The price of palm oil

As the num­ber of pas­ture-only dairy herds plum­mets, Fon­terra wants to cut sup­pli­ers’ use of palm ker­nel ex­tract.

New Zealand Listener - - CONTENTS - By Jonathan Un­der­hill

As the num­ber of pas­ture-only dairy herds plunges, Fon­terra wants to cut sup­pli­ers’ use of palm ker­nel ex­tract.

Fon­terra and state-owned farmer Land­corp are united in their be­lief that New Zealand’s grass­fed dairy cows are the se­cret to get­ting top dol­lar for dairy prod­ucts. Now, re­search show­ing that the con­tro­ver­sial stock feed palm ker­nel ex­peller (PKE) al­ters the make-up of milk­fat sug­gests it’s more than just a brand­ing ex­er­cise. Land­corp an­nounced last Au­gust that it would stop us­ing PKE from June this year be­cause, chief ex­ec­u­tive Steve Car­den said, it wanted its part­ners and cus­tomers to be able to “trust that we farm sus­tain­ably and care for the en­vi­ron­ment”. He said the move would en­hance the state-owned en­ter­prise’s abil­ity to at­tract premium cus­tomers and cater for shift­ing con­sumer ex­pec­ta­tions.

About the same time, Fon­terra also an­nounced a stan­dard for sourc­ing sus­tain­ably pro­duced palm prod­ucts – palm oil and PKE – af­ter dis­cus­sions with Green­peace. And the dairy gi­ant fol­lowed up in Novem­ber with an en­hance­ment to its global brand­ing – the Trusted Good­ness quality seal that’s now be­ing put on all Fon­terra prod­ucts world­wide.

The logo is de­signed to ap­peal to con­sumers who want sus­tain­able and eth­i­cal prac­tices in food pro­duc­tion, and its cred­i­bil­ity is helped by “New Zealand’s nat­u­ral, grass-fed ad­van­tage”, said Fon­terra’s global con­sumer chief Jac­que­line Chow.

PKE is a by-prod­uct of the pro­duc­tion of palm oil in coun­tries such as In­done­sia and Malaysia. Those two na­tions are the big­gest sup­pli­ers of PKE to New Zealand, which over­took the Euro­pean Union as the world’s largest con­sumer of the feed in 2014.

Palm ker­nel ex­tract im­ports tum­bled by a third last year af­ter record vol­umes of

the sup­ple­men­tary dairy feed had flooded into the coun­try in 2015. Some 1.5 mil­lion tonnes of PKE were im­ported in 2016, down from 2.2 mil­lion tonnes the pre­vi­ous year. The value dropped 38% to $262 mil­lion.

This was not a re­sult of bad pub­lic­ity but be­cause PKE is closely cor­re­lated to the price farm­ers get for their milk. As port op­er­a­tors will tell you, im­ports of stock feeds and ­fer­tiliser dropped off as dairy and milk prices fell. To­tal im­ports from In­done­sia plunged 26% to $672 mil­lion last year.

In­done­sia’s neigh­bours were re­minded of the rapid growth of palm plan­ta­tions in 2015 be­cause the op­er­a­tors were among agribusi­nesses burn­ing forests to clear land, blan­ket­ing the re­gion in smoke. Last year, Pres­i­dent Joko Wi­dodo pro­posed a halt to the grant­ing of new land for plan­ta­tions that pro­duce the vegetable oil, which is used for ev­ery­thing from in­fant for­mula to bio­fuel and cos­met­ics.

That Green­peace came out en­dors­ing Fon­terra’s sus­tain­able PKE plan sur­prised Lewis Road Cream­ery founder Peter ­Cul­li­nane, who dis­cov­ered the lobby group wasn’t ready to rip into PKE be­cause it was work­ing with Fon­terra, a com­pany it had pre­vi­ously blamed for cli­mate crimes.

He had ap­proached Green­peace NZ ex­ec­u­tive di­rec­tor Russel Nor­man about tak­ing a pe­ti­tion to Par­lia­ment for an out­right ban on PKE im­ports but says Nor­man’s re­sponse was that they’d “come to the con­clu­sion we can’t com­pletely stop them and a re­duc­tion in im­ports was the next best thing”.

