Historically, NZ milk prices were 30-40% less than those of the EU and US, he told the Northland Dairy Development Trust annual conference. From 2006 Fonterra had closed the gap with implementation of its strategy combined with world trade reforms, including new market access and fewer dairy product price support schemes.
“We are now tracking much as they are,” he said.
“It’s about staying on strategy; every day delivering the highest milk prices we can and putting the value-add earnings on top of that.
“We have a very strong view that GlobalDairyTrade and the Milk Price Manual are among the key drivers of our co-operative to close that gap.
“Who would have believed back in the 1990s or the early 2000s that our returns would close the gap with Europe and the US?” he asked.
But the baggage that came with price convergence was volatility.
“Back in the day volatility was US$150/tonne between seasons; now prices can move that much between GDT events.
“That’s what you and I in our farm businesses have to deal with and Fonterra is looking to do what it can to help manage that risk.
“We are focused on giving you as much information as possible on forward pricing.”
In response to a farmer’s question, Wilson said the policy of milk price “point” forecasting had not changed but the degree of volatility was now much greater.
That was reflected in the dividend range, to satisfy market requirements without having to update more frequently.
Wilson said Fonterra was consistently delivering milk prices, derived from commodities and ingredients, which were $3/kg higher than a decade ago.
Looking back over a decade, he said the average return for the first five years was $3.80 and the average for the second five years was $6.80.
“That’s a measure of Fonterra’s increased efficiency,” he said.
The milk curve now had a higher, wider and flatter peak, of 50 to 60 days, not 14 days.
“We are investing in more processing assets to make sure we can process the peak and to give us more options at the peak.
“In the past it was quite normal to all but dump milk – to make low-returning products – for that short peak.
“Now the peak is wider we need capacity to be more efficient and effective.”
He said the returns from optimising peak milk processing would more than pay the capital costs of extensions for Pahiatua, Edendale and Lichfield.
Likewise, the consumer and food service product plants at Waitoa, Te Rapa, Eltham and Clandeboye were built to satisfy strong demand in the fastest-growing division of Fonterra’s output.
