Leitíssimo strikes dairy gold in Brazil

Leitíssimo strikes dairy gold in Brazil
A combination of Kiwi practices, verdant land and cash from clued-up investors like Sam Morgan yields Leitíssimo three times the production it would generate in New Zealand. Is this the end of our dairy industry - or the next step for IP?
The milky way

When Simon Wallace was fresh out of Lincoln and expecting to follow his family into dairy farming, his search for the perfect location led him all the way to Brazil. A combination of Kiwi practices, verdant land and cash from clued-up investors like Sam Morgan yields him three times the production he’d get at home. Does it spell the end of New Zealand’s dairy industry, asks Andy Kenworthy, or is it the natural next step for Kiwi IP?

We all know the model: New Zealand’s main role in the world’s economy is as a high-quality grass factory: we buy our jetskis and plasma screens based on the billions we earn turning that grass into milk powder. Simon Wallace is turning that model inside out.

Wallace is the general manager of the Leitíssimo dairy company. He and his team have spent the past ten years carefully transplanting New Zealand’s world-beating dairying techniques into the tropical landscape of western Brazil. The company now has a 5,500-hectare series of five heavily irrigated circular pastures, servicing 3,500 head of cows, heifers and calves, all reared from an initial stock bought on the Brazilian market crossed with New Zealand bulls.

The result? An average 35,000 litres of milk per hectare a year, more than double the sort of production possible in New Zealand. One experimental pasture stocked with Leitíssimo’s best-performing cows produced 50,000 litres of milk per hectare per year. The milk is distributed fresh in the company’s own fleet of trucks to customers within a few hundred kilometres of their base.

These sorts of numbers are what inspired Trade Me wunderkind Sam Morgan to weigh in with more than $10 million worth of investment. As I write this, Leitíssimo has completed the first stage of development for another 15 pastures. Big players like Federated Farmers, Fonterra and PGG Wrightson have taken note, and have their own projects rolling out in South America, as well as across the globe. Fonterra has a 50/50 joint venture with Nestlé called Dairy Partners America (DPA) that operates 13 manufacturing sites across Brazil, Venezuela, Colombia and Ecuador. Federated Farmers has set up a farm to service part of the DPA network in Brazil. PGG Wrightson has no fewer than 17 farms in Uruguay, through its Uruguay company New Zealand Farming Systems. It is currently the subject of a multimillion-dollar takeover bid from Singapore-based Olam International.

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Leitíssimo combines New Zealand-grown stock and pastoral experience with local knowledge and a massive domestic market

Fonterra, which has just made record payouts to its members after the worst world recession since the Great Depression, is not new to overseas expansion. It set up a distribution network in the Philippines way back in 1981 and now has operations across Asia and the Middle East. It is even currently in the process of developing its second dairy in China: an interesting twist when considering the threat of multibillion-dollar buy-ups of New Zealand land by Chinese corporations.

This is very big business, and it’s all based on brains. All around the developing world the burgeoning middle class is getting a taste for fresh milk, and there are some very heavy hitters vying with each other to supply it.

“This is about food,” says Peter Moore, Fonterra’s general manager, international farming. “The world is looking for more food to feed a growing population. There is less land available to grow food, therefore people are looking at more and more efficient systems.”

But what will happen if farmers in Brazil and elsewhere take up this new approach on a gargantuan scale, and can produce more for less than we can? Couldn’t this, combined with the threat of New Zealand farms being bought up by offshore interests, leave us with a hollowed-out agricultural sector where we don’t own the real property or the intellectual property?

It’s surely a risk. If more and more countries can create their own high-quality fresh milk, it suddenly seems a bit odd for an isolated country like New Zealand to base its economy around making a powdered version of it, because it’s the only way we can get it to market. It’s like trying to export fish fingers to Iceland.

But Wallace and his mob are not the only ones doing this, and the involvement of Fonterra et al shows it didn’t come out of nowhere. Even Wallace’s own upbringing provided him with an international perspective on farming way back in the 1970s and 80s. Wallace senior was involved in breeding cows from India and Pakistan for use in tropical countries. So it was a fairly logical extension for his son to take this a step further to harness Kiwi farming know-how in what he calls the “supercharged” climate of the tropics.

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After completing a feasibility study on the basic idea in 1999, the next challenge was to find the right spot to get started. Eighteen months and 150,000 dusty kilometres of driving later, Wallace and the team discovered two things. The first was that land in the most established dairy farming areas in Brazil was not going for a song: all the initial deals fell through. The second and more exciting discovery was an area of Brazil that looked like great dairy country, where virtually nobody was dairying. After consulting the investors, it was decided to go for the pioneering approach and set up 350 kilometres north-east of the capital, Brasilia.

This meant building all the roads and power lines before even starting on the homes, irrigation systems and cattle enclosures. The company has since also built its own processing plant, a fleet of distribution trucks and a school. Some of their new neighbours apparently thought they were slightly mad. Their first hotel landlady was aghast at how early they got up every morning when interviewed for a Brazilian documentary about the enterprise. And one local farmer reputedly told his mates he'd drink every bit of milk the farm could produce. Wallace recently reminded him of the boast, as they were standing in the milk storage area surrounded by full vats. He should have handed him a straw.

