Fonterra has reiterated a hands-on policy for the supply of milk in China for manufacturing into its dairy products by announcing it was close to purchasing the lease of two farms near Beijing.
Having been stung once by partnering a local Chinese dairy processor, Fonterra's announcement yesterday reinforces its intention of targeting what many expect to be the world's largest dairy market by controlling the supply of raw milk that goes in to its products.
The Chinese dairy market is too large to be supplied from New Zealand, and in 2007 Fonterra bought its Tangshan farm near Beijing, and based on the success of that, has decided to extend its holdings.
Fonterra's China managing director Philip Turner said the Tangshan farm was successfully demonstrating Fonterra could profitably produce high-quality milk in good volumes.
"By investing in two further farms, we are building on our commitment to build a safe, secure and sustainable milk supply for our customers in China."
Land in China is owned by the people not individuals, and Fonterra has announced an agreement with the Government of Yutian County in the north of the country to take long-term leases on two potential farms about 115km from Tangshan and 180km from Beijing.
Fonterra said it intended for the farms to each be about 35ha and milk 3300 cows. Cows are housed in China.
In 2007 Fonterra spent $20.7 million on an 85% stake in the Tangshan farm in Hebei province with partner and local dairy processor San Lu.
It initially ran 3000 New Zealand cows but the herd has grown to 5800 cows, of which half were milking at any one time. The farm produced 25 million litres of milk in the past financial year.
Fonterra in 2007 bought a $200 million shareholding in San Lu but in 2008 it became implicated through that shareholding when San Lu dairy products were contaminated with melamine.
The Government seized the San Lu stake after the 2008 tainted milk scandal.
Fonterra now owns the farm assets outright.
But China remains a target market for Fonterra, given it is forecast to be the country's largest dairy market in the next few decades, with double-digit annual growth and demand for milk that is more than double Fonterra's New Zealand milk flow. In the 2009 financial year alone Fonterra trebled exports to the market to 160,000 tonnes.
Media group Fairfax has reported Fonterra was looking to re-enter dairy product manufacturing in China. Fonterra has developed two specific dairy products for the Asian market, a bone health product called Anlene and another to assist pregnant women, Anmum.
