$555m Fonterra investment for Waikato and Southland

Fonterra [NZX: FCG] is investing $555 million to establish a high-efficiency milk powder drier in the North Island as well as significant upscaling of its South Island milk processing capacity.

The dairy cooperative says it has been given resource consent to build a drier at its Lichfield site in South Waikato capable of processing up to 4.4 million litres per day and is similar in size to the world’s largest drier at Darfield, which produces up to 700 metric tonnes of whole milk powder per day.

Concurrently, in the South Island, Fonterra will install three plants at its Edendale site in Southland.

This will comprise of a milk protein concentrate plant capable of processing 1.1 million litres per day, a reverse osmosis plant that will increase capacity on an existing drier by 300,000 litres per day and anhydrous milk fat plant capable of processing 550,000 litres of milk into cream a day.

“Our strategy is to increase earnings by driving more milk volume into higher-value categories globally by turning the wheel from commodities to higher-margin products,” Fonterra’s chief executive Theo Spierings says.

“By creating more options for our New Zealand operations we are better placed to be able to make the product mix that delivers the greatest returns to our farmers and meet the needs of our consumers and customers worldwide.”

Fonterra managing director of global operations Robert Spurway says the cooperative has to ensure we have the right balance with having the capacity to cope with additional milk produced during the peak of the season, while making sure we avoid having millions of dollars’ worth of infrastructure standing idle in our quieter months.

“There will be 50 fulltime jobs at Lichfield once the drier is complete and 25 more roles will be created once the plants are finished at Edendale. That’s on top of the hundreds of builders, labourers and others who will be working during the construction phase,” Mr Spurway says.

Fonterra Shareholders’ Council Chairman Ian Brown says there is a direct link between the $555 million investment in the Lichfield and Edendale sites and the $615 million investment in the partnership with Beingmate in that both align with the Fonterra strategy of increasing the volume and value of our milk.

“The investment in New Zealand operations is a real positive and will optimise the Milk Price we receive by enabling our Co-op greater flexibility in deciding which products our milk goes into and when.

 “The added employment opportunities in the construction phase and, long term, within our factories will also prove to be a welcome cash injection for the local communities,” Mr Brown says.

In a separate announcement only minutes before the Waikato/Southland plants and Beingmate investments just after 1pm today, Fonterra confirmed it has maintained its forecast farmgate milk price for the 2014/15 season at $6.00 per kgMS.

Along with a previously announced estimated dividend range of 20-25c a share, the forecast cash payout for the season is $6.20-6.25.

Fonterra chairman John Wilson says the decision to maintain the forecast farmgate milk price reflected the longer-term outlook for international prices fordairy.

“Current market views supported by our own forecasting indicate commodity prices improving later this year or in early 2015, with global demand for dairy continuing to grow year on year. 

 “While the long-term market fundamentals remain sound, we need to recognise that the current market conditions are difficult and there remains further downside risk.

 “There is still volatility. This reflects challenges with supply and demand following a good dairy season globally.  Given these factors, the forecast is our best judgment at this time,” Mr Wilson says.