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Fonterra open to investment funds as partners in China

Tuesday 26th October 2010

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Fonterra may seek investment funds as partners in future farms and would be willing to take a minority stake.

“Right now we’re owning the farms but down the road (we’re) looking at doing those more with partners,” chief executive Andrew Ferrier said in Beijing.

“There’s no shortage of capital – all kinds of different funds are looking at putting money into China.” Fonterra is building its second, US$30 million intensive dairy unit in China.

The Yutian Farm in Hebei Province will start producing milk in November next year, aiming at an annual 25 million litres, which would double its output in China and help it tap demand it expects to triple to US$70 billion by 2020.  

Ferrier reiterated that demand growth would support development of more than 20 farms, with existing customers interested in buying more though there “isn’t a specific number.” 

The company has “concrete” plans for two more farms in the next couple of years in Hebei, where suitable leasehold land is worth about $300,000. 

Among U.S. funds to put money into Chinese farms with a local partner are KKR,  Carlyle Group and Blackstone Group. Nestle, the world’s largest food company, and Danone compete with Fonterra in Asia in branded products including yoghurt but they’re also among the cooperative’s biggest customers and potential partners. 

The CEO of New Zealand’s biggest business said an initial public offering in a Chinese venture to fund more farms was possible but not likely. “An IPO is quite expensive capital,” he said. 

Fonterra’s own balance sheet is relatively strong. Its gearing ratio fell to 44.9% from 53% a year ago as farmers bought more shares and the company retained more earnings.  

Fonterra took a minority stake in San-Lu, the Chinese dairy company that failed after being embroiled in a tainted milk scandal. It would insist on having control of production if it were to contemplate taking a smaller stake in a new venture, he said.

Ultimately, the company benefited from the scandal because of increased demand for ‘safe’ sources of milk products. Its first farm, at Tangshan, has exceeded expectations and turned profitable, Ferrier said.

Still, it didn’t meet the company’s preferred internal rate of return of 30%, which he said was understandable given it is a pilot farm. It expects IRR of a minimum 15% to 20%. 

China’s annual dairy consumption is about 25 kilograms per person, based on 2007 figures. That’s minuscule compared to South Korea at 80 kg and the U.S. at 225 kg. New Zealanders eat 210 kg a year, according to figures provided by Fonterra. 

Imports are forecast to dwindle as a percentage of overall dairy demand in China, meaning Fonterra would become “an increasingly small” player in that nation if it were just to rely on output from New Zealand, said Fonterra’s GM for China, Philip Turner. 

“At best we become increasingly irrelevant in what is rapidly becoming the most important dairy market in the world,” he said. 

Almost a third of China’s dairy market is for ultra heat treated (UHT) milk, making it the biggest product in the market, while cheese amounts to just 0.2%. Turner said the level of UHT consumption is “unusual in the dairy world.”

Products such as infant formula make up 4.8%. 

China has also become a key player in Fonterra’s global Dairy Trade auctions of milk powder, making up about 50 of the 300 registered buyers. It declined to be more specific.  

Disclosure: Jonathan Underhill travelled to China courtesy of Fonterra 

(BusinessDesk)

Businesswire.co.nz



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