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Keith Woodford discusses the implications of A2 and Fonterra working together

Rural News
Keith Woodford discusses the implications of A2 and Fonterra working together

By Keith Woodford*

The joint venture agreement between Fonterra and The a2 Milk Company (A2M) to work together producing dairy products free of A1 beta-casein is a seismic shift for both the New Zealand and global dairy industries. Fonterra has consistently expressed strong negativity for close on 20 years about such products – known colloquially as ‘A2 milk’ - and as recently as 2016 the Fonterra CEO said it was just a ‘marketing concept’.

In essence, Fonterra has done a U-turn. It won’t have been an easy decision. There will be some challenges explaining and defending the U-turn to its 10,000 farmer members, most of whom, having listened to Fonterra’s previous messaging, have yet to start converting their herds.

Despite the challenges of the A2 versus A1 issue, Fonterra has now decided that continuing to fight against the A2 cause was a losing stance. This has to be the start of a fundamental repositioning for the future.

Within Fonterra, there have been supporters of A2 for a long time, and at least two directors began their own herd conversions many years ago, even before becoming Fonterra directors. But until now, the corporate line has been dismissive, within a framework where contrary views have to stay private.

Fonterra has now become the first of the international dairy majors to embrace the A2 concept. The other majors – such as Nestle, Danone, Arla, FrieslandCampina, Yili and Mengniu – will all have been giving thought as to how they should meet the emergent challenge of A2. But to see their ‘fellow major’ Fonterra make the first leap will have come as a big shock.  The dairy world is indeed going to change.

Until now, A2M has had a Western-World plus China monopoly of bovine milk that is free of A1 beta-casein.  India does produce lots of milk from both buffalo and native indicus cattle that is free of A1 beta-casein. Similarly, the native cattle of Africa are all A2. Sheep, goat and indeed human breast milk are also free of A1 beta-casein. But for mainstream milk supplies across the Western World, this is something new.

The big winner from the joint venture is going to be A2M.  I have been suggesting for the last two years that the phenomenal growth of demand for A2 products would out-strip the ability of their current suppliers in New Zealand and Australia. Indeed, 78 percent of the A2M revenue and all of the a2 Platinum infant formula comes from approximately 60   predominantly large-scale Synlait suppliers in Canterbury. Until now, the A2M perspective has been that supply is not an issue, but with raised business horizons, that has now changed.

A2M shares are currently trying to find their new value, having increased more than 35 percent in two days. However, some of this is due to the concurrently announced outstanding physical and financial results for the first half year of 2017/18.  The shares are now above $NZ12, having increased 150 times their value of ten years ago when they were just a few cents.

There is likely to be ongoing share price volatility for A2M. Depending on the hour of the day, the market capital value of the company can vary between either less or more than the value of Fonterra. But the big message is that A2M now has a market value, like Fonterra, of about $10 billion, despite only having between two and three percent of the milk supply that Fonterra has.

Over at Fonterra, the farm-level benefits of the joint venture will fall unevenly amongst Fonterra’s farmer members. Farmers with multiple herds can quickly test their cows and re-organise so as to have some herds that are pure A2. However, for farmers with only one herd, the herd conversions journey will take about 10 years even with DNA testing. The precise time for conversion will vary depending on starting point and the specific strategies. 

There is a range of strategies that farmers can use to speed up the conversion process, but all of these come with additional cost.

The first goal for any farmer converting to A2 is to ensure that all replacement calves are A2. At that point, the typical farmer will still be six years away from having a pure herd. So, this is really something that the big farmers are going to benefit from, at least in the short and medium term.

If most farmers now choose to convert to A2, then LIC, as the major supplier of semen, is going to have a challenging task. The LIC bull-breeding chain runs for six years from when a bull calf is conceived until it is progeny tested.  So, there could be a lot of bulls coming through the system that will no longer be wanted.

There will be kickback from some farmers who are not convinced of the need to ‘go A2’.  Fonterra will also be very careful in its messaging to ensure that consumers are not scared off ‘A1 milk’, as they will have plenty of this to sell for the next ten years.   So, all messaging to farmers will be soft messaging, and consumer messaging will be soothing.

