PRINTABLE VERSION   EMAIL TO A FRIEND   RSS FEEDS 10:57 UK, 27th Aug 2014, by Agrimoney.com
Fonterra holds milk price as it unveils China deal

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.

'Further downside risk'

"We need to recognise that the current market conditions are difficult and there remains further downside risk," said John Wilson, the Fonterra chairman.

"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.

'Sound fundamentals'

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 year.

"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 false alarm.

'Game changer'

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.

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