Getting that far wasn’t easy, however, says Wallace. “There were a lot of hard yards. There are massive bureaucratic hurdles. In the first few years it’s hard, even for people with the most tenacity and patience. But we reached a point where we said, ‘We are not going to complain about this any more, let’s just embrace it and become excellent at working through those processes.’ We have become very good at that, which is probably a competitive advantage for us now.”

Thankfully, there was no shortage of equipment: Brazil has some of the most technically advanced farming machinery in the world, so only the most specialised bits of dairying kit had to be shipped in. And the land was competitively priced, as Wallace puts it, which placed a refreshing focus on how much value you could create from the land itself, rather than by subdividing it later for housing or a golf courses.

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Milking it

New Zealand dairy by the numbers

• The Food and Agriculture Organisation of the United Nations predicts there will be an additional 2.3 billion people by 2050, requiring a 70 percent rise in agricultural production

• According to Fonterra, demand for dairy around the world is growing by two percent a year

• New Zealand milk production is forecast to grow at a long term average of two to three percent

• Fonterra sources 6.6 billion litres of milk overseas last year, just under a third of its total output

• Global powdered-milk prices have more than doubled in recent years to around $4,500 a tonne

According to Leitíssimo

• The average US stock-fed dairy farm produces between 15,000-20,000 litres of milk per hectare per year

• The average Kiwi dairy farm also produces about 15,000 litres of milk per hectare per year

• Leitissomo is getting 35,000 litres of milk per hectare per year—and in one experimental paddock stocked with its best performing cows, it achieved 50,000 litres of milk per hectare per year

But for Wallace, Leitíssimo’s success is really based on a process of painstaking integration. This isn’t a case of air-dropping a Kiwi dairy farm into your chosen location and unpacking it. This is a living partnership, not some neo-colonial land grab. Just like the cows, the whole firm is a hybrid of the best of both countries.

Morgan was switched on to Leitíssimo by his father Gareth, and when he visited he was impressed by the depth to which this cross-pollination ran.

“It’s quite weird,” he says. “You are driving through what looks like desert and then suddenly you are in this little bit of the Waikato. I think there are quite a lot of people who would try to build an organisation like that in South America, but these guys are real entrepreneurs. They have gone in there and started from scratch. It’s really a Brazilian company, although it is owned and run by New Zealanders.”

Brazilian partners have helped them adapt the New Zealand approach to the new conditions. The New Zealand staff speak Portuguese, some have married Brazilians and are raising their children on the farm. And Wallace clearly loves his adopted home and the people he shares it with.

I ask him how he got people like the Morgans so keen. “Our small group at the start really put our heads down and tried to get some runs on the board. When you go into Latin America there is such huge opportunity that it is often about what you choose not to do. We just stuck to our knitting, got a few years under our belt, got some respectable data on the board so we were beyond the venture capital stage and actually doing it and able to demonstrate that.

“We wanted not just to put something up on a PowerPoint; by the time we were talking to Sam and Gareth Morgan, a lot was done: key performance indicators had been focused on and progress recorded. We had hundreds of thousands of data points, the results were repeatable, and across the team we had the expertise, the commitment and the passion.”

Morgan also spotted how savvy the company was in controlling the whole package. “Leitíssimo owns the cows, the milk, the factory, the trucks and the brand. It has created a sustainable ecosystem,” he says.

This approach has certainly created a lot of value in this company. And although this has never been conceived as a franchise or cookie-cutter affair, there are clearly elements that can be transferred elsewhere, particularly the expertise of people like Wallace and his team. It wouldn’t be at all surprising if some of them turned up near some cows in other foreign climes sometime soon. They are living, breathing examples of the fact that New Zealand’s competitive advantage has more to do with our zeal than our land.

Morgan should know. “I think it is an interesting model for New Zealand,” he says. “We need to provide our best talent with the greatest opportunities, if those exist elsewhere in the world then they should go there, but keep Kiwi ownership where we can.”

But is this a malignant form of brain drain that could be damaging to New Zealand, Inc?

Not so, according to Wallace, Moore and Morgan. Far from competing with New Zealand farming interests, they see this as just another extension of them.

Leitíssimo estimates that even just the part of Brazil they are in has the potential to produce as much milk as the whole of New Zealand. But, Wallace points out, “In this state alone, which is about the size of France, we have a 800 million litre deficit in terms of milk production, so there’s a great market right here. The whole concept has been about embracing the world. It’s about feeding more milk into that network, just from a different geography.

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Leitíssimo has built roads, housing and a school for its business and staff. “They have gone in there and started from scratch,” says investor Sam Morgan. “It’s really a Brazilian company, although it is owned and run by New Zealanders”

“The value of Fonterra is not that milk is produced in New Zealand; it is that milk is produced in a lot of places and then traded around the world. New Zealand dairy farmers have a massive investment in a global business, not just a few dairy farms in New Zealand. We have done this since the start; it’s just that sometimes in the semantics and discussion that goes on we get a little bit protective or focused on the land holding.”