Western Star butter, Perfect Italiano, Mainland and Bega cheese: the brands Australians have loved and eaten for decades are up for sale.

Fonterra, the New Zealand-based processor behind the dairy products, has announced it is looking to exit Australia, and has put the retail brands and its assets – eight manufacturing facilities – on the market to focus solely on their food service and hospitality business.

For many in the industry, the announcement is not a surprise.

“Fonterra has been talking about the potential of divesting all or part of the Australian business probably for the last two years,” said Dairy Farmers Victoria president Mark Billing, a fourth-generation dairy farmer.

“If I was supplying to Fonterra right now, I’d just be a little bit concerned about what’s the future for the company, what’s the future for the milk pool that I’m supplying into.”

Fonterra’s impending exit makes it the latest domino to fall in Australia’s dairy sector, which has been consolidating and shrinking over two decades as local processors struggle to maintain viable profit margins and stay globally competitive, leaving a gap for cheaper imported butter and cheese to flood the market.

Fonterra has been a key player in shaping – and, some would argue, damaging – the landscape of Australia’s dairy industry. Fonterra bought full ownership of Victorian farmer co-operative Bonlac Foods in 2005 during a period of intense consolidation in which many other farmer co-operatives, such as Dairy Farmers, Warrnambool Cheese & Butter (Cheer, Cracker Barrel cheddar), Tatura Milk, were gobbled up by bigger players.

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Today, the dairy industry is dominated by the big four: Bega, Saputo, Fonterra, and Lactalis. Together, they represent more than 80 per cent of the nation’s milk processing.

For many dairy farmers, Fonterra’s news is bittersweet: the New Zealand giant has left a sour taste in many mouths. In 2016, Murray Goulburn (which was taken over by Saputo the following year) unexpectedly slashed the price it paid for milk in a move that outraged farmers – and was mimicked by Fonterra a week later.

“They were paying reasonably well at the farmgate, but 2016 brought a lot of that goodwill undone,” said Billing, whose family stopped supplying Fonterra 18 months after the move.

“There is a bit of angst out there with some people who got burnt by Fonterra. Farms went to the wall, families were put under a huge amount of pressure.”

The milk price cuts led to the creation of the ACCC-enforced dairy code of conduct and sparked a class action against both processors that was eventually dropped for Murray Goulburn but led to Fonterra paying out 350 farmers in a $25 million settlement.

Industry observers expect that Fonterra’s competitors Saputo and Bega, which licenses its brand to Fonterra, are best poised to take a look under the hood.

But acquisition may not be straightforward and could require the approval of the Foreign Investment Review Board (FIRB) and the competition regulator.

“Bega and Saputo are potentially going to have more headwinds around regulator approval because they’ve already got big market share,” said Rabobank senior dairy analyst Michael Harvey.

“It’s a big transaction. It’ll fundamentally change the look and shape of the industry … It would be one of the biggest acquisitions or sale of a dairy company since Murray Goulburn was sold to Saputo.”

How did we get here?

Over the decades, farmers have faced multiple setbacks in the form of natural disasters such as drought and flooding, the effects of climate change and supply chain complications that emerged from the COVID-19 pandemic that pushed up the price of essential input costs such as feed, electricity, fuel and fertiliser.

All this has dampened the ability of farmers to invest in their operations: the average cost of a natural disaster comes to about $1.4 million per farm, according to a recent farmer wellbeing survey by Norco and the National Farmers Federation (NFF).

“Business in Australian dairy is not easy,” said Norco chief executive Michael Hampson. “It’s not a high-margin game by any stretch of the imagination.”

Grocery retailers have also played a role in keeping consumer milk prices low. Supermarket giants Coles, Woolworths and Aldi introduced $1-a-litre milk around 2011, and the price of private-label milk didn’t budge until 2019.

In 2016, many Victorian dairy farmers exited the industry after the federal government’s response to that year’s drought was to initiate a water clawback plan in the Murray-Darling Basin, impacting water availability for farmers.

