Fonterra’s coal-fired climate folly

by Jeanette Fitzsimons

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.

 

one lump or twoThis 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 100,000 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 half 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, Peter Fraser argued convincingly that the new driers would need more than half 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 half million plus 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.

Correction:  this blog has been corrected on 20 April to change the “million cow” figure to “half a million” – see comments by Peter Fraser below. Thanks to George Williams for pointing out the error.  

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.

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6 responses to “Fonterra’s coal-fired climate folly

  1. Pingback: Fonterra’s coal-fired climate folly – Hot Topic

  2. George Williams

    Peter Fraser’s maths is completely wrong.1MT of WMP takes approx 6500 litres of milk to produce. At the highest scenario production level of 700MT per day per drier, that is 9.1 million litres at peak. In New Zealand the average production season totals 200x the peak day so that is a total milk supply of 1.82 billion litres over a season. In South Canterbury the average production per cow is 4453 litres per cow (13/14 season). So that means to completely fill the driers proposed would require 408,713 cows. Far less than the 1 million cows suggested. Admittedly still a lot of cows but less than half the half the claimed growth even at the highest possible scenario!!! So scaremongering or what… If the coal action network’s maths is this bad on cow numbers, what part of their evidence can be relied on???

  3. Hi George,
    thanks for your comment. Peter set out his calculations in quite some detail in his evidence. See here: http://files.ecan.govt.nz/public/consent-projects/submitters-evidence/Submitter_Coal_Action_Network_-Evidence_of_P_Fraser_.pdf

  4. George Williams

    Peter’s calculations are wrong because
    1. He is wrong about the % solids in milk. He is using 11.5% but the average Total Solids in NZ milk at peak is more like 15% (Fat + Protein +Lactose + Ash etc). This leads to an overestimation in the amount of milk required by ~30%
    2. He has not taken into account that Milk powder has at least 4% moisture left in it so the amount of milk solids required to make a given amount of powder is overestimated by another >4%
    3. He has also not taken into account that Milk Powder manufactured in NZ is standardised for Fat and Protein by the addition of Lactose. NZ Milk naturally has far higher levels of Fat and Protein than what is required by international standards for milk powder so additional Lactose is used to fill out the powder. This leads again to another overestimation of the milk volume required by about 7.5%.

    Just applying a very rough reconciliation from the total NZ dairy Cow numbers (~5 million) vs the total milk supplied in New Zealand (~21 billion litres) = 4.2 billion litres per million cows compared to the total milk expected to be processed by the proposed driers even if using 9 million litres per day at peak (1.8 billion litres per season) leads to an estimate of only 429,000 cows required… simple check that points out there is clearly an error…

  5. George, cow don’t lactate from birth. It take at least 2 years for a cow to grow up and produce a calf – should be more if we were looking after them properly. And cows are kept around 5 milking seasons before they are sent to the works. So you haven’t counted the replacement animals – seven years of grazing to produce 5 seasons of milk.

  6. Peter James Fraser

    Hello George,

    Thank you for your comments – I have had a sleepless night redoing my calculations as a result of your post; and yes, there is an error in my calculations. However, that error does not change the key conclusion provided in my evidence that if built, the plant will require 555,508 cows to supply it, and this has a ‘people equivalent’ of 8,332,620 (which is where the comparison with the city of Jakarta comes from).

    As noted by Jeanette, my figure of 555,508 cows includes replacements – so it needs to be halved to get a per drier figure – this is 277,754 cows per drier; which can be further decomposed to a ‘milking herd’ of 195,652 cows with 40,969 Rising 1 heifers and 40,133 Rising 2 heifers.

    The 555,508 figure is then multiplied by 15 to get the 8,332,620 people figure.

    For completeness, I assumed cows produce 23 litres of milk per day at the peak (so 4.5M litres / 23 litres per cow per day = 195,652 cows).

    With respect to the 11.5 conversion between litres and kgMS (i.e. 100 litres of milk = 8.69 kgMS), I note in my evidence that milk composition changes across the season and have used 11.5 as a planning number – though accept other conversion figures can be used (indeed, when at MAF we used to use 12.61).

    I also agree there is a 3.3% differential between litres of milk and kgs of liquid raw milk – but given I was doing an ‘order of magnitude’ comparison I do not consider this materially effects the conclusions.

    The error I made relates to the ratio between converting kgMS to kg WMP. I assumed a ratio of 1:1 when it is more accurately 1:1.5-1:1.75. As a result, I under-estimate the plant production, finding that when processing 4.5M litres of milk per day it will be operating at about 56% capacity when it will actually be running at, or very near to, full capacity. I then posed the question of ‘if the plant is only running at 56% capacity how many cows will be required for it to operate at full capacity?’

    This is where the 1 million cows number comes from and I acknowledge this number is incorrect.

    This also implies that given the revision above, the scenario 2 and 3 numbers I state in my evidence need to be discounted.

    For clarification, I never stated that if the plant was processing 4.5M litres per drier per day then it will require 1 million cows to supply it – I agree with you – the figure is about half of that.

    I am deeply embarrassed and shocked by this error as I take tremendous pride – and considerable care – in producing credible figures. Indeed, I sought advice regarding the specific calculation as I could not understand why two plants would be built and then operated at a little above half capacity and I suspected I had made an error (and specifically asked whether I had). Unfortunately, not only was my error not picked up but the advice I got was that both scenarios were possible. I therefore proceeded as per my tendered evidence.

    I take full responsibly for the error because it was issued under my name so it is my responsibility to ensure everything is correct – and the simple fact is it wasn’t. I therefore apologise unreservedly to all concerned for my error and for any distress or confusion it has caused.

    I have also written to Mr Paul Rogers, Panel Chair, outlining the error, taking responsibility for it, and correcting it.

    Again, I apologise unreservedly and thank you for bringing this to my attention.

    Kind regards

    Peter Fraser
    Rōpere Consulting Limited

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