Harvest in the rain

Westland Milk Products is probably the only dairy company in the world that uses rain as part of its marketing strategy. A video on its website has a voiceover proudly stating the remarkable fact that the West Coast measures rain in metres rather than millimetres as it shows a farmer battling through the precipitation.

The wild nature of the region, sandwiched between the Southern Alps and the Tasman Sea, the ability to farm in one of the wettest places in the world and the fact those cows are predominantly grass-fed gives the company the differentiation it needs to compete on the world stage.

It has always had those points of difference, but in the past three-and-a-half years it has also had the capital it so desperately needed to make higher-value products and fight for shelf space in some of the toughest markets.

When China’s largest dairy company, Yili Group (Inner Mongolia Yili Industrial Group), bought the former co-operative back in 2019, there was a sense of loss and resignation for many farmers. But it had been a hard road for too long with low payouts and even a clawback of payout one year.

It has been quite a turnaround in performance and morale since then. The company continues to pay farmers 10c/ kg MS above Fonterra’s payout each year – which is above its initial guarantee to match Fonterra’s farmgate milk price – and farmers have finally been able to catch up on long-overdue capital expenditure on their farms.

 

Yili pumped $40 million into a fully refurbished Hokitika butter plant so the company can now put more butter into retail and food service formats which moves it up the value chain.

Moving away from commodities production into higher-value dairy products is the crux of the company’s marketing strategy and though that is a goal for most dairy companies, Westland’s higher-value products in 2022 accounted for 72% of its total revenue.

Last year, Westland’s revenue topped $NZ1 billion and delivered a profit of $NZ39m. That was a 27% increase in revenue on the previous year which had loss of $82m. That turnaround was brought about by a mix of factors including record milk prices, an 11% increase in milk production and increased sales as well as reduced waste and reduced costs of production.

While it is a Chinese-owned company understandably driven to increase its own profits, farmers have more money in their pockets, their farms are increasing in value and the West Coast-Canterbury economies benefited from $535 million through milk payments in 2022.

From the success of 2022, Westland has been cautious about expectations this year with downward global milk prices, ongoing impacts of inflation, political instability around the world and war. Though the global milk supply is down, so is demand. Which makes its added-value strategy all the more important.

About 80% of Westland’s milk is collected from about 400 farms on the West Coast, spread between Karamea at the northern tip of the region and Haast in the south. The other 20% is collected from farms in Canterbury with a climate that makes the two regions as different as two separate countries.

While the company has a plant at Rolleston, Canterbury, and collects winter milk from some of the region’s farmers, Hokitika remains the hub for Westland’s production, including its Westgold butter brand which was launched into 570 Walmart stores in the United States last year.

Westland’s general manager sales and marketing, Hamish Yates, describes the US market as the holy grail for retail butter, so it is a huge opportunity for the company. Dairy is very much part of the American diet, resulting in high dairy consumption per capita and he says it has been incredible for the company to get an imported butter into that market.

As exciting as it is for the company to access such a lucrative market, and Hamish says it will become a major market that will probably represent between 20 and 25% of Westland’s total butter volume next year, he is cautious not to get caught up in that excitement.

“You have to be careful not to be dazzled by the excitement of such a large population market with good premiums available. It’s important not to get caught up with that and chase it and then find 50% of our volume is going there. We want diversity.”

The launch into the US market was not without its challenges. Hamish says the launch had been a long time coming because although Walmart approved the deal back in 2019, Covid-19 came along and like many supermarkets around the world, the retail giant put a pause on new products.

When it finally got back on board last year, Westgold’s gold packaging around its butter prompted a lawsuit from an Irish competitor which also has gold packaging on its Kerrygold brand. The matter was resolved out of court and the packaging similarity was short-lived because Westland was already in the process of transitioning to new packaging for Westgold that better depicts the West Coast environment.

Now the rugged coastline near Punakaiki is wrapped around Westland’s salted butter, while Graeme McNabb and Rachael Anderson’s farm in the Kowhitirangi Valley is the picture of its unsalted butter on supermarket shelves around the world. They moved to the Coast from Canterbury five years ago, at a time when Westland’s payout was low, but were drawn to the region and particularly the farm they bought. It lies on the lower hill country that borders the rainforest, with the Southern Alps a pretty spectacular backdrop.

“It’s absolutely stunning and hence that’s why it’s on the packaging,” Graeme says.

He admits a co-operative dairy company was part of the attraction and he was sad to see it go. But he also has trust in Yili’s ability to make Westland a successful milk company and says Westland’s chief executive Richard Wyeth is doing a good job. He trusts Yili will look after its suppliers beyond its 10-year guarantee to match Fonterra’s farmgate milk price.

