Fonterra accelerates China drive with Abbott deal

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.

Production target

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 target.

"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 told

"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 spokesman said.

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.

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