KEY POINTS:
Fonterra is stepping up its foray into the vast Chinese market by establishing a dairy farm in China milking up to 3000 cows.
Such an operation would make the farm about as big as the largest stand-alone New Zealand dairy units.
Fonterra said its move was aimed at supplying more quality milk to its Chinese joint venture San Lu and boosting returns from the business.
No figure was given yesterday for how much Fonterra planned to spend.
The company said it was discussing land acquisition with Chinese authorities and was looking to start next October. It is expected Fonterra will bear most of the farm's cost.
Milk supply director Barry Harris acknowledged yesterday that the spending on the farm was not part of the co-op's original San Lu strategy.
But he said the investment was not a cleaning-up exercise aimed at dealing with poorer-than-expected milk quality and returns. He said the quality of Chinese milk was no surprise, returns from San Lu were on track and the joint venture could continue to make a profit with current supplies.
But the new farm provided an opportunity to ramp up San Lu's milk quality and extract higher returns from the market, Harris said.
The farm would use Fonterra's expertise to provide "quality milk for San Lu and meet the increasing demands for high-quality milk in China", he said.
Continued growth would be driven by having access to locally produced quality milk.
"By developing a cow-to-consumer supply chain in China we will be able to create value for our joint business and improve returns."
Rapid expansion of milk production by China meant it was due to increase from 22 billion litres a year to 40 billion litres in seven years. Growth in dairy consumption in China was also very strong. "While we expect to continue to import milk products from New Zealand, to meet market demand in China we also need to be producing high-quality, locally produced milk."
Former Fonterra CEO and current PGG Wrightson director Craig Norgate said the new China farm could prove very helpful.
"To the extent that it's about improving the quality and reliability of milk supply for the consumer business then it's totally understandable."
Dairy Farmers of New Zealand vice-chairman Lachlan McKenzie said Fonterra farmers would want to see spending on a new China farm boost their bottom-line earnings.
The co-op's 43 per cent stake in San Lu - a major Chinese dairy market player - cost US$107 million this year.
