By Guest Work 18/04/2016 1


By Jeanette Fitzsimons

Cross-posted from Coal Action Network Aotearoa 

Why would Fonterra spend several million dollars on a process lasting nearly a year, seeking planning consent for a huge new milk drier that it knows will never be built? Perhaps that’s not a lot of money to them – after all, one million is only three months’ salary for their CEO.

Fonterra’s proposed Studholme project, just outside of Waimate in South Canterbury, would see two new spray driers powered by two immense coal boilers – one 65MW, the other 50.

This is the biggest new coal burning project in the country, with the hearing happening just as our Minister for Climate Change is about to travel to New York to sign the Paris agreement where we undertook to reduce our greenhouse emissions a totally inadequate 11% below 1990 levels. (It’s even more inadequate when creative accounting turns this into more like +10%).

Fonterra is already the second biggest coal burner in the country and grew its coal use by 38% between 2008-2013. They pay lip service to climate change but in practice are totally wedded to coal.

This new plant, if it is built and runs at capacity, would produce some 175,000 tonnes a year of greenhouse gas emissions (similar to its Darfield plant), plus the much more global warming potential of the methane and nitrous oxide from nearly a million new cows that would be required to supply the milk.

But that isn’t the reason the plant will never be built. In New Zealand, increasing greenhouse gas emissions are never a reason for anything the dairy industry or Government does – they just aren’t on the radar.

Coal Action Network (CANA) put a major effort into submissions with two expert witnesses at the hearing in Waimate last week. We argued, supported by dairy economist Peter Fraser, that there is no milk available now to supply this behemoth and that, contrary to Fonterra’s submissions, milk supply is dropping and farmers are shedding cows.

2170256011_a387bced12_zThat’s not rocket science, given the price farmers receive for their milk solids has plummeted to $3.90 from a high of $8.40. Fonterra says it expects, supported by no evidence at all, that historical growth of 4-5% a year in South Island milk production will resume soon. It offered no evidence of what sort of price rise would be needed for farmers to add more cows or undertake very expensive land conversion, and no evidence that prices would rise at all.

It fell to CANA to bring the only economic evidence on this to the hearing. Peter Fraser, an economist with experience in Treasury, MAF and several positions in the industry, argued convincingly that the new driers would need up to a million new cows to supply the milk to run them at capacity; that his best estimate was that prices would recover to ~$5 +/- $1, and that new dairy farms needing irrigation were not economic at less than $6.50 and, in many cases, much more.

Further, the EU farmers – whose quotas have just been removed – are planning to meet any growth in demand that does occur and the cost structure of intensive dairying in NZ is now higher than theirs. We are no longer the low cost milk producer feeding on grass. If prices do rise substantially, the US is poised to enter the market ahead of us.

(On the other hand if we are wrong and prices do rise and the extra million cows do materialise, we have an unmitigated disaster in Canterbury with the human equivalent of those cows and their water impacts being equivalent to plonking a city the size of Jakarta on the Canterbury plains.)

Peter’s evidence is why I am sure this plant will not be built. So why are we going through this charade?

Even though Fonterra does not have a great reputation for strategic thinking (they are still making low value commodities like milk powder when successful companies are adding value and paying their farmers much more), they have heard Peter’s analysis before and it is hard to believe they are incapable of understanding it.

I can see two possibilities:

  1.  Fonterra needs to portray the image of a successful and expanding company to keep investor confidence. Its debts are currently roughly equal to its assets so it is in a parlous financial state. If they do grow milk supply the farmers with new cows will have to buy shares to be able to supply Fonterra, and this will help the company get out of its mess. Perhaps they really think wishing will make it so?
  1. In case we are all wrong and milk supply does expand, if they already hold a consent for a processing plant no-one else will try to capture that milk as they couldn’t catch up and build a new plant first. So it may be an anti-competitive move.

Neither of these is a good reason for spending nearly a billion dollars it doesn’t have and going further into debt, for milk that nobody can afford to produce.

Edendale

Waimate is left expecting jobs and economic development, and so is not pursuing any other strategy. This state of affairs could last ten years before the resource consent would lapse. But the jobs and development will never materialise. This is known in the trade as “planning blight”.

In this case, whether Fonterra run its new factory partly on wood waste is irrelevant. But most of the discussion focussed on that, rather than the lack of milk. That elephant in the room, like climate change, is just too big to be on the radar.

Further reading:

The media summary of CANA’s evidence to the hearing in Waimate.

All evidence by CANA, CANA members, and experts to the hearing.

Featured image: Health Gauge CC flickr


One Response to “Fonterra’s coal-fired climate folly”

  • On your two points. 1) seems to assume investors are very stupid. Institutional investors in particular would do their homework and would see through such a game. 2) if this really is believed then other players could also apply now for their own consents for processing plants. If this is not happening it may be because they don’t think the future outlook is good enough to justify trying to gain a consent. That would suggest there is no point in trying to block entry since there is no likelihood of entry. There is a third possibility, vertical integration is efficient. This is the point Oliver Williamson make back in 1970s, in cases of high transaction costs vertical integration is efficient since in-house production is cheaper than contracting out. I don’t know if there is a competitive market in milk driers or not but if not then out outsourcing could result in hold-up problems which would make in-house driers look attractive.

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