A planned $342 million dairy hub in China, part of a new strategic alliance with pharmaceuticals giant Abbott, would help Fonterra’s push into added-value products, an expert says.
The deal, if approved by the Chinese government, would result in the joint venture with the US firm investing a combined US$300m ($342m) in the farm hub.
The hub will consist of up to five dairy farms and more than 16,000 dairy cows in production, producing up to 160 million litres of milk per year.
Fonterra already has two dairy farms in China, with another three under development. Its goal is to be producing 1 billion litres every year in China by 2018.
Waikato University professor of agribusiness Jacqueline Rowarth said increasing its milk production in China was a key part of Fonterra’s business strategy.
The joint venture would help Fonterra’s push into added-value products, Rowarth said.
Increased milk production would allow Fonterra to sell more products to consumers under its own brands, with the profits flowing to its farmers rather than other companies.
“At the moment it doesn’t have enough milk so it has to sell it to someone else.”
Rowarth said the joint venture was an “interesting” move that would enable Fonterra to expand its capacity more quickly while spreading the risk.
Pairing with a pharmaceutical company was a good strategy, she said.
“It might be that they are moving more into nutriceuticals, which would add another plank to their foundation. It also brings a different thought pattern to the table.”
Federated Farmers dairy chairman Andrew Hoggard said expanding production overseas would also allow Fonterra to keep producing milk during New Zealand’s winter.
“Our only concern is around making sure the overseas farms are run to the highest standard. If it has got a big Fonterra logo on it and something goes wrong, will that hit us in New Zealand?”
Dairy consumption in China has been rising steadily over the past 10 years and health scares, including last year’s botulism false alarm, have prompted increased focus on finding safe sources of milk.
“This would be Fonterra’s third farm hub in China and will complement our existing farming operations in Shanxi and Hebei provinces that have been very successful,” Fonterra chief executive Theo Spierings said.
“Farming hubs are a key part of our strategy to be a more integrated dairy business in Greater China, contribute to the growth and development of the local Chinese dairy industry and help meet local consumers’ needs for safe, nutritious dairy products.”
If the venture gets regulatory approval, the first farm is expected to be completed and producing milk in the first half of 2017 and the remaining farms will begin production in 2018.
Abbott is one of the world’s largest pharmaceutical firms, with a market capitalisation of almost US$70 billion and annual revenue of US$40b. It produces drugs to treat a wide range of ailments including psoriasis, Crohn’s disease and HIV.
Fonterra is the world’s largest dairy exporter and reported earnings of $1 billion in 2013 on revenue of $18.6b.
It is working to repair its reputation in China after last year’s botulism scare, which led to a mass recall of whey protein used in infant formula.
The Chinese Government this year introduced a new regulatory regime for infant formula, requiring providers to have greater control over their supply chain to reduce safety risks.