Synlait Dairy 2009

Since it opened in August 2008, Synlaits $106 million Mid Canterbury plant has been processing 1.2 million litres of milk per day into milk powder for the food ingredients market. Ultimately, it will produce small batches of specialist milk powders as ingredients in functional foods with specific health benefits. Differentiation of milk will begin on the farm rather than in the factory, with cows selected and managed to produce milk with different properties.

At the businesss official launch in February this year, management announced that they were seeking $70 million of investment to more than double seasonal processing capacity to 550 million litres.

Despite global recession, Synlait is on target to exceed sales of $100 million in the current year.

BACKGROUND

Synlaits beginnings can be traced to 2000, with the seeking of shareholder investment to help fund the conversion of a dryland sheep farm at Te Pirita to an irrigated dairy farm running 3000 cows. By 2006, the business by then known as Synlait had shares in eight farms running 8000 cows. These were then amalgamated to form a venture large enough to support the manufacture and marketing of milk.

The decision to become a vertically integrated business was motivated by the conviction that New Zealand has no future as a commodity food producer, competing with countries which can produce plant proteins more cheaply.

Synlait now owns 14 farms running 15,000 cows. Sixty independent suppliers provide about two thirds of its milk.

In 2007, Mitsui was brought in as a partner. The Japanese trading company now owns 22.5% of the business and ensures products get to customers warehouses efficiently and on time, while Synalit produces the milk products and manages sales.

Manufacturing began in August, 2008. At an official launch in February, 2009 the company announced plans to attract new equity, to support a $70 million expansion of processing capacity and product range by 2011.

The plant will handle 200 million litres of milk this season, 300 million litres next year and - all going to plan - 550 million litres in 2010/11. This compares with New Zealands around 14.1 billion litre total milk production.

FUNCTIONAL FOODS

From farm to factory, Synlait has been structured to specialise in small batch production of high-spec milk powders used as an ingredient in functional foods, manufactured to offer health benefits above and beyond basic nutrition.

Currently, the company manufactures mostly standard milk powders. These are purchased as an ingredients product by a number of mostly Asia-based companies with an interest in eventually buying specialist milk powders custom-made to their requirements.

For Synlait, the process of making milk powders with specific health-promoting properties begins on the farm, not in the factory. Cows can be selected and managed to produce a myriad of variations in their milk, says John.

Milk varies an enormous amount between cows depending on the environment where they are run, what they are fed and their genetics. We are looking at components that give milks different properties so we can combine them in different ways, producing specific powders with specific attributes.

Properties could be could be simple but sensible like heightened calcium, or very sophisticated, like changing the fatty acid composition in an infant formula and boosting levels of anti-microbial protein lactoferrin to make it more like human milk.

While initially, Synlait will focus on the food ingredients market theres a 20-year plan which includes non-food options such as pharmaceuticals.

THE FACTORY

To the untrained eye, the Synlait plant looks just like any other New Zealand powdered milk manufacturing facility. However, there are differences reflecting the ability to make small batches of specialist milk powders as well as produce in bulk.

One large dryer is now operating at Synlait with another on the drawing board. A smaller dryer with 5% of the capacity of the existing dryer - is being built. This will provide the flexibility to produce small batches of specialist powders without slowing production.

The big dryer will process two tanker loads of milk per hour, compared with two tanker loads per day for the smaller dryer, says John.

Already, the first special milks have been made, differentiated to meet the specific needs of a specific customer.

THE FARM

Synlait has 61 suppliers on 52 farms, including their own farms. Eighty percent of Synlait products value will be created on-farm, rather than in the processing plant.

Commercial sensitivity means John cant provide specifics of ways the company is planning to enhance milk. However, ways cows could be managed to produce differentiated milk could include special feeds or different milking times. Selection for the expression of specific genes is another option.

Dairy sheds are designed so different milks can be segregated into different vats.

There will be the ability to trace all milk products back to the cows which produced them.

Suppliers are paid on lactose as well as fat and protein components of their milk, providing in-the pocket feedback on ultimate market value.

RESEARCH

Synlaits novel approach to milk production demands investment of around 2% of revenue into research and development. Research is not done inside the company but is contracted out to universities and Crown Research Institutes, where there is a tremendous amount of relevant capability, says John. Government has matched the companys investment in R&D.

The focus is on finding on-farm rather than processing plant opportunities for adding value to milk.

Were not expecting benefits in the next year or two, but are looking at an around 10-year investment cycle.

Johns own background as a senior scientist with Dexcel, has helped focus Synlaits emphasis on R&D.

THE BUSINESS

Synlait has a corporate rather than cooperative structure. More than half the unlisted public company is owned by people working within it. Japanese trading giant Mitsui holds 22.5% and the rest is taken up by private shareholders, many of them farmers. The company is seeking $70 million to expand its plant from existing shareholders and investors, and also the public who can purchase shares through a Canterbury accounting firm.

The business rationale is to deal business to business, rather than selling consumer products.

We are market-led, says John. We go to our customers with options then invest in areas they show an interest in.

The focus is on the fast-growing Asian market.

John acknowledges that the current recession will impact Synlaits profitability as the value of specialist milk products will always be influenced by commodity prices. However, the company does not hold any stock in a difficult period and is quite pleased with prices being received.

The aim is to leave farmer suppliers better off financially than they would be with Fonterra, with an added attraction for some being that there is no requirement to hold shares in the company.