Fonterra surprised analysts by sounding a resilient note on
dairy price prospects as it unveiled a return to joint ventures in China – six
years after the melamine scandal – and a $460m investment in New Zealand dairy.
The Auckland-based co-operative, the world's biggest dairy exporter,
stuck by a forecast of a 2014-15 milk payout to farmers of NZ$6.00 per
kilogramme of milk solids, despite the weaker market.
Prices at GlobalDairyTrade, the twice-monthly auction run by
Fonterra, fell last week to a two-year low, taking their decline so far in 2014
above 40%, in a rout attributed to a strong uptick in world production at a time
when Chinese importers have stepped back, having built up large inventories.
"We need to recognise that the current market conditions are
difficult and there remains further downside risk," said John Wilson, the
"There is still volatility. This reflects challenges with
supply and demand following a good dairy season globally."
Indeed, given the market weakness, Annette Beacher at TD Securities
said that "many local analysts assumed that Fonterra was going to announce a
downgrade" to its milk price forecast.
"We cannot rule out a downgrade at another time," she added.
However, Mr Wilson said that "current market views supported
by our own forecasting indicate [dairy] commodity prices improving later this
year or in early 2015, with global demand for dairy continuing to grow year on
"Long-term market fundamentals remain sound."
Indeed, the group highlighted the prospect of jump of more
than 80% to NZ$33bn, in the value of the Chinese infant formula market by 2017
as it unveiled a tie-up with Beingmate, a baby nutrition group based in the
eastern Chinese province of Zhejiang.
The deal will see Fonterra take a stake of up to 20% in
Beingmate, with which the co-operative will set up a joint venture which to sell
its product in China.
The tie-up will also purchase Fonterra's Darnum plant in
Australia, and may also expand into milk production.
Fonterra has, until now, focused its Chinese investment on
milk output, after its last joint venture partner in the country, Sanlu, emerged
at the centre of the 2008 melamine scandal in which thousands of babies fell ill
after drinking milk tainted with the toxic plastics ingredient.
Fonterra itself emerged at the centre of a safety uproar
last year when some of its product was feared to be contaminated with the bacterium
which produces botulism poisoning, although the incident turned out to be a
Theo Spierings, the Fonterra chief executive, highlighted
that Beingmate has a "shared commitment to international best practice" on
quality standards and was "committed to stringent processes and controls"
around processes such as milk collection.
He termed the deal a "game changer" which will provide Fonterra,
currently a wholesale supplier of raw material to many baby food operators in
China, with its own "direct line into the infant formula market in China, which
is the biggest growth story in paediatric nutrition in the world".
"China is our number one market," he said.
Fonterra also unveiled an NZ$555m investment in expanding
its milk drying capacity which, in increasing the proportion of milk it can
turn into powder, will allow it better to exploit commodity price differences.
The cap on the co-operative's drying capacity has, in
limiting the amount of milk it can convert into powder at a time of relatively
high prices, limited its payouts to farmers.