“I don’t have any fears they won’t treat us well after 10 years because they want our product. I think there are a number of farmers who are quite concerned about what happens after 10 years, but I think they want our product and they’ll pay to make sure they keep us.”

He says the longer Yili owns Westland, the more confidence farmers have about their future under Chinese ownership.

“The performance of the business in the last 12 months has broken a few records for Westland and that must give farmers more confidence.

“It’s Yili putting its money where its mouth is,” he says. “Farmers think about consumers more because that’s the message we get from the dairy company. Their focus is 100% on what their customers want.”

He can see the Hokitika dairy factory on the other side of the Kowhitirangi Valley from the farm’s elevated position. Tucked in close to the alps guarantees an annual rainfall of 4.5m on the farm – measured in metres just like the video said.

“When it rains, it absolutely buckets down, but we get a lot of beautiful days. I find it a great climate and this country is used to that level of rain, so it copes.”

Graeme and Rachael’s farm, like the Punakaiki coast, are the image Westland wants to capture and market as it competes with other dairy processors for a share of the market. As its website says, ‘from the wildest places comes the purest ingredients’ and added to that Hamish says it cannot oversell the West Coast’s predominantly grass-fed farming system.

“It’s all about differentiation – there are a lot of dairy exporters in New Zealand and one rather large one we compete with on a daily basis,” Hamish says. “It isn’t enough for us to be just another New Zealand dairy processor. Everything we do in our marketing is representing that we are the essence of New Zealand dairy – we’re the best parts.

“Given the unique farming landscape we have on the Coast, that’s something none of the others can compete with. That proximity to the Southern Alps and the fact on the West Coast we’re sandwiched between the alps and the Tasman Sea is something that is only ours. So that differentiation of provenance is really important.”

As he says, the proof is in the pudding and the Westgold brand on butter, UHT milk and UHT cream continues to grow from strength to strength, whether that is due to its grass-fed claims, or just its natural geography that he describes as quite special.

“I think the fact we can sustain a premium price position versus our competitors in many of our markets is proof.”

The company used the grass-fed card to compete with other ‘milks’ in a new advertising campaign for its butter launched in New Zealand and Australia last year. Fun one-liners poked fun at anti-dairy with ‘made with milk that’s actually milk’, ‘from the parts of New Zealand that oat milk hasn’t reached yet’ and ‘plant-based since 7000BC’.

While butter is on a roll for Westland, its Westgold brand has been around since 2004 and the butter was launched into NZ supermarkets as a 400gm package in 2016 – the same year it won a champion butter title in NZ. It is now sold in 18 countries and in 2022 alone its volume grew by 58% on the previous year.

Adding value to the milk strategy

Adding value to its milk is a strategy that has also been around for a few years. The former co-operative recognised the need to differentiate its products through its heritage and location, while acknowledging high-value products were key to its success. Back in 2017, Westland’s focus was to move closer to the consumer through retail and food service channels.

Katie Milne was a director of the co-operative back then – at the same time she became Federated Farmers’ president – and she says everything was lined up to go down the added-value path, but farmers simply could not afford to wait.

“No-one could afford to wait to see if it could work. And paying back the debt that had accrued in the meantime was always going to mean there was a period of having to pay down a bit of debt which meant it wouldn’t go into payout.”

She says it could have been a long time before farmers benefited from the strategy and farmers were losing faith.

When Yili took over, it not only paid farmers for their co-operative shares and a promise of higher payouts; it also brought capital and expertise to Westland to turn those goals into reality.

“It is really good to see that the value-add strategy that we had proposed and tried to chase, is paying dividends and that is great. It’s a shame it’s not all in our pocket, but it’s bloody good. It’s still our product and we still have that pride that it is our grass-fed milk that is allowing them to thrive like that.”

Katie says farmers are enjoying less stress, knowing they will be paid 10c/ kg milksolids (MS) above Fonterra’s payout. Any doubts farmers had when Yili took over Westland seem to have disappeared. Yili has thrived and the company keeps farmers well informed, which it does not have to do, she says.

“We do still feel like we’re all part of it,” she says. “It’s good to see that those guys who would have preferred if we could have stayed alone, now see it is the best thing that ever happened. It saved them from the bankers – it saved them from going under, honestly.”

She says the only fly in the ointment is that Westland’s payout follows Fonterra when it falls, even with the value-add strategy.

“It would be nice to think that if they really go hard and the strategy keeps bringing in huge profits for them, that there might be an opportunity down the track to help us a little bit more. Clearly, they don’t have to.

“But the more loyalty we show, there might be an opportunity for them to cement that really good relationship even further and encourage farmers to produce a bit more milk for them. I know they’re looking for more milk at the moment, so that’s another sign of good confidence.”

