Fonterra changes strategy to pursue China farm partnerships

Fonterra has decided it is no longer ‘‘strategically important’’ to own its farms in China outright.

Chief executive Theo Spierings said low Chinese domestic milk prices and the cost of developing farms in the country were partly to blame for its international farms group making a loss in the past financial year.

Fonterra has had a rough time, even though it has reported a jump in annual profit of 183 per cent.

It uses overseas milk supply to remain the world’s biggest dairy exporter.

Spierings said it did not have to completely own its China milking investments. ‘‘The farms are strategically important but owning them outright is not, so we are pursuing a partnership model. This will enable us to progress our milk pool strategy (offshore milk production) while recouping establishment costs,’’ he said.

Fonterra has 25,000 milking cows in China that produced about 12 million kilograms of milksolids in the past year.

It planned more partnerships, including one it announced last year with United States pharmaceuticals giant Abbott.

A Fonterra spokesman said it had been unable to find a location for the Abbott joint-venture farms. The Chinese Government had not yet given the deal all the necessary approvals, partly because the farm site was unknown.

The hub was to consist of five dairy farms and more than 16,000 dairy cows in production, producing up to 160 million litres of milk per year.

Fonterra had ‘‘no firm other partnerships in the mix,’’ the company spokesman said.

The Abbott joint venture was to use animals either imported, or sourced, from Fonterra’s existing farm hubs. The first farm was expected to be completed and pro- ducing milk in the first half of 2017, before the remaining farms started production a year later.

Spierings said last year the Abbott farms would complement Fonterra’s ‘‘very successful’’ farming operations in Shanxi and Hebei provinces.

‘‘Farming hubs are a key part of our strategy to be a more integrated dairy business in Greater China,’’ he said.

Abbott was to be Fonterra’s third Chinese hub farm, touted as contributing to the growth of the local Chinese dairy industry. It would also ‘‘meet local consumers’ need for safe, nutritious dairy products’’. Fonterra wants to produce one billion litres of milk in China by 2018.

Two years ago it was targeting 2020 for this milk volume. The company says on its website it is ‘‘on the right track’’ to hit its onebillion-litre goal.

The company built its first Chinese farm, Tangshan, in 2007 as a pilot to ensure it could produce ‘‘New Zealand standard’’ milk locally.

Spierings said profitable partnerships were important to its global, multi-hub strategy. It wanted to complement New Zealand supply with milk pools off- shore, ‘‘protecting our scale so we can remain globally relevant.’’

Spierings said it was making progress with its joint-venture partner, Beingmate, which was helping Fonterra promote its Anmum brand and to sell dairy ingredients. The relationship was putting Fonterra in a strong position in China’s infant formula market, he said.

Beingmate was in a proposed partnership with Fonterra to develop the co-op’s Darnum plant in Australia.

Australia was a tough market, where profit margins were ‘‘squeezed’’.