Fonterra loses in Landcorp switch

New Zealand's biggest corporate farmer, Landcorp, plans to shift nearly one-quarter of its milk supply from Fonterra to rival exporter Open Country Cheese in the most significant challenge yet to the giant co-operative's near-monopoly.

State-owned Landcorp will pull eight Waikato farms - accounting for about 1.8 million kilograms of milk solids - out of the Fonterra co-operative.

Next season, those farms will begin an exclusive supply arrangement with Open Country, the fast-growing cheese exporter set up by former National MP Wyatt Creech in 2004.

Landcorp farms nearly 370,000ha around the country.

Chief executive Chris Kelly said the move would provide significant risk mitigation for the business as it made good sense to have a spread of products across and supply to a wider group.

The growth of competition was always envisaged by the Government when Fonterra was created with the introduction of the Dairy Industry Restructuring Act in 2001.

The act bypassed existing competition legislation to give Fonterra exclusive access to some export markets until 2007.

However, Fonterra has a near-monopoly and controls most dairy exports.

Many Fonterra critics will interpret Landcorp's shift of supply as a blow to the co-op.

Last year, Synlait - a Canterbury-based operation with 8500 cows, producing about 45 million litres of milk - pulled out to set up its own factory.

There is no love lost between Fonterra and Open Country who have a fought a long battle over delivery costs through the Commerce Commission.

Open Country is based in Waharoa (north of Matamata) in the eastern Waikato and the Landcorp farms are all in the surrounding area.

A Fonterra spokesman said yesterday that Landcorp remained a large and important shareholder and one with which the co-op maintained a good relationship.

"We're focused on sustainable growth and we're working with Landcorp and other shareholders to achieve that."

Fonterra's farmers are required to hold shares in the co-op equivalent to the number of kilograms of milk solids they supply. The amount of milk Landcorp is shifting out of Fonterra is equivalent to nearly $10 million worth of shares.

But Kelly said there were no plans to cash in those shares.

Instead, they would be used to offset new Fonterra shares required in the next two years because of the number of dairy farm conversions being done between Taupo and Rotorua.

Landcorp is converting 25,000ha of former forestry land to dairy - adding an additional 30,000 cows.

Kelly said this was not an anti-Fonterra move.

Open Country chief executive Alan Walters said the strategic partnership would provide a significant new source of milk for Open Country.

The company specialises in exporting hard cheeses such as cheddar.

Walters said there was potential now for Open Country and Landcorp to work together to breed cows that provided milk specifically for cheese production.

Most of Fonterra's production is focused on milk powder.

Last season, Open Country processed 80 million litres of milk. The Landcorp farms will boost that by another 20 million litres.

Walters said the company expected to add more local farms to its supplier base increasing volumes to a total of 120 million litres by next season. The company had the capacity to produce as much as 20,000 tonnes of cheese.