From Fonterra to new frontiers—how Synlait plans to go from farmer to pharma
Picture this: you run a multimillion-dollar business in an industry that is one of our biggest export earners. It’s a hands-on enterprise that requires technical knowledge and business smarts, daily decision-making and constant risks. Yet you’re stuck in Commodity Hell, reliant on the whims of international markets, exchange rates, rising costs and consumer trends. You have one customer and that customer sets the price of your product.
You’d be looking for a better way to do business, right?
For the majority of New Zealand dairy farmers and entrepreneurs, this is the daily grind in the business of milk production—volume in, volume out, and hope like hell someone down the line can sell the stuff. But John Penno, Ben Dingle and Juliet Maclean aren’t satisfied with being a cog in a commodity machine. They already run the nation’s largest dairy farm on the Canterbury Plains, 60 kilometres south-west of Christchurch. They’re determined to get out from under Fonterra’s crushing weight and blaze their own trail, but their bold plan first requires beating Fonterra at its own commodity game.
In April, the trio dropped a bombshell when they announced plans to cash out of the co-op. They’re the first farmers to split from Fonterra and have caught the industry’s attention. If Penno, Dingle and Maclean succeed, other farmers are likely to break away from Fonterra in search of greater returns on their capital and efforts. If they fail, our largest export industry will lose its best hope to date of a richer life beyond commodities and centralised control. Fonterra will rule unchallenged, driving its commoditydominated strategy to its inevitable fate of declining competitiveness and reward.
This isn’t just a dairy story. In many ways what is happening on the vast grassy plains of Canterbury is the story of New Zealand—and its emerging economy. Like every other sector of our economy, dairy is being forced to find new revenues from clever new science, smart packaging and fresh ideas. If Synlait can crack it, anyone can.
“This isn’t just a dairy story. In many ways what is happening on the vast grassy plains of Canterbury is the story of New Zealand—and its emerging economy.”
There’s nothing much at Te Pirita save for a five-way crossroads in the flat, dry farmland on the east bank of the Rakaia River. Just up Te Pirita Road on the right, though, is an interesting-looking farm entrance in the shelter belt of towering pine trees.
Robindale, the sign says. The farm must have been here for generations, broken in by tough men and then nurtured by others of dogged perseverance in the face of bad weather, bad markets and bad politics. But the entrance is bold. Huge, rough stone pillars flank the farm road. The raw earth around suggests they’re quite new, and the wide space between them hints that the new owners have plans for getting big things in and out of this property.
Inside, in a paddock flanked by more trees, is a gaggle of utes and cars parked randomly in front of a nondescript, single-storey, 1980s house. This is no home: step inside and the living room is a plainly-furnished office and the bedrooms are equally functional workspaces. Why such a big farm office? The answer lies a bit further up the track when visitors catch sight of three gigantic centre-pivot irrigation booms, each 900 metres long, that turn the brown Canterbury grass into three circles of green paradise, each almost two kilometres across. Among the booms is an 80-bail rotary milk shed. In season it runs 12 hours a day, milking Robindale’s 4,500 cows. This is the largest dairy farm in the country. It is the leading edge of the industry in New Zealand.
Robindale is owned by Synlait, the company Penno, Dingle and Maclean have created. But Robindale is only the first, albeit sizable, building block of Synlait’s much bigger ambition: forget skimmed milk powder at US$5 a kilo, the mainstay of Fonterra’s business. Synlait is talking ingredients for functional foods and nutraceuticals, consumer products with health, medicinal and other benefits that make up a US$40 billion global market growing at 20 percent a year.
“Milk is the ultimate commodity,” says John Penno, chairman of Synlait. Frustrated that Fonterra’s business model prevents them from increasing the value of the milk they produce, they began in the late 1990s to invent a new type of dairy business that could break free from the commodity trap.
Ben Dingle and Juliet Maclean were already taking an entrepreneurial approach to farming. The couple met at Massey, ran a ski resort in France for a while and then bought a Northland farm in just their second year of sharemilking. They bought a Waikato property soon after. Dingle honed his farm management skills while Maclean pursued her scientific work in livestock and feed. In 2000 she won a Nuffield Scholarship that allowed her to pursue her biotechnology interests in Europe and North America.
“Our strategy was to consolidate and build,” says Dingle. “We wanted to get ahead and be successful, so we started rubbing shoulders with successful farmers and business people like Steve Allen, who is now chairman of [independent dairy co-op] Tatua, and Jim van der Poel who’s a director of Fonterra.”
Among the people they met was Penno, who was a senior scientist at Dexcel, the dairy industry’s research centre. He had a successful career in applying science in very practical ways on the farm. A partnership was born.
