KEY POINTS:
You can see the crane on the horizon well before you see the 140 workers scurrying among the concrete and stainless steel.
A few metres off State Highway One, at Studholme in South Canterbury, New Zealand Dairies is building a new $140 million dairy factory.
The new factory
will start accepting milk from August. It is one of three new dairy companies scheduled to start processing milk in the next two years - the others are Synlait in Canterbury and Affco, through Dairy Trust, near Invercargill.
Since Fonterra last month announced a record payout next season of $5.53 a kg of milk solids, land prices for land suited to dairying have risen by up to 10 per cent and there was plenty of talk of sheep farmers, disillusioned with low lamb prices, converting their farms.
Despite unprecedented international demand for dairy products, it has not been an easy road for new processors.
There have been changes to the board of NZD, including new chairman Australian Peter Lavery, and a capital injection by Nutritek Overseas from Singapore, which is underwriting $24 million in capital raising.
Nutritek, a US$300 million Russian-based company, operates 11 dairy plants in Russia, Estonia and Ukraine producing milk products, infant formula and specialised nutrition for babies and infants.
Lavery said Nutritek could end up with 35 per cent of NZD, allowing the company to complete in one year almost two stages of redevelopment at the former vegetable processing factory near Waimate.
One milk-drying plant was expected to be ready by August with the second dryer operating in time for the 2008-09 season.
Lavery described Nutritek as "pretty irresistible".
"While providing new capital, Nutritek also offers NZD a distribution network for its products in Russia, Western Europe, Southeast Asia and China. They offer us big marketing outlets for premium products and they can also bring a lot of technological expertise to bear for us," said Lavery.
That will allow NZD to produce specialised milk powders which command premium prices. Milk will be collected by a contractor within a short distance of the Studholme factory.
Lavery declined to reveal the amount of milk NZD will collect each day, the distance from the factory of its catchment, or how much powder it will produce.
But deputy chairman Ad van Leeuwen reputedly runs 9000 dairy cows on farms north of the Waitaki River. Lavery described farmers who have committed milk to the factory as "adequate" and he appreciated some farmers would want to see the company up and running before committing.
Any shortfall can be sourced from Fonterra under provisions allowed for by the Dairy Industry Restructuring Act and any NZD surplus will be trucked to either Fonterra or Westland Dairy Products.
Lavery said Fonterra's price can be justified given international commodity price trends, but there seems little doubt the dairy giant's record payout and bold forecasts have made life difficult for the new players.
NZD suppliers had to commit for three years by February and do not have to buy shares in the company. They will be paid on the same basis as Fonterra, but Lavery will not reveal the price.
AgInvest director Andrew Watters said the price of dairy products had risen to a new level and he believed other primary products would follow.
Banks have revised their five-year milk payout forecast on which they base their lending, from $4.50 a kg milk solids to between $4.60 and $4.70, another sign that many think the higher prices were here for the long term.
AgInvest invests in farms and agribusinesses and has predicted the milk payout will reach $6 a kg.
Watters said in an interview that he based his optimism on the fact world food inventories were low, and demand was high, Europe has scrapped its export subsidies for dairy products and the growth in biofuels will stymie the efforts of other food manufacturers to increase supply.
The price of corn has increased recently from US$2.30 a bushell to US$4.30 a bushell because of demand from ethanol manufacturers.
"The key thing is that farm feed costs have gone through the roof," he said. "Especially in the United States but also in South America."
This means competing dairy manufacturers, which use grain for up to 90 per cent of their stock feed, cannot respond to growing international milk prices. Watters is confident the same conditions will flow through to sheepmeat and beef prices.
AgInvest owns eight Southland dairy farms and eight in the North Island. It paid $25 a kg milk solids and $28 kg milk solids for two it bought in Southland last month.
Watters said there was a risk dairy hype could drive up land prices and costs, but it was important not to compromise the criteria on which investment decisions were made.
"Your view of farming should not change because of one good year," he said. "Don't let hype overtake commonsense."
-OTAGO DAILY TIMES
