Saturday, March 30, 2024

China links paying dividends

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A week-long trip to China with Prime Minister John Key’s recent government and business delegation enabled Fonterra chairman John Wilson to view first-hand his co-operative’s engagement with its biggest and most-important market. Hugh Stringleman got a debriefing.
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Vertical integration of Fonterra’s activities in China position it well for dynamic markets, regulatory changes and government approval, Fonterra chairman John Wilson says.

President Xi Jinping commented on Fonterra’s $1 billion-plus investment in China and the creation of 1600 jobs, Prime Minister John Key had reported.

Xi left no doubt he was aware of Fonterra’s involvement in food safety centres, improving farm productivity, dairy farm effluent research and the training of young dairy professionals.

“Farmers rightly ask if our China investment strategy is paying off and we are now receiving feedback from the most senior level that it is,” Wilson said.

Although Fonterra’s relationships in China were business-to-business and business-to-consumer, they were not possible without government-to-government contacts.

“So much is underpinned by the strength of NZ government relationship with the China government.”

China was a hugely complex market with significant change under way, he said.

NZ exporters wanted to be nimble but they were pushing against a huge regulatory environment in China where government assistance was critical.

Increasing affordability of dairy products reflected changing demographics, bringing in millions of new customers who were very focused on food provenance, safety and nutrition, Wilson said.

Although it would continue to be a very strong market for Fonterra dairy ingredients, China’s food service and consumer business grew 25% last year.

A growing segment of the huge population was looking for fresh dairy products and that was why Fonterra’s farming presence was critical. 

Many fresh dairy foods were not possible from NZ’s distance so Fonterra was building towards a critical mass of milk from its own farms for a new processing plant.

Wilson said development of the first farm in the third hub, a joint venture with United States dairy giant Abbott, was under way.

Onfarm productivity for the two previous Fonterra dairy farms hubs was greater than predicted but profitability, while positive, was held back by low milk prices in China.

“In the crudest terms, we are making money onfarm.

“The third farm hub has begun but we will only go further when dedicated processing facilities are built.”

While there, Key, Wilson and chief executive Theo Spierings participated in a commemoration of completion of the first phase of the China-NZ Environment Co-operation Project.

The project explored ways to use stock effluent as a fertiliser to maintain crop productivity, improve soil health and protect water quality. 

Nearby arable farmers who supplied the dairy farms with crops and cut pastures were benefitting from applied effluent, although the means used were not yet up to NZ standards, he said.

Fonterra also signed a memorandum of understanding (MOU) with its local partner Beingmate, the infant and child formula manufacturer and retailer.

Wilson said the MOU was an indication of the time taken to get regulatory approvals in China; representing the 18 months since the Beingmate deal was announced to finally get Fonterra products out through Beingmate’s huge distribution and retail network.

He was referring to Anmum formula out of Canpac NZ and Darnum Australia.

Anmum volumes had grown more than 100% since the Beingmate investment 12 months ago and the licensing of Anmum to Beingmate.

He mentioned the disruptive force of online retailing and the growing share of sales through sites like Alibaba, whose founder Jack Ma spoke approvingly about Fonterra premium UHT demand and sales.

Wilson was positive about the prospects for an updated free-trade agreement with China to address “safeguards” that imposed costs on NZ dairy products greater than those from Australia.

Although it didn’t happen this time, he was confident officials from both countries would reach agreement before long.

Ongoing discussions would also address the clearance and approval times for NZ fresh dairy products into China.

“We want to integrate NZ and Chinese requirements so that products leave our NZ processing sites with approvals through to retail shelves in China in the shortest possible times,” he said.

“That is critical to us as the market evolves towards more fresh dairy consumption.”

Wilson said China’s imports of dairy ingredients were picking up, responding to the growth in underlying demand.

Imports were up 14% in February, compared with February 2015, and yearly tonnages to the end of February were up 6% compared with the previous corresponding period.

“Feedback from our key customers in China is that inventory levels are coming down towards more historical levels.”

Fonterra’s large peers globally were making similar investments in China, in farms and processing facilities, all through partnerships.

“The competition has ramped up, especially over the past year as European milk production expanded, and that is most noticeable in the UHT market.”

The markets for UHT and infant formula were very crowded spaces, hence the Chinese regulations and brand approvals connected with food safety and trade consolidation.

So was Fonterra’s position threatened by increasing regulation aimed at narrowing brand choice?

“No, we are in a very good position, vertically integrated from farm to marketplace, including our own brand manufacturing and packaging.

“Adjustments around our plants might be required but we agree with what the Chinese authorities are trying to achieve here – confidence in the supply chain and strong traceability.”

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