“My view is you can­not be half-preg­nant and the charge should be led by the Green­peaces of this world rather than Lewis Road,” Cul­li­nane said.

Su­san Kilsby, a dairy an­a­lyst at NZX Agri, says part of PKE’s pop­u­lar­ity has been its con­ve­nience – “a quick phone call and you can have a cou­ple of tonnes de­liv­ered the next day” – and it is an easy prod­uct to han­dle. But Cul­li­nane calls PKE “a new ad­dic­tion in New Zealand, which sur­vived quite hap­pily with­out it un­til quite re­cent times”.

“It’s not only cheap feed, it’s re­ally bad cheap feed,” he claims, be­cause it is linked both to rain­for­est de­struc­tion and to hu­man rights abuses. He cites Amnesty In­ter­na­tional’s ac­cu­sa­tions that Fon­terra’s PKE and palm oil sup­plier, Wil­mar In­ter­na­tional, used chil­dren and forced labour on its plan­ta­tions.


The for­mer ad­ver­tis­ing ex­ec­u­tive also likes the con­no­ta­tions of grass-fed dairy, which he says is “al­most as good as be­ing or­ganic” in some mar­kets.

Nor­man blogged af­ter his first meet­ing with Fon­terra in De­cem­ber 2015 that chief ex­ec­u­tive Theo Spier­ings told him the com­pany didn’t want to be im­pli­cated in de­for­esta­tion in In­done­sia, which was “real progress”.

Fon­terra was on the right path, but had Green­peace sold out? “Our aim is to re­duce PKE use to zero in New Zealand,” said Grant Ro­so­man, Green­peace’s spokesman on In­done­sia’s rain­forests. “We have ap­plauded Land­corp for this move. We see the Fon­terra move as a step in the right di­rec­tion and will mon­i­tor their im­ple­men­ta­tion.”

How­ever, it was clear that farm­ers sup­ply­ing Fon­terra were go­ing to con­tinue to use PKE, at least in the short term, he said. “With Fon­terra be­ing a large global player, we wanted them to use their in­flu­ence over the sup­plier of PKE to help halt de­for­esta­tion, peat­land de­vel­op­ment and com­mu­nity ex­ploita­tion.”

Ro­so­man has just re­turned from a trip to In­done­sia and says there are “more and more com­mit­ments to no de­for­esta­tion”, but there was still a long way to go to bring it un­der con­trol. “A drop in PKE use means a drop in the size of the eco­log­i­cal foot­print of New Zealand farm­ing.”

But there’s another eco­nomic an­gle to what Fon­terra is do­ing: PKE shows up in the milk, chang­ing its fatty-acid pro­file.

In Septem­ber 2015, to a gen­er­ally an­gry re­cep­tion from farm­ers and in­dus­try lobby group DairyNZ, Fon­terra is­sued a vol­un­tary guide­line that farm­ers should feed lac­tat­ing cows no more than 3kg of PKE a day in a diet of 18-20kg of dry mat­ter in or­der to al­low the dairy com­pany to keep to its prom­ise to ex­port mar­kets that its milk comes from pas­ture and de­serves a premium price.

At the time, farm­ers griped that Fon­terra was “telling them how to farm” and hadn’t made the eco­nomic case for cut­ting down use of the feed. Some said 3kg was an arbitrary limit.

And it is tricky to im­ple­ment. DairyNZ ranks dairy-farm­ing sys­tems on a 1-5 scale. in which 1 is a purely pas­ture-based farm and doesn’t im­port feed, while a farm with a rank­ing of 5 uses im­ported feed all year round, through lac­ta­tion and for dry cows.

In between, sys­tems 2, 3 and 4 use vary­ing amounts of sup­ple­men­tary feed – to ex­tend the milk­ing sea­son and in­crease pro­duc­tion. It is also a god­send in times of drought, when grass is scarce.

