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The price of palm oil
As the number of pasture-only dairy herds plummets, Fonterra wants to cut suppliers’ use of palm kernel extract.
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.
AS GOOD AS ORGANIC
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.
WET AND DRY
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.”