Fonterra warns prolonged energy outages could threaten dairy processing
Fonterra’s growth ambitions are at full throttle as premium-paying markets like the United States demand New Zealand’s highly-reputed dairy protein, but at home, the big exporter fears the brakes are on in the economy.
As the country’s biggest company readies to increase capital and IT expenditure and forecasts revenue and profit growth, its managing director co-operative affairs Matt Bolger says national labour productivity is stubbornly slow to rise, technology uptake ambition is small and energy supply resilience a real concern.
All this while New Zealand struggles for more access to high-value export markets to provide greater diversification at a time of major geopolitical uncertainty.
Fonterra can cite $25 billion in export earnings for the 2026 financial year, with $19.6b of this returned to the economy, and a $1b investment recently announced in the production of more South Island value-add ingredients. However, it also offers another stark statistic.
Bolger estimates New Zealand has access to only around 14% of global dairy consumption at tariffs below 10%.
“Trade access is extremely important to us and we applaud any work done by ministers and officials to open up more access. We get that it’s hard and that there are a lot of things going the other way.
“We need to maintain the access we have and keep dairy access on the table – that’s a really important thing.”
New Zealand’s need to invest in energy supply is also top of mind.
With coal use banned after 2037 and the natural gas supply dwindling faster than expected, Fonterra, as a perishable product processor, is particularly vulnerable if energy supply is threatened.
“If we can’t run factories for a day or a week, that has enormous implications because you can’t stop the product flowing. The potential for having energy outages that last any time is very bad, but if they last more than a few hours, that has huge implications for us and our customers, and ultimately farmers and the wider economy.”
Fonterra no longer uses coal to fire its North Island manufacturing plants and is investing substantially and quickly to decarbonise and convert to biomass and wood pellet energy for its boilers, Bolger says.
“We’ve seen firms closing outside our sector due to energy pricing and energy supply uncertainty. We think energy resilience needs to be one of the key priorities for any sort of economic development out of any government.”
On productivity, Bolger says there’s “a sense of frustration” that New Zealand hasn’t been able to lift it.
“To give credit to farmers, they have steadily lifted productivity through genetics and pasture and animal management. We’re trying to do what we can with technology and so on in our factories, but it does feel like there is something that holds us back.
”Maybe it’s thinking a little bit too small around the use of technology in firms or maybe it’s the fact we are a nation of small-to-medium enterprises and it’s hard to get the scale needed to deploy technology.”
Meanwhile, Fonterra continues to develop the US market for protein products and highly nutritious ingredients, now one of its most important growth engines.
While it’s not a new market, consumer understanding of health nutrition has finally caught up with Fonterra’s science and research, Bolger says.
“We’ve been doing the science on functional proteins and the value of dairy proteins, as opposed to generic protein for decades, and we’ve been trying to sell them in there for a while. Now consumer understanding has matured a lot.
“Health trends come and go but protein is very good and the story around GLP-1 drugs is having quite a leading effect on people. They’re losing a bit of weight, eating fewer calories a day and focusing on the quality of what they’re eating a lot more.
“Even if you’re not taking that medication, that’s mainstreamed a lot of the discussion around the quality of what you’re eating.”
GLP-1 is a natural hormone released by the gut after eating. It helps control blood sugar and signals the brain that the gut is full.
Bolger declines to give a percentage of expected future earnings growth from specialised proteins, but says it will be significant.
So how will Fonterra ensure the value of US protein market growth is captured in New Zealand?
Bolger says the “vast majority” of Fonterra products are sourced from New Zealand, returns from which flow back to farmers and shareholders here.
On whether New Zealand has the energy infrastructure, skills and research capability to become a global specialised dairy product producer, he says Fonterra already is, supplying many of the world’s leading food makers.
And while New Zealand’s limited dairy market access is concerning, Bolger says the good news is many global customers are paying a premium.
“New Zealand butter has traded at a significant premium to US and European butter for a substantial time now – even the commodity sort. Customers value the taste, mouth-feel, colour and the grass-fed way our farmers farm here.”
So, is Fonterra’s optimism an outlier to the national economic mood?
Bolger says first it must be acknowledged “it hasn’t always been this way”.
“A lot of hard work” has gone into Fonterra’s now-strong balance sheet and confidence to invest, he says.
“The organisation’s matured a lot in the last 10 years, in its understanding of risk, policies around risk, and management of balance sheets and capital allocation.
“There’s also fundamentally a deeper understanding of our identity as a New Zealand farmer-owned co-op, and while that can sound a bit like a slogan, it really does affect how to think about your strategic choices.
“Because it’s so clear that we’ll always have to process our farmers’ milk and sell it for as much as possible offshore, that means when we’re making capital decisions, we’ll never put that core function at risk.
“In the past we may have lost sight of what was core and what was optional, but the core is very, very clear to us. Having the machine working very well now, generating great cashflows from food service into Asia and proteins into the US and Europe, it’s now getting us into a position where we can invest with a very strong balance sheet.”