A newsletter to suppliers from Fonterra chair John Wilson announces plans to expand processing in New Zealand and the proposal for a new partnership in China:
Your Board has given approval to build a new high efficiency milk powder drier in the North Island and further increase milk processing capacity in the South Island to help meet global demand for dairy products.
This investment, totalling $555 million, will grow the Co-operative’s processing capability and allow for more flexibility to better optimise production.
New Zealand is our most important milk pool. Our strategy is to increase earnings by driving more of your milk into higher value categories. It’s all about turning the wheel from commodities to higher-margin products.
Key points on the new Lichfield drier:
- Capable of processing up to 4.4. million litres per day
- Similar in size to the world’s largest drier at Darfield which produces up to 30 metric tonnes of Whole Milk Powder per hour, and 700 metric tonnes per day
- Will use the latest energy-efficient processing and water reuse technology.
Three plants will also be installed at our Edendale site in Southland. Key points are:
- Milk Protein Concentrate (MPC) plant which separates protein from skim milk and turns it into protein powder – capable of processing 1.1 million litres per day
- Reverse Osmosis (RO) plant which will increase capacity on an existing drier by 300,000 litres per day
- Anhydrous Milk Fat (AMF) plant capable of processing 550,000 litres of milk into cream per day
In total, the development of Edendale will increase capacity by 1.4 million in milk, and 550,000 litres of cream processing per day.
Global Partnership with Beingmate
We are establishing a global partnership with Beingmate, which is one of the leading infant food manufacturers in China. Beingmate is already a long-standing customer – and is a well-established and respected company in China.
Our partnership will be the next milestone for our strategy, as it will increase the volume and value of our ingredients and branded infant products exported to China.
Together we will create a fully integrated global supply chain from the farm gate direct to China’s consumers, using Fonterra’s milk pools and manufacturing sites in New Zealand, Australia, and Europe.
This global supply chain will see more of our high quality dairy ingredients and our Anmum™ brand exported from here in New Zealand. It will see more high value paediatric products made in Australia for China at the Darnum plant – that is our second milk pool. And it includes a third milk pool in Europe where whey specialty ingredients will be manufactured at our new JV plant in the Netherlands, and through our alliance with Dairy Crest in the UK.
This partnership is about volume and value. The value will come from accessing Beingmate’s extensive distribution and sales network in the infant formula market in China. This market is today worth around NZ$18 billion – and is expected to be worth nearly NZ$33 billion by 2017.
This partnership will come together in two phases:
We are starting the process to issue a partial tender offer to gain up to a 20 per cent stake in Beingmate. Depending on the response to the tender offer, Fonterra’s total investment in the global partnership will be in the range of NZ$615 million (including proceeds from the JV in Australia), funded through debt.
After gaining regulatory approvals and Fonterra satisfactorily completing the partial tender offer, Fonterra and Beingmate will set up a joint venture to purchase Fonterra’s Darnum plant in Australia and establish a distribution agreement to sell Fonterra’s Anmum brand in China.
The purpose of the proposed joint venture will be to manufacture nutritional powders, including infant formula and growing up milk powder at Darnum, for Beingmate as well as Fonterra.
Beingmate will own 51 per cent of the JV to satisfy Chinese regulatory requirements.
The JV will be governed by a Board, and Fonterra and Beingmate will each appoint two directors.
We will manage Darnum’s operations, under a formal management agreement. We will also supply raw milk to Darnum.
Today’s announcements are a major step forward in our strategy to be a globally relevant co-operative so that we can will deliver increased returns to our farmers – through both the Milk Price and dividend – during the ups and downs of global dairy price volatility. We are financing the increases to processing capacity and our partnership with Beingmate from a solid balance sheet position, and a strong gearing position will be maintained. These investments are intended strengthen returns by:
- Turning more New Zealand milk into higher value products
- Optimising the use of our Co-operative’s global assets
- Investing in capacity and flexibility of our New Zealand assets
- Building a fully integrated global supply chain. . . .
This is very good news for the company and the communities where it is expanding processing because of the jobs that will be created.
The board also decided to hold the forecast farmgate payout at $6 a kilo.
Along with a previously announced estimated dividend range of 20-25 cents per share, the forecast Cash Payout for the season is $6.20-$6.25.
The decision to maintain the forecast Farmgate Milk Price reflects the longer term outlook for international prices for dairy. Current market views supported by our own forecasting indicate commodity prices improving later this year or in early 2015, with global demand for dairy continuing to grow year-on-year.
While the long-term market fundamentals remain sound, we need to recognise that the current conditions are difficult and there remains further downside risk.
There is still volatility. This reflects challenges with supply and demand following a good dairy season globally. Given these factors, the forecast is our best judgement at this time.
It is early in the season, and it is important to continue exercising caution with your farming business budgets. The reality is, we expect to see ongoing volatility, and we will keep you informed as we move forward.
Russia’s decision to block European imports and cheaper grain prices which are leading to an increase in production in the USA will both have an impact on the supply of milk and other dairy products.
Fonterra and its suppliers are right to be cautious.
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