Fonterra's Dennington factory was always in the firing line

The 110-year-old factory was showing its age when, in January last year, Fonterra announced it would invest $8.6 million in a new packing line.

The money, Fonterra Australia announced, was part of "...a capacity expansion program worth around $165m across seven of Fonterra Australia's sites, all of which are at peak capacity".

Fonterra was riding high on the back of an aggressive recruitment drive offering farmers a bonus of 40 cents a kilogram of milk solids around $50,000 over the year for average-sized farms.

The bonus came without strings attached for farmers who were new to Fonterra and was sorely needed by existing suppliers.

Many were still locked into supplying Fonterra as they repaid loans taken by 40 per cent of suppliers in the wake of the May 2016 "clawback".

Fonterra grew its milk supply by around 400 million litres that season but, almost as quickly as milk had flooded into Fonterra, it flowed out again.

The company published an 18pc decline in milk intake for the nine months to March 31, 2019, nearly triple the 6.4pc fall in national production reported by Dairy Australia.

In a March 29 email sent to Australian suppliers, Fonterra's Matt Watt wrote: "...drought conditions and heightened competition for milk have led to lower milk volumes which is impacting our business performance."

"Lower volumes mean we have had limited ability to capture additional value to pass through to farmers."

Those two sentences rang alarm bells for prominent Colac, Vic, dairy farmer Mark Billing.

"It reminded me of what happened to Murray Goulburn and made me worry about Fonterra's ability to pay a competitive price," Mr Billing said.

"With national production shrinking to 8 billion litres, one of the processor's got to go - they can't all operate at 60pc capacity.

"With Fonterra's reputation the worst in the industry, it's likely to lose even more supply."

A member of the Bonlac Supply Company (BSC) when the 2016 dairy crisis erupted, Mr Billing understands Fonterra's position better than most.

"This season is going to be a turning point for Fonterra in Australia," he said.

"It's lost more milk than any other processor that can't be accounted for just in terms of drought, and I'm sure more suppliers are getting ready to go.

"Some suppliers who'd been locked in until now are about to become free to leave at the end of this season because they've finally paid off their Fonterra loans created by the clawback.

Fonterra's decision to follow Murray Goulburn's milk price cut bothers the former Bonlac board member.

"The BSC benchmark was used as an excuse," he said.

"Fonterra was given several opportunities to vary the milk price earlier in the season but didn't because they were afraid of losing supply.

"We've seen the impact of those decisions at farm level losing staff, cutting costs and decreasing production and now that's starting to flow onto other parts of the supply chain."

It was bad timing for Dennington, which recently lost a contract with Nestlé held since the factory changed hands in 2005.

An industry veteran described the Dennington plant as "a very old, inefficient and labour-intensive plant that's incredibly expensive to run".

"The Nestlé contract was really all that kept it viable," the source, who wished to remain anonymous, said.

"While it's very sad news, the loss of the Nestlé contract made Dennington's closure inevitable."

Still, the announcement came as a shock for farmer-supplier Norm McCosker.

"It's one of the best factories going, they've just spent millions on it over the past year," Mr McCosker said.

Dennington worker Frank Kelly said it had been obvious the factory was in trouble.

"There was no warning but the writing has been on the wall," Mr Kelly said.

"We've only been running at about 30pc capacity, so something was going to happen."

A Fonterra spokesperson told Stock & Land that, late last year, Nestlé transitioned the Dennington-made milk powders in-house.

"Even at capacity Dennington is not sufficient at scale to generate returns due to it being a purpose-built nutritionals plant that is making lower value product," the spokesperson said.

"We've tried to keep the site viable and profitable by expanding into different product formats and formulations, and last year we invested in the bagging line and other capabilities.

"However, despite these investments, structural changes in the dairy industry and the drought have led to lower milk volumes and excess processing capacity, and unfortunately the Dennington plant is just not viable in a low milk pool environment."

The spokesperson said last year the factory was at maximum capacity, having to turn away milk.

"While we have lost some farmers, we've also recruited, and our share of the total milk pool remains steady," they said.

"The reduction in Fonterra's milk intake this season is in part due to structural changes in the dairy industry since 2016, but also because of the declining milk pool due to the drought.

"In this low milk pool environment, Australian dairy needs less processing capacity, not more, so while we may evaluate options for the site, we consider the most responsible decision for our industry is to close it."

They said the assertion in The Weekly Times that two dairy companies were interested in purchasing the site was incorrect.

"We've received no contact from any dairy companies interested in purchasing the site," they said.

"These sorts of claims are really unhelpful as they give our people false hope."

The closure has left many factory workers unsure about their futures.

Jason McDonough had worked in the factory for 25 years, and said he was "shocked" by the decision as he didn't see it coming.

Anthony Bourke was set to mark 43 years at the factory in November.

Mr Bourke said he was aware the factory was not working at capacity, but he had no idea the company would close it.

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