Open Country Cheese was formed by primary sector entrepreneur and former cabinet minister Wyatt Creech and a number of other investors when the dairy industry export controls were relaxed and the industry deregulated from 2001 onwards. Shareholder funds of $30 million were raised and the company listed on the Unlisted market with 39 million $2 shares. Its present price is $2.25, giving the company a market capitalisation of $85 million. The share price has moved around between $1.50 and $2.60.

Production began in September 2004 . The purpose-built facility at Waharoa values at $29 million for buildings and cheese plant now also contains a whey powder plant, completed in April 2006 at a cost of $18 million.

In its first year of cheese production OCC took in 52 million litres of milk and made 6000 tonnes of cheese, all of which was exported, In the second year (2005-06) it used 80 million litres of milk and made 9000 tonnes of cheese. This year (2006-07) it is budgeting for 160 million litres, from which will be made 18,000 tonnes of cheese and 8000 tonnes of whey powder.

It will take its full entitlement of 50 million litres of milk from Fonterra, the dominant industry player, and all the milk produced by more than 100 contracted local dairy farms, within 20kms radius of the plant.

Full capacity of the plant would be 200 million litres of milk annually, to produce over 20,000 tonnes of cheese. Without the Fonterra milk supply, OCC would need about 150 supplying farms with 50,000 dairy cows. Within 20kms radius of the plant OCC estimates there are 200,000 cows.

Present:
The OCC product mix is predominantly cheddar, with some edam, havarti, gouda, colby, kamai red and kahui. Production is tailored to individual customer specifications. Sales of bulk cheese are made to over 20 countries, including Australia, West Indies, Asia, Saudi Arabia, Egypt, Algeria, UK, Europe and Russia. OCC expects that Fonterra’s monopoly rights to dairy quota markets in Europe, the US and Japan will unwind between 2007 and 2010, giving OCC opportunities to compete in those markets with Fonterra.

OCC has three main types of customers:
Processors, who melt bulk cheddar into processed slices.
Food service, who shred cheese for pizza manufacturers.
Retailers, who repackage cheese and put their own labels on it.

OCC has purchased an unused whole milk powder plant from Denmark and is investigating where to locate it in NZ and when to build it. Options include Waharoa and the South Island. It will take a further 100 million litres of milk annually and is expected to be operational for 2008-09. The milk powder plant will enhance the company’s product range and ability to ride out the highs and lows of international commodity prices.

Further growth opportunities for OCC include more varieties of cheese, ice cream manufacture or replication of its facilities in other parts of NZ.

Financials
OCC had sales of $42.4 million in 2005-06, considerably ahead of the prospectus forecast of $34 million. This is because of record world cheese prices and movement of year-end stocks. It made a net profit after tax (NPAT) of $1.9 million. This season it is forecasting $81 million of revenue, less $70 million expenses, and a NPAT of $4 million. It prefers to reinvest profits in growth rather than pay a dividend.

Suppliers
OCC has established credibility with dairy farmers, as shown by the increase in suppliers from 26 in 2005-06 to more than 100 in 2006-07. It expects to get close to its required number of suppliers in 2007-08, when it could reduce dependence on Fonterra milk supply under the provisions of the Dairy Industry Restructuring Act 2001.

OCC pays seasonal, quality and quantity incentives for milk supply. It is keen for farmers to move to split calving herds to ensure milk supply during the winter. In June/July 2006 it was supplied by 15 farms.

Farms who switch to OCC supply can cash in their Fonterra shares at more than $6/share for every kilogram of milk solids they supply, which is usually $600,000 to $700,000. This money is then used for other purposes, including more cows and plant replacement.

OCC’s proposition to farmers is that they can free up the capital in Fonterra shares while still receiving a fair market price for milk. Unlike Fonterra, OCC does not require that suppliers of milk are also shareholders. OCC claims that it is paying more than the Fonterra raw milk payout when the costs of holding shares are included.
Hamish Thomson, a former Taranaki dairy farmers, is the field manager for OCC, who says the job is a challenge and exciting, building supplier relationships from scratch.

Dave and Sue Forsythe are supplying from their 820-850 cow herd just south of Te Awamutu. Dave did an Icehouse rural entrepreneurship course and looked critically at their business goals and achievements. A big expansion in milk solids production in recent years meant constant drain on capital for more Fonterra shares. Rather than sell up or ease off, they decided to do the numbers on exiting Fonterra and using that share capital elsewhere. The winter milk premium available from OCC was also a big factor.

They now have a 50% share with an equity manager in a dairy farm 90mins north of Melbourne in the Warragul district, which they took over on March 1. The Forsythes will remain in Te Awamutu but ease back, getting in a herd manager. The reasons for diversifying include lower land costs and higher milk prices in Australia.

Their herd is Holstein-Friesian and Jersey-cross, producing nearly 500,000 kg MS annually, at around 580kg/cow. This is achieved by feed supplementation from maize, potatoes and palm kernel, on a feed pad and Herd Home alongside the farm dairy, which is a 36-a-side herringbone. Half of the herd is autumn-calving, which provides winter milk supply for OCC. They pay a cost of the transport of milk to Waharoa because they are outside the home zone.

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