Fonterra expects to invest on average $500 million of new capital expenditures annually in New Zealand.


These investments include new plant for growth capacity and planned programme of maintenance and upgrades.


Fonterra chief executive Andrew Ferrier outlined the need for new stainless steel for efficiency and growth at the co-op’s special general meeting last month.


He says Fonterra continually strives for new benchmarks of efficiency as it seeks to lower the cost of processing milk, to maximise the milk price.


Recent projects like the drier 4 at Edendale (ED4), Southland are showing what can be achieved when massive scale is combined with the latest technology.


The cost of producing a tonne of powdered product at ED4 is around 30% lower than at its other Edendale plants.


“In a perfect world, all our plants would be on a par with ED4, or with the likes of our new drier 3 at Clandeboye,” he says. “But of course, we can’t overnight simply replace perfectly good, if slightly inefficient, stainless steel.


“But in those areas where we have a growing milk supply, we can raise the bar on our manufacturing efficiency more quickly as we develop new facilities.”


Growing supply helped the business case for ED4, and it’s also behind Fonterra planning for a new plant at Darfield, central Canterbury that it expects to open in late 2012.


But Ferrier also points out that building new stainless steel is capital intensive.
The cost of ED4 might have been spread over several financial years, but the total investment was around $212m.


He says last financial year (2008-09), ED4 represented 27% of its total capital spending.
“Think about that – one of every four capex dollars that year went into a single plant at just one of our sites.


“Including the big ticket items involving new plant for growth capacity and our planned programme of maintenance and upgrades, we expect to invest on average around $500m of new capex each year in New Zealand.


“Investing to overhaul our supply chain and to obtain scale and cost efficiencies from new stainless steel is aimed at improving the milk price.


“A more secure capital base therefore goes hand in hand with our milk price objective.”


At the meeting Fonterra shareholders voted unanimously to start the ground work on Trading Among Farmers (TAF), a platform which will allow them to trade shares among themselves.


TAF will spare Fonterra spending large sums of money on buying back shares from farmers who either exit the co-op or give up their dry shares.
In the 2007-08 season affected by the drought, the co-op paid $600m for redeemed shares.


A more stable capital base will allow Fonterra to invest for growth capacity.