There’s de­bate about the eco­nomic ben­e­fits of var­i­ous sys­tems but farm­ers have spo­ken with their feet. A pa­per by Bruce

Grass-only dairy farm­ing has fallen 75% to just 10% of the to­tal, hav­ing ac­counted for 41% of farms at the start of the decade.

Greig of Lin­coln Univer­sity’s com­merce fac­ulty, en­ti­tled “Chang­ing New Zealand Dairy Farm Sys­tems”, notes “dra­matic changes” over the past decade, with a trend to more in­ten­sive farm­ing us­ing greater amounts of sup­ple­men­tary feed.

Between 2000 and 2010, the num­ber of sys­tem 5 farms rose by 300% (to a stillmod­est 4% of to­tal dairy farms). Sys­tem 4 farms rose by 63% to 18% and sys­tem 3 by 111% to 36%. Those that were grass-only sys­tem 1 tum­bled 75% to just 10% of the to­tal, hav­ing ac­counted for 41% of farms at the start of the decade.

If you are not a farmer, you might not re­mem­ber the drought of 2012-2013, which af­fected the en­tire North Is­land and the West Coast of the South Is­land. A one-in-40year event, it cost the coun­try an es­ti­mated $1.3 bil­lion. Des­per­ate farm­ers reached for sup­ple­men­tary feed, in­clud­ing PKE.

But as farm­ers search for in­sur­ance against sum­mer droughts, other feeds are be­com­ing in­creas­ingly pop­u­lar, among them chicory, a for­age crop some­times sown with plan­tain.

Chicory sur­vives and thrives over the

sum­mer be­cause it has a deep tap root and has a high yield of quality for­age in terms of protein and di­gestibil­ity. Chicory is also the se­cret in­gre­di­ent in the de­vel­op­ment of a new fat lamb, dubbed the Omega be­cause it has been grown to be high in Omega 3 and polyun­sat­u­rated fats.

Land­corp says chicory is a high-quality and cost-ef­fec­tive for­age, par­tic­u­larly in sum­mer (which is typ­i­cally when PKE is used). At Wing­point, a Land­corp dairy farm in the Wairarapa, 7% of the land is planted in chicory.

What seems ev­i­dent is that PKE is linked to changes in the com­po­si­tion of milk­fat. Jo­ce­lyne Be­natar, se­nior re­search doc­tor at the car­dio­vas­cu­lar re­search unit of Auck­land City Hos­pi­tal, tested the fatty acids in seven brands of milk bought at New Zealand su­per­mar­kets in 2013, re­peat­ing tests she did in 2011, when there wasn’t a drought and PKE use was lower.

The 2013 tests showed that palmitic acid, a sat­u­rated fatty acid, made up al­most 30% of the to­tal fat in the milk she tested, com­pared with around 15% in 2011, when other fatty acids ac­counted for more of the to­tal. Oleic acid, an un­sat­u­rated fatty acid, reg­is­tered more than 30% of to­tal fat in 2013, com­pared with less than 10% in 2011. Trans-fatty acids, no­tably vaccenic acid, were also higher in the 2013 re­sults.

Be­natar, who did the tests as part of her doc­toral re­search, says fatty acids are “re­ally com­plex ... It de­pends on the breed of cow (which is an is­sue, as we are now lim­it­ing the range of breeds), what you feed an­i­mals (sea­son­al­ity plays into this) and the gut bac­te­ria. The two vari­ables we con­trol are the breed and the feed.”

Since rec­om­mend­ing a daily limit on PKE, Fon­terra has been do­ing more de­tailed re­search, fo­cus­ing on 30 of the most prom­i­nent fatty acids. In a let­ter sent to its farm­ers last Novem­ber, it said it had con­cluded that high rates of PKE use “change the amounts and the ra­tios of th­ese fatty acids”.

Ex­ces­sive use of PKE cre­ates a prob­lem for Fon­terra, be­cause it re­sults in milk­fat that is “dif­fi­cult to process into prod­ucts like but­ter, and does not meet cus­tomer re­quire­ments for other prod­ucts”, the let­ter said.

“There is no point pro­duc­ing milk if we can’t sell it. If the PKE trend con­tin­ues, the po­ten­tial cost to the com­pany is across all of our prod­ucts.”

