Fonterra, the New Zealand dairy cooperative, is poised to reshape its strategic focus following the completion of its $4.22 billion sale of its consumer businesses to French dairy giant Lactalis. The transaction, approved by farmer shareholders in , is expected to finalize within the first quarter of , delivering a tax-free capital return of $2.00 per share – equivalent to approximately $3.2 billion – to its owners.
The divestment marks a significant shift for Fonterra, allowing it to concentrate resources on its more profitable Ingredients and Foodservice divisions. According to Fonterra’s Chief Financial Officer, Andrew Murray, the consumer business consistently delivered a return on capital below the company’s target range and required higher operational expenditure. This strategic realignment aims to maximize value from every drop of milk produced by its farmer-owners, focusing on business-to-business (B2B) channels where the company believes it holds a competitive advantage.
The move comes as Fonterra reported a strong financial performance for fiscal year 2025, with a record $16.2 billion payout to its New Zealand farmer-shareholders. This success, driven by robust international demand for premium dairy products, underscores the cooperative’s strength in its core operations. The company collected 1,509 million kilograms of milk solids, generating a total revenue of $26 billion, and saw its operating profit jump 13% to $1.73 billion.
While the sale of the consumer arm represents a streamlining of operations, Fonterra is not anticipating a decline in overall earnings. The cooperative has set a goal of achieving earnings equal to those of by , even without the contribution of the divested Mainland business. This confidence stems from a focus on operational efficiency, technological advancements within its manufacturing network, and a commitment to higher-margin products.
Fonterra’s Ingredients division, which produces milk powders, proteins, specialty ingredients, dairy fats, and cheese products, is central to this strategy. The company is actively developing strong customer relationships within this segment, enabling it to innovate and invest alongside its partners. Non-reference products, which generate a return on capital of around 17% to 18%, are prioritized over regulated reference products, which yield a 5% return.
The Foodservice division, specializing in creams and cheeses for restaurants, bakeries, and food manufacturers, also plays a key role. While China remains a significant market, particularly for its Anchor Food Professionals brand, Fonterra sees substantial opportunities for growth in Southeast Asia, especially Vietnam. The company notes that despite slowing population growth in China, the expansion of a wealthier middle class continues to drive demand.
Recent market conditions have presented both challenges and opportunities. Global Dairy Trade (GDT) prices experienced volatility towards the end of , but rebounded in early , with the index recording its strongest performance in almost five years in a recent auction, rising 6.7%. This recovery is attributed to a stabilization of milk production globally and a potential easing of geopolitical uncertainties that weighed on prices last year.
Murray noted that factors such as the US government shutdown, which impacted food-stamp payments and temporarily increased US dairy exports, may have contributed to the earlier price weakness. However, with production volumes beginning to decline, particularly as the domestic season peaks, Fonterra anticipates relative stability in milk prices, barring unforeseen geopolitical shocks.
Fonterra’s long-term strategy also includes increasing its share of the New Zealand milk pool. While the cooperative’s global ranking has slipped – now seventh largest globally, and expected to fall to tenth post-sale according to Rabobank – Murray emphasized that this is not a primary concern. “I fundamentally believe that we’re still going to be selling the same amount of milk and we’re going to generate more profit for it,” he stated. Fonterra believes a strong, scaled cooperative is vital for the New Zealand dairy industry.
The completion of the Lactalis sale will result in a leaner, more focused Fonterra, positioned to capitalize on the growing demand for high-value dairy ingredients and foodservice products. The cooperative’s commitment to efficiency, innovation, and strong customer relationships underscores its ambition to deliver sustainable returns for its farmer-owners in the years ahead.
