Southern Pastures LP – New Zealand's largest dairy farmland fund – has become a shareholder of co-operative Westland Milk Products.

The agreement, starting from the 2018/19 season, will add an extra four million kilograms of milksolids to Westland's milk collection annually, from Southern Pastures' nine Canterbury dairy farms.

Westland Milk, New Zealand's second biggest dairy co-operative after Fonterra, also said it had cut is farmer payout range to $6.20 to $6.50/kg, reflecting market conditions. The previous forecast was $6.40 to $6.80/kg.

Westland chairman Pete Morrison said the new forecast was competitive compared with other payout predictions in New Zealand.

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Fonterra, the biggest co-operative, has a farmgate milk price forecast of $6.40/kg.

Morrison said Westland and Southern Pastures would also conduct a business case investigation with the intention of forming a 50/50 joint venture company that would also involve Lewis Road Creamery, which is 25 per cent owned by Southern.

"The objective will be to process and distribute milk product that will be from free-range, grass-fed cows on farms that meet very high values covering animal welfare, human health, sustainability, the environment and human rights," Morrison said.

Key to the agreement was the ability of Hokitika-based Westland - a relatively small co-operative - to segregate and process milk from different sources.

"We can economically and efficiently produce separate specialty lines with very little impact in terms of cost and time management on how the plant is normally run."

The agreement will also produce an immediate benefit for Westland as Southern Pastures will bring with it premium New Zealand dairy company Lewis Road Creamery.

"This effectively creates a significant new customer for the West-Coast based co-operative with Lewis Road purchasing some of the grass-fed milk produced," he said.

Southern Pastures is chaired by Prem Maan - who is the founder and chairman of Foundation Securities (NZ) and Foundation Capital. Former All Black Graham Mourie is an executive director.

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Westland Milk fell behind its far larger competitor, Fonterra, in 2016, but new chief executive Toni Brendish told the Herald last year the co-op was closing the gap.

The co-op turned in a $17 million loss over 2016/17 and its payout at $5.18 per kg of milksolids was the lowest of all the Kiwi dairy companies.