US deal offers significant premiums to Synlait suppliers

Canterbury-based dairy processor Synlait Milk [NZX: SML] has formed a new partnership with US baby products manufacturer, Munchkin Inc, that could offer its 161 farmer suppliers a chance to earn well above the normal payout.

Munchkin, a privately-held Californian company known for designing, manufacturing, and distributing innovative infant and toddler products, is planning to launch a new grass fed branded retail-ready infant formula into the United States and China. It will be manufactured exclusively by Synlait.

Synlait managing director John Penno says the partnership will help the dairy processor reduce its exposure to China.

"We are cognisant of ensuring our infant formula business does not become overly reliant on the China market, and so Munchkin, with its focus on the United States market, is a potentially important addition to our growing portfolio of retail-ready infant formula customers," he says.

The raw milk used to manufacture the infant formula is subject to a new grass fed standard which requires cows to be exclusively grazed on a pasture and crop-based diet, with no grain feeding or feed not grown in New Zealand. Farmers will be independently audited to ensure they stick to the standard.

Munchkin chief executive Steve Dunn says the company's forecast gross revenue for the 2015 financial year is more than $US300 million, and he expects the new grass fed infant formula business to contribute significantly to its bottom line over time.

Synlait is looking for up to 25 suppliers, depending on size, to join the grass fed standard. The carrot is a premium for their milk, above the $5.50 per kilogram of milk solids the company has forecast as its farmgate milk price for next season. This season's milk price is expected to be between $4.40/kgMS and $4.60/kgMS because of continued low global dairy prices.

Synlait won't reveal what the premium for grass fed will be, but it's expected to top the existing range of premium earning options it provides farmers which include A2 milk, Immuron Colostrum and its best practice dairy farming programme, Lead with Pride. The company doesn't reveal what premiums are paid for A2 or Immuron although it does for Lead with Pride. Farmers on the internationally recognised 1SO 65 dairy farm assurance programme are split into two bands, with Gold-Plus accredited farmers receiving an extra 6c/kgMS and Gold-Elite an extra 12c.

Only one supplier has made Gold-Elite status to date. Synlait has eight certified suppliers under the programme and a further 15 due to be certified in July.

Synlait says the grass fed programme will pay significantly above that 12c premium "given the value of the milk for us", a spokesman says.

Penno says the company's focus is on ensuring it continues to provide its milk suppliers with opportunities to earn more for their milk, over and above the base price.

Synlait also says its "doors are open" to new suppliers generally for the next season to cope with increased demand.

Synlait Milk's shares traded at $2.51, down 26% for the year.

(BusinessDesk)