Wellington, Sept 23 NZPA - Fonterra says its domestic milk production jumped 7 percent last year to record levels -- and expects the milkflow to keep growing.

Fonterra collected a record 1.281 billion kilograms of milksolids in the year to July 2009, up from 1.192 billion kg the previous season, as farms recovered from drought.

It expects this year's collection to be about the same level.

But chairman Sir Henry van der Heyden told a briefing on the cooperative's annual report today that NZ pastoral farmers were the best in the world and drove improved productivity every year.

"Productivity is going to keep on improving here in New Zealand."

He said claims that incremental improvements in production were not finite.

Asked about business-plan models the company has run showing milkflows levelling out in 15 or 20 years, Sir Henry said the company had demonstrated its confidence over the next decade by investing $200 million in the world's biggest milk dryer at Edendale near Invercargill.

"There's a sign that we're investing for the expectation for milk production to actually grow," he said.

"For the medium to longer term, the next five to 10 years, we do expect volumes to keep increasing."

Chief executive Andrew Ferrier told the briefing that the company wanted growth in New Zealand, so long as it was sustainable.

Investment in research was making it possible for domestic milk production to grow, and the company believed its NZ "footprint" could grow for "quite some time," he said.

The past season's improved milk output made it possible for external sales to increase 8 percent, even though the volume of milk sourced overseas dropped when commodity prices fluctuated.

But Fonterra's global ingredients business had customer numbers growing faster than NZ milk production, so the company would continue to increase the amounts of non-NZ product it sourced offshore.

An example of this was in the United States, where imports of milk protein concentrates (MPC) have been a big earner for Fonterra, but it had invested in two joint ventures with an American cooperative to produce MPC there from US milk.

"It ultimately makes more sense for us to supply MPC out of the USA than out of New Zealand," he said.

"It complements the product we're selling from NZ."

Mr Ferrier discounted any likelihood of an impact from campaigns being mounted by American dairy farmers against MPC being used as a food ingredient, or seeking to have significant tariffs on imported MPC, which displaces domestic milk in US food production.

"If a very unfortunate incident were to occur of Americans blocking MPCs, we would still be able to deliver a product to our customers from the United States, and we would direct (NZ) MPCs elsewhere in the world."

The United States last year produced 39.91m kg of MPC, and imported about 49.44m kg, while also exporting 28.12m kg.