Another big costly whole-milk powder plant off Fonterra’s menu

Chief operating officer NZMP Kelvin Wickham responded to Herald questions about the short amount of time Fonterra’s $360 million, two-year-old Lichfield milk-powder dryer was used last season, and the company’s plans for its 96 processing plants given forecasts that milk growth has flatlined.

Wickham confirmed Fonterra insider claims that Lichfield only operated over the peak three to four months of the dairy year just ended.

“Returns from protein and cheese products were better, so we utilised other plants in the Waikato. This coming season (the current 2018-2019 season) we’ll run it longer because we expect to manufacture more whole-milk powder because prices are higher, as is the milk price.”

Wickham said the Lichfield build was to provide central North Island processing flexibility depending on whole milk powder prices.

“You might recall, in the 2013-2014 season the whole-milk powder price was extremely high, as was the milk price [to farmers], and we could’ve made more money if we’d had more whole-milk powder capacity, but we didn’t. It made sense to build the Lichfield dryer, which gave optionality in the central North Island.

“In 2015-2016 we actually spilled [peak] milk, and that is not a good situation.”

Fonterra has 96 processing plants on 30 manufacturing sites in New Zealand.

With milk growth widely thought to have peaked after climbing steadily each year over the past 15 years, industry observers suggest Fonterra, the dominant processor, might end up with stranded assets.

Wickham said Fonterra was “very comfortable” with its plants situation.

It had the capacity to cope with a big milk “flush” – the peak production months of September and October – and also had choices about where to send milk at any time for processing into the most profitable products.

“We have older plants. As some plants come to the end of their useful life you mothball them, put them on standby in case they’re needed. We’ve done lots of scenarios – growth scenarios, decline scenarios.

“We’re very comfortable with our buffer capacity. Milk is still going to grow and over time that buffer will decline.

“The good thing is we are very unlikely to need to put significant capital into another whole-milk powder plant for hopefully a long time. We’ll use the growth milk we hopefully get to put into value-add plants like cream cheese and mozzarella and still have the ability to switch back to make long runs of whole-milk powder.”

Asked if some older and ageing plants could be closed under a peak-milk scenario when it was not cost-efficient to upgrade them, Wickham did not want to speculate.

“We build our plants for 25 to 50 years and we have a plan of which to retire and build new ones accordingly. We are quite comfortable with the plan we have, with the new plants we’ve got, with the foot print we’ve got, but we will continue to adjust depending on the milk price.

“Some [dairying] areas are still growing, others are probably not going to grow.”

Asked if Fonterra would share its plant plan with farmer-shareholders, Wickham said the company had to be “very careful” with disclosure because of the potential concern caused to staff and communities.

“Also this year we expect whole-milk powder pricing to be much firmer than, say, cheese or proteins, but things change. That’s why we don’t close them [plants]. We keep them warm so you can staff them up quickly.

“Only if the milk drops significantly and looks like it’s not going to come back would you close a plant.”

By: Andrea Fox

Source: NZ Herald

Link: https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12080284

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