From commodity bit player to global brand in ten years is an ambitious target, but that’s the goal driving Penno, Dingle and Maclean. In 2000 they started with some ideas about the future shape of dairying. By 2010 they plan to have built Synlait into a major supplier of high-value, hightechnology ‘milk components’ to food producers worldwide.
Along the way, they’ll turn the commodity model on its head. Fonterra “won’t turn on a milk drier for an order of less than 1,000 tonnes,” says Penno. Synlait aims to do short-runs of milk powder at competitive prices, thanks to cheaper transport costs and cost savings elsewhere in the system.
With their own production capability, Penno, Dingle and Maclean can deal directly with customers. Their goal is to customise milk: seek out food companies around the world that have specialised needs for high value ingredients, select cows and cattle feed to produce the particular profile of milk needed and process it in their own plant to ensure the specifications are met with rigorous traceability, right back to the cow. This will make them the first integrated cow-tocustomer company in New Zealand, offering a bespoke service that Fonterra can’t.
It’s not a plan for the faint-hearted. The company will be investing up to $70 million to build a processing plant at Dunsandel, on SH1 halfway between Christchurch and Timaru. It has already hired an experienced dairy industry plant manager, is discussing designs with consulting engineers and sounding out contractors. But the sheer complexity and cost of this takes the intrepid trio into a realm where no colleagues have gone before them.
Penno, Dingle and Maclean reckon they need about 20,000 cows to produce 100 million litres of milk a season to keep their “small” plant busy. They can buy some of the milk directly from Fonterra and more from neighbouring Fonterra shareholders thanks to provisions in the regulatory bill that enabled the creation of Fonterra as a near-monopoly on the nation’s milk processing.
But they need to build up their own herds to between 10,000 and 15,000 cows to give them the critical mass to start feeding their own plant. At that point, they can cash out of Fonterra and use the money to fund their own plant.
In the 1990s, this seemed absurdly ambitious. Even getting to 2,500 cows—a big farm by New Zealand standards—would be a stretch. At the time, Dingle and Maclean ran 300 cows as sharemilkers in the Waikato while they also owned a Northland farm and Penno ran a team of scientists at Dexel. The only way it would work would be to pioneer some radically new models for raising capital, employing staff, running large herds and governing the business.
Undaunted, they incorporated Synlait in 2000 and went looking for land. “I think we looked at every single farm in the North Island,” Dingle says. “We just couldn’t find what we wanted for our growth plans.”
Eventually, the trio cast an eye towards Mid Canterbury. The large, flat, dry farms for sheep and beef looked ideal for converting to irrigated dairy farms. However, that carried two big risks: Fonterra had a moratorium on accepting new milk supply in the area until it had finished a big increase in its processing capacity at its Clandeboye plant; and could Synlait get the water?
“From the outside, it probably looked like we took a punt,” Dingle recalls. “But actually we had a Plan B and a Plan C. Also, we were just so enthusiastic about the combination of climate, access to water and the quality of the land. Canterbury is probably the best place in the world to run a dairy farm thanks largely to its temperate climate.”
In February 2001, Synlait took the plunge and bought its first farm, Robindale, a 600-hectare sheep and beef property. Soon after, Fonterra lifted its moratorium and Synlait drilled a 200-metre well to find water.
They stripped out fences and shelter breaks to create vast areas they could irrigate. They quickly built up to milking 1,800 cows in 2003 and then to 8,500 cows on 2,800 hectares after buying more local farms. Synlait already has a staff of 70.
Is it necessary to be so bold? “It’s not an ego thing,” says Dingle. “We just want to be successful. We realised we were in a very strong strategic position to expand into something other than just the commodity game. With our science backgrounds, we knew we could do something special that no other farmers can: control the supply of milk at the farm level.”
To nurture its rapid growth, Synlait has pioneered some new models. For example, it has raised money for each of its six farms from other farmers and wealthy individuals in rural areas. It is also planning to raise money from small investors.
Unusually for a farming company, Maclean runs a professional human resources operation to ensure Synlait attracts, develops and retains the best employees. Farm managers, for example, get to build up equity stakes in the farms they run.
Penno, Dingle and Maclean see a brighter future producing high-value customised milk products for specialised customers. “You can do a whole lot of things to the milk in the factory, but actually you can do so much more when the milk is still in the cows,” says Dingle.
Such as? Synlait’s founders won’t give away too many of their secrets, citing commercial sensitivity, but say milk is directly affected by diet and behaviour. For example, says Dingle, feed can be controlled to adjust the amount of fat; milking at night increases melatonin levels; and different types of feed can elevate the production of conjugated linoleic acid (see ‘End game’ sidebar).
