Fonterra is talking tough about the new competitive threat posed by meat company Affco's move into dairying.

"Anyone coming into the market needs to understand that we will be a tough competitor," Fonterra chief executive Andrew Ferrier said yesterday.

Affco said on Monday it had formed a subsidiary, Dairy Trust, to exploit dairy processing opportunities. Its annual turnover is expected to eventually be in the hundreds of millions of dollars, meaning Dairy Trust may take over from Westland as the second-largest industry processor.

Dairy Trust initially plans four processing facilities in Northland, Waikato, Wanganui and Southland.

The announcement comes after Affco's profit last year dropped from $21 million to $13 million.

Affco is controlled by fishing company Talley's, which also owns 30 per cent of Waikato dairy company Open Country Cheese. Talley's director Andrew Talley has played down the threat Dairy Trust poses to Fonterra but acknowledged unidentified potential partners in the business have dairy industry experience.

Open Country Cheese chief executive Alan Walters said yesterday his company was not currently involved with Dairy Trust but did not rule out a future role.

"It's too early to say at this stage."

The Dairy Trust development follows Fonterra's announcement in January that it would introduce "tactical pricing" next season to stop rivals pinching co-op suppliers in Canterbury and Waikato. Tactical pricing involves bidding to retain a Fonterra farmer's milk if they plan to switch to a competitor.

The Westland and Tatua co-ops said they were not involved in Dairy Trust. But Tatua's CEO Mike Matthews described the Affco move as "a natural evolution of the industry". Deregulation and current good commodity prices were an incentive to newcomers.

Matthews believed Talley's exposure to dairying through Open Country Cheese would have made the company familiar with the international dairy scene, and moving further into the industry via Affco could help the Talley family spread risk. "They're business people and they can no doubt make a call as they see fit."

DAIRY RANKINGS
2005/2006

Fonterra
Per cent of NZ milk processed 93.51
Revenue $13 billion

Westland
Per cent of NZ milk processed 3.16
Revenue $241 million

Goodman Fielder
Per cent of NZ milk processed 1.37
Revenue unavailable

Tatua
Per cent of NZ milk processed 1.28
Revenue $135 million

Open Country Cheese
Per cent of NZ milk processed 0.56
Revenue $42 million

Gisborne Milk
Per cent of NZ milk processed 0.12
Revenue $12 million

Source: Dairy Companies Association & processors