A spokesperson says $1 billion had been spent on start-up costs and operational losses for the Yutian and Ying hubs of seven farms, for which $555 million had now been accepted.
Inner Mongolia Natural Dairy Company, a subsidiary of China Youran Dairy Group, had agreed to purchase six of the seven farms for $513m.
Fonterra would also sell its 85% share of the Hangu farm, first started in 2008, to the minority shareholder Beijing Sanyuan Venture Capital, for $42m.
Sanyuan had exercised its first right of refusal to purchase.
After regulatory approvals and currency conversions, Fonterra expected the proceeds to be available during this financial year and intended to use them to further pay down debt.
Chief executive Miles Hurrell says by building the farms, Fonterra had demonstrated its commitment to the development of the Chinese dairy industry.
“Establishing the farms has been challenging, but we have successfully developed productive model farms supplying high-quality fresh milk to the local market,” he said.
“It is now time to pass the baton to Youran and Sanyuan to continue the development of these farms.”
In the announcement of sale, Fonterra did not include the $1bn total cost but confirmed the figure afterwards.
Major write-downs of the book value of China farms subsidiary occurred during the past two financial years, totalling $266m.
By claiming the anticipated $555m proceeds would exceed the current book values, Fonterra was not including the operational losses over recent years, only land, buildings and livestock.
In the FY20 accounts, China farms reported $11m normalised earnings, an improvement of $25m on the loss incurred the previous year.
Hurrell says the sale of the farms would allow Fonterra to prioritise areas of its business where it had competitive advantages.
Head of research for Jarden, Fonterra equities analyst Arie Dekker says the planned sale was a very strong outcome, with Fonterra giving up little in the way of earnings and enabling another large chunk of debt to be repaid.
But Fonterra was still involved in the Shandong farming joint venture with Abbott, the multinational infant formula manufacturer, which was consistently making small losses.
A $65m impairment was taken in 2020 to align with updated valuations on those two farms.
“It would be good to see Fonterra look to exit this investment as well,” Dekker said.
“We are still looking to Fonterra to be clear where other non-core or more mature investments sit, like Chile and Australia.
“In the China farms experiment, there are important lessons for Fonterra’s farmer shareholders associated with the shift away from its core areas of competitive advantage.
“(It shows) the need for much stronger supporting detail and justification associated with large scale investment of scarce capital away from the core NZ business.
“Against the $1bn cumulative investment, the justification for a shift into farming in China was never convincing.”
The current performance of the seven China farms includes 31,000 cows producing around 9000 litres annually each cow, for a total of 22m kg milksolids in FY20, worth $282m of revenue.
For the past five financial years production has varied between 16m kg MS and 26m, and revenue has risen from $183m to $282m.
In Fonterra’s China investment plan, outlined in detail in November 2014, the farms were forecast to produce 1bn litres annually by 2020, compared with 250m litres actual.
By now the cow numbers were expected to be 100,000, not 31,000.
Then chief financial officer Lukas Paravicini said the strategy was to have a fully integrated China dairy business, contribute to the growth of the local dairy industry, meet the demand for safe, nutritious dairy products and address the Chinese government’s priority for food self-sufficiency.
Then managing director of International Farming Ventures Alan van der Nagal said capital expenditure on China farms to that point had been $598m.
The Yutian hub, including Hangu, is to the east and south of Beijing in Hebei province; the Ying hub is further west of the capital in Shanxi province; and the Shandong joint venture is further south in Hanan province.
Fonterra says the transaction value was subject to customary purchase price adjustments and exchange rate movements.
Any gains or losses on the sale would be normalised upon completion of the sale.