Synlait’s technology will be used to build the Synlait brand. The company won’t sell directly to consumers but does want to be associated with other people’s products. The Intel Inside campaign is a good example, says Dingle. He’s reluctant to talk about potential partners, but says approaches have increased since Synlait announced its plans.
Synlait has already grown from nothing in 2000 to being today the largest single dairy farm in New Zealand. But will the strategy pay off? “Yes,” says a senior executive in the primary sector, “if they can get their pasture-to-plate strategy working. John Penno’s science is very important. It’s all about what they can do inside the cow and with what comes out of it that nobody else can do. But they won’t succeed if they only get as far as short-runs of standard powders. Customisation like that is just another commodity business.”
“Some people have told us ‘The dairy industry has treated you well and now you’re smashing it up.”
Others are more sceptical. “I’ve heard it all before,” says another primary sector veteran. “Synlait says there are niches out there in the market but the reality is they’re limited. The primary sector is all about capital and scale to overcome the difficulties of getting into overseas markets.”
This scale-is-God mentality is deeply rooted in the sector. Challenging it, as Synlait does, makes many farmers and other primary players uneasy. They don’t want to be drawn into the debate, preferring to comment anonymously while the drama plays out.
Even Fonterra declined to be interviewed for this article, but in a written statement the co-op agrees there’s a market for customised milk products and points to its development and marketing of organic and kosher milk and specialised powders. Fonterra says its size and global reach give it a “considerable edge” in the customised milk market.
Synlait won’t get the market to itself: Fonterra says there’s “certainly” scope to do more customised milk production. “It would be more accurate to describe Synlait as competing with, rather than complementing, Fonterra’s business,” the statement says.
Dingle plays down the split with Fonterra. “Some people have told us ‘The dairy industry has treated you well and now you’re smashing it up’,” he says. “But mostly the response has been positive. The industry needs to keep evolving.
“Fonterra may see us as a competitor, and at some level we are, but we are also doing something quite different.”
On paper, however, Synlait will have two advantages over Fonterra: a relatively small part of its capital will be invested in plant with the majority of money invested on-farm; and collecting and getting milk to Dunsandel will cost a quarter of Fonterra’s national average.
But Synlait needs to grow a lot more before it’s ready to start processing milk at its own plant at the start of the 2007–08 season. It has to achieve its base case of competing successfully against Fonterra on processing commodities if it is to create for itself the chance to tackle the vital third phase, transforming the value of its milk.
This requires learning another huge new skill set for working with large food companies overseas. These customers have recipes, specifications and additional technology for processing sophisticated, high-value milk components for foods.
Synlait will be contributing its expertise on farm for breeding the cows, devising the nutrition regimes and farm practices that will produce highly-tailored milks with specific characteristics—not to mention the processing skills to handle them—to produce the customised ingredients that food manufacturers want.
These are the mountains Synlait has to climb on its ten-year journey. So far it has conquered familiar farming foothills. If it can knock the bigger bastards off, though, it will have pioneered a radical and more profitable new business model for the dairy industry.
What really makes Synlait’s long-term investment worthwhile is the prospect of tailoring its products for use in the booming nutraceutical market. Yes, ‘nutraceutical’ is an ugly word but it’s worth a lot. Think of the space between nutrition and pharmaceuticals and you get a massive industry that includes functional foods like fruit drinks, dietary supplements and a burgeoning industry of tablets consisting of kiwifruit extracts, colostrum or bee jelly protein.
Nutraceuticals also form the basis for infant formula, hospital foods, energy drinks and health tonics. Estimates of the size of the market vary wildly from billions to hundreds of billions, depending on definitions. New Zealand already has at least 192 companies in this export industry, but milk provides some very exciting possibilities such as:
The “new aspirin”, as one Fonterra scientist calls it, is a potent antioxidant used in cancer treatments. Waikato co-op Tatua has built a $115 million business largely on lactoferrin. Fonterra has finally caught up, building a $15 million plant last year to extract the protein.
The “pre-milk milk” is rich in antibodies and sold as an immunity booster. Companies such as Manukau-based New Image are exploiting the Asian taste for colostrum pills, driving New Image’s sales up 400 percent in 2003 to about $14 million.
A hot new contender is conjugated linoleic acid, a fatty acid found in milk and isolated in the early 1990s. Studies so far show it might be beneficial in lowering cancer risk and triggering weight loss.
An exciting prospect is to use genetically modified herds to produce certain kinds of proteins in the milk. AgResearch, one of nine Crown Research Institutes, has bred transgenic cows that express extra casein (useful for cheese production) and human lactoferrin. Expressing human proteins in cow’s milk might have huge potential in pharmaceutical markets where human proteins are currently produced in tiny amounts by bacteria. AgResearch predicts $150 million in human lactoferrin sales alone.