Charting a clearer course

Hamish Yates has been with Westland Milk Products for eight years, working for the co-operative for a few years and through the uncertainty as it sought to clarify its future, before Yili took over and charted a clearer course.

“Without the access to the level of capital that we never had as a co-operative, the ability for us to move and escalate quickly was incredibly limited. Commodity-linked revenues onfarm go through cycles and farmers understand that. The biggest and most important point we are focusing on to ensure the stability and security of processing our farmers’ milk is about making sure we are always above the benchmark.

“So, if Fonterra is that benchmark, then everything we are doing needs to be slightly better.

“We need to do things slightly differently and we need to think a bit differently. While payouts to farmers may continue to go up and down, as they will in any commodity cycle, it’s our job to make sure we are doing better than the average and that’s where the value-add strategy comes into play. It’s really focusing on what our customers want and aligning ourselves with customers.”

Those customers increasingly want to know where their food is coming from, that farmers care about the environment, they are looking after their animals well and they are socially responsible, he says. They are must-have items just to get a foot in the door before focusing on that high-value conversation, which is why Westland has introduced its Grass-fed Guarantee offering and Non-GMO certification for select customers. It is also why the company will be targeting gold EcoVadis accreditation this year to provide proof of its business sustainability achievements and why it will produce its first-ever annual sustainability and corporate social responsibility report.

While Yili has been able to inject essential capital into Westland, Hamish says it has brought far more than just capital to the business. It has also brought structure and discipline, instead of the reliance on gut decisions that, he says, was often relied on. Now, staff have support from an in-house innovation team and commercial finance business partners. The business has access to two Yili innovation centres (R&D) including one at Lincoln and another near Amsterdam. Improvements have been made across the business by minimising product losses and reducing the costs of production.

“The insights we have now – the understanding of how much it costs to make something and the scenario analysis of processing milk either ‘this way’ or ‘that way’. All that is now at our fingertips and much of that has been driven through changes of leadership.

An added-value strategy is not new for a company producing a commodity product because, as Hamish says, the closer they get to consumers, the more margins are on the table. Westland’s retail and food service portfolio has had a massive increase in the past five years and now represents about 50% of the company’s revenue, including butter, UHT milk and UHT cream.

Project Goldrush was Westland’s plan to sell more butter direct to consumers and that led to the investment in increased retail butter packing capacity. It also led to the purchase last year of the North Island butter processor Canary Foods which puts butter into squeezable, individually portioned, compostable butter packs for the hospitality sector.

Canary was established in 2001 and exports 75% of its dairy products which includes the world-first compostable single-serve packages of butter. It slots right into Westland’s added-value strategy and the timing was right with the completion of the $40m investment of the Hokitika butter plant. The plant does not make more butter – it enables the company to put more of its butter into those retail and food service formats which moves the butter up the value chain.

These include butters infused with garlic and parsley or chilli and garlic. More than 100 Westland employees took part in internal research to determine the best flavours to launch the Westgold infused butters. The goal is to continue to expand the range into markets where other Westgold products are being sold.

In April, the company launched its new Westgold spreadable butter, a blend of its butter with sunflower oil grown and pressed by The Good Oil in South Canterbury.

Beyond butter, Westland has the technology to produce high-value niche bioactive products such as proteins, bioactives, lactoferrin and ingredients for infant nutrition. The latter is part of a shift away from formulated base powder manufacture to focus instead on the production of premium, paediatric-grade ingredients for supply to infant formula manufacturers. Among its protein solutions are casein, whey protein concentrate and milk protein concentrate which are ingredients added to such things as sports supplements, coffee creamers and nutrition products. Through 2023 the company plans to broaden categories including extensions to its milk protein and whey protein concentrates offerings, caseins and bioactives.

Segregating A2 milk is a work in progress. Westland began trials with A2 milk five years ago by testing cows for the A2 protein. The Coast has a high number of Jersey and Jersey-cross cows and the company encouraged those with herds that already had 75% A2 genetics to get their herd to 100%. The company offered a premium for A2 milk and the number of farmers wanting to get on board for the premium far outweighed its establishing market requirements. The gate is currently closed to new farmers joining the A2 scheme until market opportunities have been developed further. In Canterbury where some farms have the ability to milk part of the herd through winter, the company gets that much-needed continuity for production of products such as UHT milk.

Hamish says it has been a remarkable ride with Yili and he expects more of the same.

“I can honestly say, hand on heart, that being part of a winning team, knowing we have wider support to make really sound decisions and continue that momentum into the future, the change has all been worth it. It has been incredible to be part of it.”Yili’s latest investment in Westland Milk Products is a $70m new lactoferrin plant at its Hokitika facility which will make the company one of the world’s leading producers of highly-prized bioactive ingredients. Lactoferrin is a minor protein in milk with growing international demand because of its reported health benefits.