“The Murray-Darling Basin Plan has removed about 400 million litres of milk out of Victoria, just because of buybacks and water reforms,” said Billing. “That’s impacting communities up there as well, it’s not just the dairy farms.”

On top of that, dairy farmers keen to invest and expand their operations are faced with an unfriendly environment. The price of farmland has tripled in the past decade and hit record highs in 2023, according to Rural Bank. Fierce competition with farmers of other industries, such as beef and sheep, and difficulty obtaining loans has made it harder for dairy farmers to expand. Dairying land is also being purchased by Canadian superannuation funds and turned into timber plantations, Billing observed, reducing the amount of land dedicated to producing food.

The result has been a shrinking milk pool and dwindling exports. In 2004, Australia’s dairy industry produced 11 billion litres of raw milk, which fell to 9.3 billion in 2014, according to data from the Australian Dairy Products Federation (ADPF). The current season is estimated to fall around 8.3 billion.

In the past 18 months, more than 10 dairy processing facilities have announced closures. Norco is now the last fully farmer-owned dairy co-operative.

“The amount of milk that was bought and processed by 100 per cent farmer-owned entities has gone from probably 85 per cent to just Norco,” Hampson said.

Three of the big four dairy processors are foreign-owned: Fonterra is New Zealand-based, Saputo is Canadian, and Lactalis is French. Bega is an ASX-listed $1.3 billion entity.

Hampson says farmers are only one group of stakeholders among several that these corporations must juggle.

“For all these other [entities], it’s about offshore shareholders … and obviously requirements to pay dividends to those people, which means the motivations at play aren’t necessarily what they used to be 25 years ago, about supporting the farmer. It’s about corporate profits,” Hampson said.

Fallout

Despite efforts to encourage Australians to shop local, the cost of living crisis has driven shoppers to favour more affordable options. Products from New Zealand, where dairy farmers are paid less, are making their way to Australia.

And we’re consuming more of it: imported dairy products rose 17 per cent, largely from New Zealand, but also from the US and Europe, in the 2023 financial year. This means about 30 per cent – or 344,000 tonnes – of dairy that Australians consumed were from overseas, a 25 per cent jump from the year before according to ADPF figures.

At the same time, our exports fell by 16 per cent between February 2023 and January 2024 compared with the year before.

“Consumers, retailers and food service have clearly all accepted imported dairy products freely interchanging with Australian cheeses and butter,” stated the federation.

Fonterra did not make Oceania managing director Rene Dedoncker available for interview. In a statement, Dedoncker said he wanted to assure farmers that all existing supply contracts at the time of sale would be honoured in the event of any divestment.

“These contracts are vital to our business. Any purchaser of the business would then be obligated to comply with the terms of agreements until expiry of the term of the agreement,” he said.

Billing worries about what will happen to rural communities and jobs if Fonterra’s manufacturing sites are shut down.

“Cobden, Stanhope, Darnum [in Victoria] would nearly fall off the map, I think, if those processing sites didn’t exist. They’re large employers of those regional areas,” he said.

But he sees an opportunity for brands such as Western Star butter, born in western Victoria nearly 100 years ago, to be returned to Australian hands. “It’s an iconic Australian brand. It’s like Vegemite.”

All eyes will be on June 2, the deadline for when processors have to announce the minimum prices they will pay farmers for milk.

“As a dairy farmer, we are price takers,” Billing said. “We need to have competition in the processing market so that we are not beholden to a single big player, particularly if it’s a multinational.

“As more multinationals come into our food production framework and supply chains, it just worries me about food security. Australia has never really had to worry about food security.”

Billing and Hampson are unanimous on how consumers can help local farmers.

“We really need consumers to buy Australian product,” Hampson said.

“Consumers, I think, need to be aware that yes, they’re cheaper product coming in – but it’s off the back of farmgate prices in New Zealand being lower than Australia’s,” said Billing.

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