It con­ceded there were other vari­ables, such as the breed of cat­tle and the sea­son, and said it was pos­si­ble a higher ra­tio of PKE could be used in some farm­ing sys­tems. But it also said it was “de­vel­op­ing and val­i­dat­ing a fast, ef­fec­tive and low-cost method of test­ing for fatty acid changes caused by PKE”. It expects to up­date farm­ers in the next few weeks.


Three kilo­grams a day is half the 6kg level DairyNZ has rec­om­mended for an emer­gency diet in drought, when only half a cow’s feed is from for­age. But Fon­terra says the rule has to be “wet and dry”, ap­ply­ing to lac­tat­ing cows even in a drought. The guide­line is vol­un­tary this sea­son, but once a test is de­vel­oped, farm­ers would be able to ad­just their own lev­els of PKE “to achieve milk with a suit­able fat pro­file”.

Andrew Hog­gard, a dairy farmer who rep­re­sents his sec­tor at Fed­er­ated Farm­ers, says Fon­terra “put ev­ery­one in the wrong di­rec­tion” with its vol­un­tary 3kg cap. It has since be­come clear the real is­sue is “th­ese fatty acids and the man­u­fac­ture of but­ter”.

If Fon­terra can de­velop a clear marker for PKE in milk, backed by re­search, the changes in milk­fat com­po­si­tion could be­come a quality is­sue like any other, which could be covered by a de­merit sys­tem, he says.

Smaller dairy com­pa­nies Mi­raka and Syn­lait Farms pay their farm­ers a premium for milk that “ticks all the boxes”, such as en­vi­ron­men­tal stan­dards on the farm. But Fon­terra would have a more chal­leng­ing task if it were to of­fer a dif­fer­en­ti­ated sup­ply, be­cause it op­er­ates at mul­ti­ple sites around the coun­try and all the milk goes into the same pools, whether farm­ers use PKE or not.

De­mand for PKE should rise again now that dairy is be­com­ing more prof­itable – and there are early signs that it is, says Fon­terra. But two thing mil­i­tate against it. First, dairy farm­ers went back to ba­sics when the milk price dropped and stayed low, favour­ing pas­ture and, if nec­es­sary, fer­tiliser to pro­duce milk. The other is its im­pact on milk­fat and the per­cep­tions of global con­sumers.

Hog­gard says that, back-of-the-en­ve­lope, pas­ture of clover and rye costs 2c a kilo­gram of dry mat­ter as a feed; spread urea fer­tiliser and it rises to 10c. If the milk payout is high, or grass is in short sup­ply, farm­ers can opt for hay and silage at al­most 20c/kg. Maize silage is priced at 24-25c and PKE, 20-30c.

“A lot of farm­ers re-eval­u­ated their farm sys­tems,” Hog­gard says. “The key thing is a lot of farm­ers will have got back in touch with how do we use more of the 2c dry mat­ter.”

Lewis Road’s Cul­li­nane says he reck­ons PKE changes the taste of dairy prod­ucts such as but­ter – which for many years prompted him to buy Lur­pak but­ter from Den­mark rather than but­ter made in New Zealand.

“PKE is just another way of bulk­ing up pro­duc­tion,” he says. “It’s cheap, you can bring in marginal land and pro­duce milk for milk pow­der – the big­gest vol­ume for the cheap­est price. It’s ab­surd when we have a rep­u­ta­tion for green, green grass – it’s such a huge trick to be miss­ing.”

“The real is­sue is th­ese fatty acids and the man­u­fac­ture of but­ter.”


In­done­sian for­est burns (1) to clear land for palm plan­ta­tions (2). PKE as cat­tle feed (3) is un­der­min­ing our pas­ture­only rep­u­ta­tion (4). 2



From left, Theo Spier­ings and Jacque­line Chow from Fon­terra; car­dio­vas­cu­lar re­searcher Jo­ce­lyne Be­natar; Lewis Road Cream­ery’s Pe­ter Cul­li­nane; Fed­er­ated Farm­ers rep An­drew Hog­gard.

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