Edendale manager Keith Mason said consent for foundation work had already been granted and work had started.
Above-ground construction was likely to begin in the next four weeks, and he expected the $212 million plant to be commissioned by September 2009.
The additional milk drier would take the plant's capacity to more than 15 million litres of milk a day.
The drier would manufacture UHT and instant whole milk powder, adding to the existing suite of powders, cheese, refined and edible grade lactose, whey cheese, casein, anhydrous milk fat and whey protein concentrate produced at what would be one of the world's largest powder plants.
Mr Mason said the existing plant could handle expected milk flows this season but the expansion was designed for increased production in the future - not just from newly converted sheep and beef farms, but from better pasture management and genetics on existing dairy farms.
"This is about building capacity going forward, and recognising the growth of dairying in Southland," he said.
The number of staff employed at Edendale was expected to increase by 40.
The Southland District Council has given Fonterra permission to build a 70m tall boiler stack, a 31m tall boiler building and a 60m tall milk dryer building, but it imposed 16 conditions including the control of noise.