August 27, 2014 11:25 am

Milk supplier Fonterra moves to broaden China footprint

epa03813911 Shelves with Dumex infant formula are seen in a supermarket in Hefei in central China's Anhui province, China, 05 August 2013. Fonterra has apologized for its bacteria contaminated products and its clients, including Dumex in China, have recalled batches of affected products. China had suspended imports of all milk powder from Australia and New Zealand, after global dairy giant Fonterra disclosed bacteria that can cause botulism were found in dairy products exported to Asian countries including China. EPA/SHEN XIANG CHINA OUT©EPA

Fonterra, the world’s biggest milk supplier, is tying up with one of China’s biggest infant formula makers as part of a global partnership aimed at capitalising on growing demand in the mainland’s $15bn baby milk market.

The New Zealand-based dairy co-operative said on Wednesday that it would invest NZ$615m (US$515m) for a stake of up to 20 per cent in Hangzhou-based Beingmate Baby and Child Food. It called the partnership a “game changer”, as it would provide a direct line into the Chinese formula market.

“China is our number one market and the proposal to join forces with Beingmate will be an important building block in Fonterra driving volume and value, and taking a step forward in terms of being a globally relevant co-operative,” said Theo Spierings, Fonterra chief executive.

Foreign dairy producers are increasingly looking to partnerships with Chinese companies as they seek to expand market share in the fast-growing sector.

Danone, the French dairy giant, paid €486m ($641m) in February to increase its stake in China’s biggest milk producer China Mengniu Dairy to 9.9 per cent, up from 4 per cent.

Mr Spierings said the $15bn infant formula market in China was expected to almost double in value to $28bn by 2017.

“This growth is driven by increasing urbanisation, higher disposable incomes, a preference for premium brands, and relaxation of the one-child policy,” he said.

Beingmate is a subsidiary of Hangzhou Beingmate Group, China’s fourth-largest infant formula maker. The deal will give Fonterra access to its distribution network for its own brand formula product.

The two companies also plan to set up a joint venture to buy Fonterra’s Darnum milk processing plant in Australia and establish a distribution agreement to sell Fonterra’s Anmum brand baby formula in China.

Chinese consumers have preferred foreign baby formula since a 2008 scandal in which domestic milk was deliberately adulterated with melamine, a byproduct of coal, in order to fake protein tests.

However, the proposed partnership between Fonterra and Beingmade follows a rough year for the New Zealand company after a false food safety alert. Last summer it recalled some of its milk shipments after identifying bacteria that can cause botulism. Later tests revealed no traces of the bacteria and the company was blamed for unduly worrying consumers.

Fonterra, which controls a third of global dairy supplies, earns its best returns by shipping milk powder to China – New Zealand’s biggest trading partner – where it can be used in high-value infant formula. However, it has faced challenges in recent years because it has not had enough milk powder processing plants to cope with the high milk volumes that New Zealand farmers are producing.

Fonterra also said on Wednesday that it would spend NZ$555m on a new milk processing plant to increase its domestic milk processing capacity.

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