Farmers likely to benefit from Chinese purchase

Federated Farmers says the likely sale of Oceania Dairy to China's largest dairy producer by market value should be good news for farmers looking to get the best price for their milk.

Inner Mongolia Yili Industrial Group (Yili) plans to buy Oceania Dairy to acquire the resource consents it holds over 38 hectares near Glenavy in South Canterbury, to build an infant formula plant on that site, according to media reports.

The deal is subject to approval from the Overseas Investment Office but if given the green light, Yili will reportedly invest $214 million in the plant.

Last year, Oceania Dairy sold milk supply contracts to Synlait Milk, which is half-owned by China's Bright Dairy, after failing to raise about $75m to build a milk powder plant near Glenavy that would have processed 220 million litres of milk a year, producing 32,000 tonnes of powder.

The Chinese company has been reported as saying it has preliminary co-operation agreements with some local farmers to supply the plant, and indicated it planned to draw on Fonterra's regulated supply of raw milk.

Federated Farmers dairy chairperson Willy Leferink said if the factory went ahead it would probably give the local farmers a good opportunity to get the best milk price for their milk.

There would be competition in the region between several companies including Synlait, Fonterra, possibly even Westland Milk.

Leferink said there would be plenty of supply available for a new plant.

Any new start-up company has the right to milk from Fonterra for three years. After that it would need its own supplier contracts.

There was still a "huge expansion" taking place in the dairy industry in that region, with a couple of big irrigation schemes like Hunter Downs and South Waitaki still to come off which would increase the amount of irrigated area down there and could lead to increased milk supply.

Leferink said he did not see "a hell of a lot of stretch" in the supply base until the country reached the maximum number of cows it could sustain in the long-term, and even then cows could produce more milk than they were currently.

"Also New Zealand has got a fantastic reputation when it comes to food safety . . . I dare say second to none . . . and these people are looking for very safe food because the Chinese don't trust their own food because of the melamine scandal and a couple of other things," he said.

There had historically been a desire among farmers to have their own plant in that region and it would also be good news for the Waimate area as it would create jobs, he said.

"It makes Fonterra all the more sharper . . . although it's a co-op, it will have to play its part to be very competitive in this market. It creates the right kind of pressures for them to stay very vigilant."

The Yili factory would be similar in size to Synlait, Leferink said.

In June, Inner Mongolia Yili Industrial Group announced a recall of some of its QuanYou infant formula made between November 2011 and May 2012 after "abnormal" levels of mercury were found in some of its products by government inspectors; in 2008 Yili was among 22 milk producers involved in the melamine-tainted milk scandal which saw six babies die and 300,000 others poisoned, the Wall Street Journal has reported.

The plant is scheduled to be completed by June 2014, working at 60 per cent capacity. Annual full capacity of 47,000 tonnes is expected in the 2016-17 year.

In 2010 Yili had been named as a potential buyer of New Zealand Dairies' South Canterbury milk processing plant, when Russian owner Nutritek Group started looking for a buyer. Fonterra bought the plant this year out of receivership.

The Press