Fonterra's US alliance targets growth in China

Consumption of dairy products in China has risen steadily over the past 10 years. Photo / Thinkstock

Partners to spend $342m on dairy farm hub, with more than 16,000 cows producing up to 160m litres of milk

Fonterra's alliance with the American pharmaceuticals and health care giant, Abbott, will allow the cooperative to accelerate its expansion in China and bring closer its goal of producing 1 billion litres of milk a year there, says chief financial officer Lukas Paravicini.

The partners yesterday said they would invest a combined $342 million to develop a dairy farm hub in China comprising up to five dairy farms and more than 16,000 cows, producing up to 160 million litres of milk a year.

Abbott is a Fortune 500 company and is a world leader in the infant formula market with a significant presence in China. Paravicini said the deal would combine Fonterra's farming experience in China with Abbott's expertise on the nutritionals side.

"It allows us to speed up our strategy on the farming side in China," he said.

Fonterra's stated aim is to produce 1 billion litres of milk a year in China and the deal would help speed up momentum to achieve that aim, he said.

"We bring the dairy farming knowledge — they bring the nutritional knowledge, so it is a good marriage," Paravicini said.

Coinciding with Fonterra's announcement was a report from agricultural lending specialist Rabobank, which said the major players in the global scene needed to buy others or enter more joint ventures to maintain the strong growth they had enjoyed in recent years.

Paravicini said Rabobank was "probably right" but that Fonterra's growth path was more likely to be organic rather than through acquisition.

"We don't exclude merger and acquisition activity but our main activity will be growth with an organic focus," Paravicini said.

Any merger and acquisition action was likely to be sporadic, he said.

"I would not say that this is the last deal you will hear about from Fonterra."

Fonterra already has one dairy hub up and running and a second one is being built.

The alliance with Abbott will create the third.

Paravicini said four or five hubs in total would be needed to reach the 100,000-cow, 1-billion-litre threshold.

Chicago-based Abbott opened a nutritional manufacturing facility in Jiaxing last month and two research and development centres in Shanghai earlier in the year.

Dairy consumption in China has been rising steadily over the past 10 years and the continued development of safe, high-quality milk sources was needed to meet growing demand, the parties said.

The new hub would complement Fonterra's existing farming operations in Shanxi and Hebei Provinces, said Fonterra chief executive Theo Spierings..

"Farming hubs are a key part of our strategy to be a more integrated dairy business in Greater China, contribute to the growth and development of the local Chinese dairy industry and help meet local consumers' needs for safe, nutritious dairy products," Spierings said.

The herd would be made up of animals either imported, or sourced from Fonterra's existing farm hubs.

All dairy cattle will have genetics traceable to New Zealand, Australia, the United States or Europe, Fonterra said.

Fonterra is the world's largest global milk processor and dairy exporter. Pending regulatory approval, the first farm is expected to be completed and producing milk in the first half of 2017. The remaining farms will start production in 2018.

About Abbott

• A Fortune 500 company, based in Chicago.
• Listed on New York Stock Exchange.
• Founded in 1888 by Chicago physician Dr Wallace C. Abbott.
• Net Sales - about US$22 billion.
• Employs 70,000 employees worldwide.
• Market position: No 1 in adult nutrition, No 1 in paediatric nutrition.
• Biggest sales by geography - emerging markets (38 per cent).

- Source: Abbott Website