the company is targeting for milk production to begin by late 2014. The group has also said that, if the pilot is a success, its plans to develop more farms in Brazil.

The first farm, however, will only supply 1% of the milk that DPA needs, according to Murray. So why is Fonterra looking at developing its own milk production in Brazil? Are there concerns over local supplies?

When asked if Fonterra had concerns over domestic supplies in Brazil, Murray declined to comment. However, reading between the lines of both his comments and the initial announcement made by Fonterra earlier this month, it seems the company is keen to build its milk production in Brazil for two reasons. One, because the company believes Brazil will be a growth market for dairy. And, two, because Fonterra acknowledges it cannot supply the emerging markets for dairy direct from New Zealand.

Announcing the project earlier this month, Fonterra CEO Andrew Ferrier took the opportunity to explain - not just to the media but to other stakeholders, including the farmers that own the co-operative giant - why the company was investing overseas.

"New Zealand milk will always be our top priority," Ferrier said. "While New Zealand milk production is forecast to grow at a long term average of 2-3%, we are looking offshore to supplement this and ensure we meet the growth potential for dairy globally."

Ferrier added: "Developing sustainable, high-quality milk supply for key customers in rapidly developing economies such as Brazil and China is a powerful way of achieving our strategy of being the natural source of dairy nutrition for everybody, everywhere, every day. We are sourcing more milk overseas - 6.6bn litres last year, or around 31% of our total. Our international farming operations are in line with this strategy of complementing New Zealand milk."

When the move was announced, New Zealand farming group Federated Farmers went public with its support. Federated Farmers chairperson Lachland McKenzie said the investment would help Fonterra reduce its "dependency" on a predominantly domestic milk supply.

McKenzie noted that 69% of Fonterra's milk comes from New Zealand and added: "It seems prudent for Fonterra to reduce its New Zealand exposure should the unforeseen happen. That could be a natural disaster, animal disease or even, as a result of public policy."

The Federated Farmers chair also pointed to Brazil's size - "it happens to be the fifth-largest country by population" - and, reflecting more broadly on Fonterra's moves in emerging markets, added: "Creating in-country supplies of liquid milk in China and now Brazil, may create spin-off businesses. With Fonterra also conducting a business case study on India, the world's second largest liquid milk market, we can see the potential."

The potential is clear. According to Euromonitor, Brazilian retail sales of dairy products reached GBP15.41bn (US$25.37bn) in 2010, up 10.3% on 2009. Euromonitor is forecasting that, by 2015, sales will climb to GBP16.84bn.

Murray is upbeat about the prospects for dairy in Brazil. "Fonterra expects Brazil to be one of the strongest-growing markets for dairy products over the next decade," he says.

The Fonterra executive, however, acknowledges that competition in Brazil's dairy sector - in view of the growth on offer - is fierce. "The Brazilian market is very competitive," he admits. "The two largest players are DPA and Danone, with roughly equivalent market shares."

According to Euromonitor data, Nestle has 15.3% of Brazil's dairy market. French dairy group Danone holds 12.1%. In third is Brazilian food group Brasil Foods, with 9.5% of the market. This week, Brasil Foods announced its interest in buying dairy assets owned by fellow Brazilian food maker Indústria de Alimentos Nilza, a deal that will increase its share further. (Euromonitor estimates that Nilza's shares of the market is 0.5%).

There are, of course, challenges in operating in a market as big as Brazil and one that is developing rapidly. "Brazil is a very large country, with long distances between dairy-producing regions, consumer markets and export ports, so transport infrastructure is the biggest challenge," Murray notes.

And Fonterra will be mindful of the recent challenges it has had across the world's emerging markets. Fonterra's recent announcement of a plans to study whether to set up a pilot farm in India demonstrates the company's caution in that market. Two years ago, Fonterra quit a venture with Britannia Industries after deciding too much investment was needed in the business.

Last month, Fonterra announced that plans to merge its Chilean subsidiary Soprole with Nestle's dairy unit through the wider DPA venture had been cancelled.

However, the DPA venture has a strong presence in Brazil. And, with the country enjoying robust economic growth (its economy grew by 8% in 2010, according to Euromonitor) and with higher living standards driving growth of products like fortified milk, there are opportunities for the world's largest dairy companies in the market. Fonterra will hope its pilot project can be a factor in further growth.

Sectors: Commodities & ingredients, Dairy, Emerging markets

Companies: Fonterra, Nestle, Danone, Brasil Foods, Britannia Industries

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