In marketing language, one never ‘destroys the existing category’.  This was precisely the message from the New Zealand Dairy Board (NZDB) in pre-Fonterra days when the question of A1 versus A2 milk first arose at the New Zealand Dairy Group, which was the biggest New Zealand dairy company at that time. From that time onward, the New Zealand dairy industry went into defence mode in relation to A2, and ran with a strategy that the best defence was to be dismissive.  For a long time, that strategy seemed to work.


Disclosure of Interest: Keith consults internationally for a range of dairy companies that hold a range of stances in relation to A2 Milk.


*Keith Woodford is an independent consultant who holds honorary positions as Professor of Agri-Food Systems at Lincoln University and Senior Research Fellow at the Contemporary China Research Centre at Victoria University.  His articles are archived at http://keithwoodford.wordpress.com. You can contact him directly here.

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28 Comments

Exciting news. I wonder if a similar result could be achieved from marketing milk from cows exclusively grazing pasture, as opposed to having various other non-bovine aligned supplementary feeds tainting the product.

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Fonterra do seem to have a head in the sand, We Know Best attitude to their customers. Maybe I'm being unfair, but they seem an arrogant bunch.

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Isn't it pretty standard with similar scale entities following standard corporate ideology?

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Head in the sand seems appropriate, Fonterra just added $ 3 billion to A2 balance sheet , where do their shareholders / suppliers get anything?

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RW,

From my perspective- non-farming background-i couldn't agree more. Their 2 major Chinese investments have been a financial and reputational disaster. The senior management seem to be on a par with Fletchers and the supposed owners,remarkably supine in the face of these huge failures.

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Typical Fonterra 20 years behind the market
A2 milk was staring them in the face & what did they do ? Tried to keep it off supermarket shelves
I couldn’t buy it on a regular basis years ago because it would sell out
There was a need for more A2 dairy cow herds & Fonterra didn’t want to know & hoped it was just a fad.
NZ could be so much richer if NZs Dairy leaders were more forward thinking
Maybe finally Fonterra has woken up about A2

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If in say 10 years the NZ herd (and perhaps the Oz herd) is converted to A2, or at least predominantly so, what's the end game for ATM? Their marketing advantage at the moment is selling a product that the big boys don't.

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Good point a2 isn't an exclusive competitive advantage, any dairy nation can produce it. Milk derived from cows exclusively fed pasture is limited by geography and climate.

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The end game is, A2 are the only company allowed to sell product as A1-free or label it 'A2' - this is patent protected. A2 also have patents on the technology to test whether cows are pure A2 producers. If milk producers want a premium for their A2 milk, they have to sell it through ATM or under agreement. Obviously patents run out eventually, but I believe they have quite a few running out well past 10 years from now.

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Personally I think it is a little like the Auckland Island pigs saga, its a credit to those that did the work, but there are plenty of researchers to design workarounds for patents. Copyright on the brand should hold but that never prtotected Coca Cola from competition.
They will will have a couple of decades to make money.

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And then they'll just be another poor company assailed by competition - like Coca Cola.

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In the world of the internet there isnt any brand loyalty, just sensationalism, launch you personal car into outer space for instance, playing Hotel California
For example.

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“Never protected CocaCola from competition” ?
Who uses CocaCola formula for Coke ?
Only CocaCola
Patents are not always the answer because patenting requires a description of the formula
Coke has never patented its formula

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I wasnt refering to patents at all.
I refered to the words they think are protected, and that is copyright, from memory, or a registered trade mark pehaps.
Their patents , I believe, are on testing procedures, correct me if Im wrong.
If so its only a matter of time before a work around is devised.

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In 10 years we could move the world to A2, the africans have already done it.
Those that dont will have their own reasons.

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Seeing the future first is a sign of true leadership vision as a Fonterra farmer sometimes all I can do is shake my head and wonder what we could be.

