Just before the annual meeting, chief executive Theo Spierings and chief financial officer Lukas Paravicini made presentations in China to major customers, intending partners and investors, teamed with the most senior members of its China-based management.
Their presentation of more than 130 slides was also released to the New Zealand Stock Exchange, NZX, under the continuous disclosure requirements, because Fonterra has investor units and bonds listed on the exchange.
The presentation covered all aspects of Fonterra’s involvement in China, now its largest market for ingredients and foodservice products and rapidly becoming a major market for consumer products also.
In the 2013-14 financial year Fonterra sold to China, in all different product forms, four billion litres of liquid milk equivalent (LME) out of its total milk collection of 21b litres – a 19% share of its production.
Ingredients like milk powders, anhydrous milk fat (AMF) and butter accounted for about 80% of those sales.
Fonterra’s Greater China vice-president of brands, Achyut Kasireddy, said that 11% of all that China business was consumer branded products and 6% was foodservice products.
In the next decade Fonterra expects China sales volume to grow to 8b litres LME but the mix of products should change considerably.
Consumer and foodservice are both forecast to grow market share by 10% to 21% and 16% respectively of the whole.
‘The business is capital hungry and building and retaining local capability is a challenge.’
Global accounts and quick service restaurants are also expected to contribute to 20% of sales, Taiwan and Hong Kong sales to grow and ingredients sales from other milk pools than New Zealand will contribute, such that the NZ ingredients sales will be less than half of the whole.
By 2020 Fonterra’s China farms are forecast to be producing 1b litres of the 8b litres LME.
The newly appointed managing director of farms, Alan van der Nagel, said by then the five farm hubs should have a total of 100,000 cows, each producing close to 10,000 litres annually.
At present there are 20,500 cows expected to produce 225m litres this season.
A third hub, a joint venture with dairy multinational Abbott, will begin development in 2015 on the eastern edge of Henan province, south of the first two hubs, in Hebei and Shanxi provinces.
The joint venture aims to build to 16,000 cows producing 180m litres a year at steady state, van der Nagel said.
The optimal feed mix is locally sourced corn silage, ground corn, steamed corn flake, brewers grain and concentrates, with some imported alfalfa (lucerne) from the United States, making up 15% of the feed cost.
He said trials were progressing to replace some of the imported alfalfa with more corn silage and that local suppliers had very tight and supervised guidelines.
The herds had a high health status, maintained by a rigorous protocol, and was free of tuberculosis and brucellosis, both widespread in China.
Cows in the first two hubs are producing 4.1-4.2% milkfat, comparing favourably with the Chinese average of 3.5% and the NZ average of 5%. They are also producing 3.5% protein compared with the Chinese average of 3.1%.
Bacterial count is very low, about 10,000 compared with the NZ average of 12,000 and the Chinese average of 300,000. Somatic cell count is 190,000-320,000 compared with the Chinese average of 400,000-500,000.
Fonterra’s China farm hub development
Fonterra achieved 8300 litres a cow last season and is going for 9500 litres this season.
The Chinese average is only half that, although modern Chinese dairies average 8200 litres.
Fonterra has invested $350m so far and will spend a further $250m this financial year.
He said competition for suitable land had intensified in China and there were significant environmental and sustainability challenges, as well as securing feed supplies at competitive prices.
“Animal welfare and health concerns are prevalent and biosecurity is a major challenge. The business is capital hungry and building and retaining local capability is a challenge.
“It is not easy, but the opportunity is huge,” he said.
Jin Ling, marketing director, China ingredients, said Fonterra supplied 42% of all imported dairy ingredients in 2013, with 23% coming from North America, 17% from Europe and 13% from Australia.
It had 72% of the milk powder category, 66% of the AMF and 62% of the butter.
About half of all sales made on GlobalDairyTrade were to Chinese customers, contributing strongly to the $4.9b of sales in FY 2014.
Esther Chu, vice-president China foodservice, said the Fonterra strategy was to concentrate on a small number of business categories: bakeries, hotels, restaurants and cafes.
It would also concentrate on five products: UHT cream, cream cheese, butter, mozzarella and slice-on-slice cheese.
