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UPDATE: Fonterra to grade milk for unsuitable fat

UPDATE: Fonterra to grade milk for unsuitable fat, such as from too much PKE

(Updates to add Fonterra comment, reference to letter to farmers, amended Fed Farmers statement)

By Jonathan Underhill

Dec. 7 (BusinessDesk) - Fonterra Cooperative Group has followed through on its work into the impact of palm kernel expeller (PKE) on the composition of fat in the milk it collects with a grading system that will start in September 2018.

The company has developed a fat evaluation index (FEI) that measures the fat composition of milk it collects from its farmers to ensure it is suitable for its manufacturing needs. From September next year, it will impose demerits on milk that doesn't measure up. The biggest issue, or "key influencer", has been excessive use of PKE, the waste product from palm oil produced by countries such as Indonesia and Malaysia, but Fonterra says the breed of cow, stage of lactation and other feeds also create changes in the fat.

"Your cooperative requires milk across the season that it can manufacture into products that meet our customers’ specifications," Fonterra said in a letter to farmers. "In recent years, your co-op has been unable to manufacture some products at certain times of the year due to an unsuitable milk fat composition – predominately caused by higher use of palm kernel extract ."

Use of the supplementary feed has boomed in recent years as farmers look to make up the gap when grass growth is poor, such as in very wet weather or drought. But it has also been controversial, with environmental groups saying it links New Zealand's dairy sector to a palm oil industry in the tropics that has resulted in vast tracts of tropical rainforest, the home of the endangered Orangutang, being burned and cleared to make room for plantations. Fonterra now buys its palm oil and PKE from Wilmar International, saying the commodities company sells sustainably sourced products.

The new system follows consultation and trials with farmers and comes after Fonterra introduced a "Trusted Goodness" logo, which is designed to appeal to consumers who want sustainable and ethical practices in food production and is underpinned by New Zealand’s "natural, grass-fed advantage”. But the main issue, Fonterra says, is the impact on manufacturing of milk with the wrong fat composition, which has implications for sales in global markets of products such as butter.

Fonterra accounts for one-third of PKE imports, which it sells through its Farm Source stores, but conducted feed trials to better understand what impact its use has on milk fat, which is made up of at least 300 fatty acids. The company focused on 30 of the most prominent fatty acids and concluded that high rates of PKE use “change the amounts and the ratios of these fatty acids”.

Last year Landcorp announced that the state-owned farmer would stop using the imported feed. Greenpeace had campaigned against the feed but reached an accord with Fonterra when it signed up to buying only sustainably produced PKE. In 2015 Fonterra announced a voluntary limit of three kilograms per cow per day of the feed, although today the company said its concern was the fat composition not the feed used by farmers.

It is a touchy subject for the industry. Federated Farmers today amended a media release on the changes because the original version had wording that referred to liability related to using PKE as a feed. It now refers to liability related to "upcoming changes to (the) cooperative's grading system" and a number of references to PKE have been removed.

"Fonterra farmers who don’t deliver milk within the suitable fat composition range will be penalised," the amended statement from the Fed's sharemilker farm owners’ section chair Tony Wilding said. It also reminded dairy farmers and sharemilkers "to update existing business agreements" to reflect the changes.

The farmers' lobby group says farm owners and sharemilkers in current agreements "should seek to add a clause to address this new risk. New agreements will also have an additional clause under milk grading and feed to direct the parties."

"Our conclusion is this is the fairest way of allocating these new demerits as per the revenue share of milk production," Wilding said.


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