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UPDATED: Fonterra spends $42mill on new Chinese dairy farm

Wednesday 20th October 2010

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Fonterra will double its production of fresh milk in China to about 50 million litres a year starting in 2011, building a second barn-style intensive farm for $42 million.

The world’s biggest dairy exporter and the Yutian County Government formally agreed to develop a new farm in Hebei province, about 100 kms away from Fonterra’s pilot farm in Tangshan.  The Yutian farm could be the second of as many as 20 in China, where the value of the dairy market is forecast to triple to US$70 billion by 2020, chief executive Andrew Ferrier told reporters at a briefing in Beijing.

“There isn’t a specific number” of farms, Ferrier said. “If we didn’t have a significant presence here, we will become less relevant in our customers’ eyes. Strategically it is very important to us.”

Fonterra targets an internal rate of return of at least 15% to 20% from its investments and prefers above 30%, he said. The pilot farm at Tangshan is profitable and exceeded expectations but “you would be naïve to think you would make over 30% on a test farm,” he said.

Fonterra has entered into a long term lease to use the land, much the same way that China-resident New Zealand business leader David Mahon suggested this week could work in this country to assuage fears about foreign ownership of local farmland. The company’s second Chinese farm is expected to begin milking in November next year, and will house 3,000 cows, including about 2,000 imported from New Zealand and 1,000 from the Tangshan farm.

At the official signing of the agreement to start the farm in Beijing, Ferrier was careful to stress the importance of a safe, secure and sustainable milk supply in China, where consumer confidence has been knocked by the melamine scandal that destroyed the joint venture San-lu.

Given the projected surge in demand for dairy products, Fonterra staff had been told to “run but don’t screw up,” Ferrier said. “China is littered with corpses of (companies) who just got enamoured of moving too fast,” he said.

Fonterra stepped back from its investment in China when its earlier Chinese partner was caught up in melamine scandal in 2008 that left several infants dead after San-lu’s farmers added melamine to the milk to lift its protein. China has already cracked down on milk production standards, removing “that entire sector of peasant farmers milking the cows” in Heibei province, said Fonterra GM for China Philip Turner. “China is trying to go from medieval dairy farm situation to a modern one in two years.”

The farm is expected to produce about as much milk as the Tangshan pilot, which has doubled its muster to 6,000 cows. 

Jonathan Underhill is travelling in China at Fonterra’s expense.

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