Fonterra has shown its commitment to being part of China's dairy industry and contributing to its development for many years through its plan to form a partnership with leading Chinese infant food manufacturer Beingmate.
The partnership will create an integrated supply chain from the farm gate direct to China's consumers, using Fonterra's milk pools and manufacturing plants in New Zealand, Australia and Europe.
At the same time, the dairy co-operative announced it is to build a new high efficiency milk powder drier in the North Island and further increase milk processing capacity at Edendale to help meet global demand for dairy products.
The total investment is $555 million with nearly $160 million being spent at Edendale.
There is no doubt this is a significant vote of confidence in the dairy industry hit recently by reduced demand overseas, mainly in China, as stockpiles are reduced.
Fonterra reduced its forecast farmgate milk price for the 2014-15 season to $6 per kg of milk solids, and maintained that price during its expansion and development announcements.
Along with a previously announced estimated dividend range of 20c
to 25c per share, the forecast cash payout for the season is $6.20-$6.25. But this could fall lower after Global DairyTrade prices reached a two-year low yesterday. Prices have fallen 20% since the start of August.
Also, the New Zealand dollar is forecast to fall in value next year against the United States currency, making New Zealand's exports cheaper. Recent terms of trade show the country moving into a deficit as reduced exports of milk and logs took their toll.
Fonterra was caught out in the infant milk scandal which saw exports of New Zealand's infant formula stopped at the ports because the powder was thought to be contaminated. The co-operative handled the situation badly, and only recently have some New Zealand infant milk manufacturers been able to get their product back into China.
By working with Beingmate, Fonterra hopes to form a partnership which will be a game-changer, providing a direct line into the infant formula market in China. However, not all is going well.
A high-profile Chinese dairy commentator is calling for the Chinese Government to block Fonterra's investment in Beingmate, showing criticism of foreign investment is not a one-sided affair when it comes to the business relationship between New Zealand and its largest trading partner.
An industry expert told China's Xinhua news agency that for the long-term safety of China's dairy industry the Government should veto the partnership between Fonterra and Beingmate.
Fonterra is said to already have control over milk pools in China through its farming operations in that country.
Rating agency Standard and Poor's has lowered Fonterra Group's rating to A on the higher risk appetite after the investment plans were outlined.
But Fonterra retains a stable outlook.
The rating agency said Fonterra's proposed sizeable shareholding in a commercial company operating in China indicates a financial risk more aggressive than what S&P had factored into the previous A-plus rating.
The transaction is happening when Fonterra is also undertaking large investments in plant expansion and optimisation in New Zealand at a time when global dairy prices are weak.
The scale of the proposed acquisition; a reliance on dividends from the equity holding, rather than having direct control over cash flows; higher leverage in the short term from the transaction; and the capital expenditure worsen Fonterra's credit quality.
New Zealand is largely reliant on the commercial success of Fonterra for keeping the economy, particularly through exports, in the black.
The vulnerability of the economy to commodity prices was exposed in July's trade figures.
Fonterra has been exposed through falling prices, declining demand and a lowering of credit worthiness, albeit on a stable outlook.
The co-operative must tread carefully, it has a large economic role on behalf of the country.
