Price volatility is causing Fonterra to look at unusual dairy products

by Rebecca Howard / 01 September, 2017
RelatedArticlesModule - Business

Volatile export prices for milk powder are causing Fonterra to look more seriously at some unusual but profitable niches like Maserati seats, high-end buttons and vodka.

As you slide into your Maserati, take a moment to thank New Zealand dairy farmers for the softness of the leather seats.

No Maserati? Not to worry. Milk can also be found in ceremonial candles in the high reaches of Tibet, high-end buttons and the occasional vodka martini, not to mention a raft of health and pharmaceutical products.

The bulk of New Zealand’s dairy exports is whole milk powder, a commodity whose highly volatile price has seen farmer income soar and then plunge in recent years. In a bid to shelter its 10,500 farmer shareholders, Fonterra Co-operative Group is looking to squeeze value out of every drop of milk.

“NZMP, Fonterra’s dairy ingredients business, aims to generate higher returns for the co-operative by moving more milk from core ingredients, such as whole-milk powder, into higher-value products, such as protein-fortified ingredients,” says NZMP marketing director Gillian Munnik.

Price volatility can affect the dairy giant’s entire export portfolio, and “the added value in some of these products is significant”, she says. “We are spending quite a lot of our innovation focus on how we can do more with these.”

Maserati’s leather interiors are treated with Fonterra’s casein. Photo/Getty Images

Today, its factories don’t just produce milk powders, butter and cheese for export but are also churning out a wide range of other products. Recent investment in plant capacity allows Fonterra to shift and channel milk to where the returns are the highest.

Casein – the main protein found in cows’ milk – has found its way across the globe given its high adaptability and not just for food. “It’s almost like the chameleon of the dairy ingredient world,” says Munnik. “It is probably the most versatile component of milk.”

Today, sports car maker Maserati buys leather for its luxury interiors from suppliers who use Fonterra’s casein to treat hides; Italian leather makers seek it out for use on designer jackets and bags. Essentially a binding agent, casein is found in plastics – such as high-end buttons – paint and glues, as well as in food such as hot dogs.

Fonterra’s proteins, which include whey protein concentrates, make up about 6-7% of its exports. The co-operative’s total revenue was $17.2 billion in the 2016 financial year, when it made 9% more higher-value products such as cheese and casein and 7% less of products such as milk powder, as it chased a more profitable product mix. Its gross margin per tonne on these higher-value products rose 24% to $1348 as a result.

Anhydrous milk fat is replacing yak butter in candles in Tibet. Photo/Getty Images

Cows v yaks

Candles and so-called butter lamps are an intrinsic feature in temples and monasteries throughout the Himalayas, with ceremonies lit by endless rows. Monks have traditionally used candles made from yak butter, but some have turned to Fonterra. Anhydrous milk fat – or AMF – is shipped to Tibet in 40-gallon drums where it is used in ceremonial candles. According to Fonterra, monks prefer the clean-burning and better-smelling AMF.

Closer to home, Australian boutique spirits company Artisan Spirit Merchants (ASM) sought to produce a unique, high-quality, pure, preservative-free vodka and to source the ingredients turned to New Zealand, including the dairy sector. Its ultra-premium vodka, VDKA 6100, is produced in Reporoa, near Lake Taupo, and is distilled using whey from the Bay of Plenty region.

The whey, which is essentially the watery part of milk that remains after the formation of curds, is fermented, using a rare strain of yeast, to produce ethanol. Given that most vodkas are made from potatoes, grain and grape, this has given the company its key point of difference.

“We strongly believe that whey-based ethanol has fewer impurities and less methanol than ethanol made from grapes and grain. Very few vodkas in the world are made using whey, so it is a unique product,” says ASM general manager Nick Mann.

“As is the case with VDKA6100, the whey-based ethanol is further enhanced when carefully filtered and blended with great water, such as natural New Zealand spring water.” Vodka can often be harsh, flavourless and odourless. VDKA 6100, however, due to its composition from whey, has a much more “interesting and elegant taste, with citrus notes and hints of white pepper and a wonderful luscious mouthfeel”.

In New York, VDKA 6100 can be found on the cocktail lists of some of the hottest bars, clubs and restaurants in Manhattan. Today, it is sold in New Zealand (duty free), Australia, the US and China.

Trendy vodka VDKA 6100 is fermented from New Zealand whey.

“The versatility of dairy”

Milk also plays a role in the medical world. Pharmaceutical-grade lactose extracted from New Zealand milk provides a vital ingredient that’s found in asthma inhalers, as well as in tablets and capsules.

“Only a tiny bit of lactose ends up in asthma inhalers, but it does the important job of delivering the drug to your lungs in the right dose every time,” Fonterra says. “A fine grade of lactose releases more of the drug, more effectively.”

Fonterra has a joint venture with Dutch dairy company Royal FrieslandCampina. Together the two dairy companies own DFE Pharma, which produces medical-grade lactose that is found in half of the world’s asthma inhalers.

The “amazing thing is the versatility of dairy”, says Munnik, pointing to whey crisps in the US and high-protein milk-based gels in Japan as well as milk protein concentrates that help the body to recover faster after trauma or illness. “These things all have greater added value.”

Nigel Brunel, director of financial markets at brokerage firm OMF, says, “New Zealand is the whole-milk powder centre of the world but we are a price taker. When a bucket of milk comes in, there’s so much stuff in it. They have started to look at it and realise it’s more than just turning it into powder.”

This article was first published in the August 26, 2017 issue of the New Zealand Listener.


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