Questions being asked over Fonterra SI plant extension

The bulk of the company's shareholders are in the North Island, and they are questioned why they are expected to provide the capital for huge investments in the South Island, where most of the expansion of milk production has taken place.

The latest expansion will involve the construction of a third milk powder plant to process wholemilk, skimmilk and buttermilk powders. It will produce 14 tonnes of milk powder per hour and process three million litres of milk a day.

The plant -- known as "D3" -- is scheduled to be commissioned on September 15 next year in time to cater for the 2003 dairy season "flush" -- two years earlier than planned for a new powder plant in Southland.

Shareholders have already asked Fonterra to review part of its capital structure two years before the review of its peak notes system was scheduled.

Fonterra partly pays for capital spending such as the Edendale expansion through the issue of peak notes, at a cost of $30 each to farmers.

The number of peak notes a farmer has to buy depends on the extent of their production over 70 days at the peak of the season -- based on the concept that suppliers with high peaks impose greater processing costs on the industry.

But the highest production peaks are on North Island farms, while the industry's extra milkflows -- and extra capital spending -- are in the South Island.

A North Island dairy farmer, Graeme Hight, of Stratford, in Taranaki, said today that the debate already under way on peak notes had been given added urgency by last night's announcement of the Edendale expansion.

Farmers he knew were concerned about about its impact on North Island farmers.

"The peak notes are complicated and expensive, and a lot of people are unhappy," he told NZPA.

Company executives have said the present form of peak notes was agreed through the merger process between Dairy Group and Kiwi, and because it was basically a compromise, was more complex than necesary.

One of the first actions of the company's new chairman, Henry van der Heyden, was to set up a "milk pricing working group", to develop milk pricing signals and develop a capital framework.

The committee has given a high priority to finding a better system for the issuing of peak notes. Fonterra's NZMP director of global manufacturing Max Parkin said today manufacturing expansion in the South Island was vital in order to cater for the expected growth in milk supply in the region next season.

"New Zealand's natural milk growth is expected to be around 2 percent this season," Mr Parkin said. "The bulk of this growth will occur in the South Island and we need the manufacturing sites to match."

The new plant would also allow for the best product mix, maximising the value of international prices for milk products.

"Additional capacity for peak milk is best targeted at milk powder," he said in a statement.

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