Fonterra Plans `Multiple' Farm, Plant Investments in China on Dairy Demand
Fonterra Cooperative Group Ltd. the world’s largest dairy exporter, plans to boost its investments in farms and plants in China to benefit from surging demand.
“Expect to see us investing in multiple farms in different percentages and ultimately investing in processing facilities of one type or another,” Andrew Ferrier, chief executive officer of the Auckland-based company, said in an interview.
Fonterra, with NZ$16.7 billion ($13 billion) in annual sales, is seeking to rebuild its business in China after a melamine contamination in 2008 killed at least six infants and caused the collapse of its local partner Sanlu Group. The company, which opened a farm in Hebei province in 2007, said last month it will invest NZ$42 million in a second.
“You’re seeing number two within a year and, assuming it goes well, we’d be looking at number three coming in closely behind it,” Ferrier said yesterday. “We see China as a market which will be served by Fonterra both with safe Chinese milk, that will be our value proposition, and New Zealand milk.”
Fonterra accounts for about 40 percent of global trade in butter, milk powder and cheese, and has sales in 140 countries. China’s imports of whole milk powder rose almost fourfold in 2009 to 176,000 metric tons, representing about 12 percent of the trade, according to an Australian government report.
Sustained Growth
China has implemented new food-safety standards since the scandal and is reviewing local authorities’ efforts regarding milk powder and other products. Sustained growth in Chinese demand for dairy products will see milk powder auction prices remain stable at about $3,500 a metric ton for the rest of 2010 before “softening” in 2011, Ferrier said.
“If there’s going to be a softening in dairy prices, it’s more likely to come in calendar 2011 driven by, for the most part, higher production out of the U.S.,” he said. “We see a scenario where U.S. production is stronger, more product hits the market and prices soften a little bit.”
U.S. milk production climbed 3.3 percent in September from a year earlier to 15.53 billion pounds, the U.S. Department of Agriculture said in an Oct. 19 report. Average prices of all products at Fonterra’s fortnightly GlobalDairyTrade auction have gained 6 percent in 2010. Whole milk powder reached a 21-month high of $4,092 a ton in April before slumping 29 percent to $2,917 in August.
“Although it will be volatile, it will be in a tighter band than what we’ve seen over the last couple of years,” Ferrier said. “You could easily jump around 10 percent to 15 percent but 10 percent or 15 percent is less volatility than we’ve had recently.”
‘Logical Markets’
The U.S. “is one of the more logical markets to help fuel growing Asian demand” and will increase its exports to Asia as the region’s demand outstrips New Zealand and Australia’s ability to supply consumers, Ferrier said. New Zealand may also see demand for its product from traditional markets decrease as more milk is exported to Asian countries, including China, Indonesia and Vietnam, he said.
“As time goes on, markets that we have traditionally been in that are further afield will become less served with New Zealand product and more served with other product,” he said. “Mexico has traditionally bought quite a bit of New Zealand milk and they’re increasingly buying American milk and that’s a natural change in flow.”
To contact the reporter for this story: Phoebe Sedgman in Wellington at psedgman2@bloomberg.net.
To contact the editor responsible for this story Andrew Hobbs in Sydney at ahobbs@bloomberg.net
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