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Fonterra is still a 50% owner of the A2 patent, according to Fonterra when asked at a meeting. If it becomes mainstream it is no longer niche and the price advantage will be lost accordingly.

I think you are being overly generous positivelywallstreet in giving them a couple of decades headstart. :-)

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Well,im not usually generous.
How about A2 takes over Fonterra and NZ moves exclusively to A2.
Fonterra is then floated on the London Stock exchange and the shareholders sell out while the other internationals are on the back foot, a five year project.
Farmers pocket the money and laugh.

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Am I the only one who is having a larf at the sheer bollocks of the concept behind A2 milk ?

... a multi $ billion company has been established on the basis of A2 being better for you than A1 milk ... when , in fact , there is absolutely no scientific basis behind this ...

Of course , never let the facts get in the way of a good story .... but A2 milk ought to be on the same shelf as liver cleansing tablets , rhino-horn powders , Niagra , and anything promoted as homeopathic ...

... for those who genuinely are lactose intolerant , there's a multitude of lactose free " milks " on the market ... most of them priced at half the per litre price of the A2 product ...

... Fonterrible were right to steer clear of this mega scam !

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.

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"Absolutely no scientific basis" is simply not true. There's been a bunch of research although I admit there's been no knock-out blow yet. Huge numbers of people self-report as being able to drink A2-only milk but not standard milk. If that wasn't the case, they wouldn't command 10% of the Australian fresh milk market.

You could start by perusing Keith Woodford's site, many of his articles have been reproduced on here too.

https://keithwoodford.wordpress.com/2017/10/31/study-suggests-link-betw…

For those who are genuinely lactose intolerance, A2 is not recommended and it is not marketed at them. It's for people who suffer symptoms due to the A1 beta-casein who still want natural milk (the only difference between A2 milk and regular is it comes from cows selected only to produce A2 beta-casein, rather than a mixture of A1 and A2).

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Well,
Now that A2 is woth billions they could extend the trials, outside India, more cultures and bigger samples.
It would help clarify the advantages, which helps the share price.
And explain why careful examination of a stool is a measure of health, though Ive heard germans do it.

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Yes, and that is what they are doing. The recent results presentation shows:

One study published in the last year from China (https://nutritionj.biomedcentral.com/track/pdf/10.1186/s12937-017-0275-… - randomised, double blind, controlled N=600, A2 vs A1/A2 mixed milk, statistically significant reduction in various symptoms including abdominal pain, bloating and, yes, stool consistency though self-reported rather than a hands on examination).

Two studies submitted but not yet published (pilot study in Auckland and a Chinese study on pre-schoolers)

Two ongoing studies, in America (looking at digestive function and inflammation) and Australia (effects on Irritable Bowel Symdrome)

I agree, the more trials and the more data the better and I'm sure the company thinks the same.

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I accept that methodology, not that I am a scientist.

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Ah, the "settled science" fallacy again. Mind you, I would have taken a lot of convincing that the earth wasn't flat.

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... you know that scene from Monty Python's " Life of Brian " where a blind man wanders off , uttering " he cured me ... I was blind ... but now I can see ! " ... and he staggers away from Brian's adoring throng , only to fall head first into a hole ...

Well ... A2 is exactly 'like that .... some duffer says , " my tum tum feels better after drinking the A2 .. than aftrer drinking regular milk " ...

... and the rah rah crowd latch onto that as if it's scientific evidence ..... they're as blind as the Monty Python guy , imaging they have discovered a miracle cure , seeing what they want to see ... a flat earth with no holes in the ground ...

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Yuh,
I know Gummy,
We have to drink the Cool Aid
This is a very long game.
Keep up the good work.

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I think a2 is a no brainer, sure the financial benefits won't be instant industry wide and will petter out over time as competitors catch up, but the defferentation is worth it to my mind.
My only question mark is Fonterras motives. Are they really interested in growing value or do they see a way to stymie competing manufacturers in NZ. a2m share price may have changed but surely Fonterras number crunched figures on the underlying profitability on a kg of a2 hasn't, so why the change of mind?
Signed
Cynic

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