Fonterra accelerated its progress towards a target of
producing 1bn litres of milk a year in China by signing a farm tie-up with healthcare
group Abbott, the dairy operator's second foreign joint venture this month.
New Zealand-based Fonterra, the world's biggest dairy
exporter, said that it and Abbott would invest a combined $300m in setting up a
so-called "farm hub" in China, to produce "high quality dairy".
The operation, expected to start production in 2017 assuming
it wins consent from Chinese authorities, will contain up to five farms, with a
combined herd of 16,000 cattle, producing up to 160m litres of milk a year for
the growing Chinese market.
Abbott is a big player in China's infant formula market,
which is expanding in part thanks to the country's growing prosperity, but also
thanks to a greater prevalence of working mothers.
The US-based group, which has announced more than $400m of
investments in its China operations, last month opened a nutritional
manufacturing plant in Jiaxing, and earlier this year opened two research
centres in Shanghai.
Fonterra, meanwhile, which supplies dairy ingredients to
customers such as Abbott, is seeking to develop in-country operations to meet
the needs of its buyers in China.
After becoming embroiled in the 2008 melamine milk-tainting scandal,
involving the Sanlu group in which Fonterra was a major shareholder, the
co-operative has sought greater control over dairy operations in China.
The group has so far set up two dairy hubs in China, but
their combined output of 300m litres a year falls well short of Fonterra's
"Taking a partnership approach for the third hub will enable
us to progress its development quickly so that we can maintain momentum around
our goal to deliver 1bn litres of milk in China by 2020," a Fonterra spokesman
"We have been open about seeking partners that will enable
us to progress our strategy in China."
'Key avenue to growth'
The deal with Abbott is Fonterra's second tie-up this month,
after it last week unveiled a joint venture with the UK's Dairy Crest to market
galacto-oligosaccharide and demineralised whey, two dairy products used in
making infant formula.
"We often look for opportunities where we can further our
strategic relationships with key customers and partners," the Fonterra
Rabobank earlier this week highlighted the importance of
joint ventures, as well as mergers and acquisitions, for large-scale dairy
companies to maintain growth.
While the recovery in the world economy will boost dairy
demand, "many markets will not return to the rapid growth rates seen before the
financial crisis," the bank said, citing "mature" Western markets and slower
growth in major developing countries.
"Ongoing high milk costs and increased competition for
branded players will also pose a challenge.
"In this context, mergers, acquisitions and joint ventures
will remain a key avenue to growth and profitability."
The bank also highlighted the quest by Western countries for
exposure to the Chinese market, noting tie-ups between US-based Whitewave and
China Mengniu, France's Danone and
Cofco, and Dairy Farmers of America with Yili.