Chinese take milk battle to Fonterra
An artist's impression of He Run International Investment's proposed $70-$80 million dairy factory in Otorohanga. Credit: Supplied.
Another Chinese dairy factory is setting up shop in Waikato and taking milk straight from the farm - at a time when our largest co-operative appears vulnerable.
Hong Kong based company He Run International Investment Ltd has announced it will build a $70-$80 million dairy factory in Otorohanga that will produce 25,000 tonnes of infant formula a year as well as specialty products like cheese.
READ MORE: Is Fonterra's iron-grip slipping?
Kiwi minority shareholder in the factory David Carey says farmers will be able to supply from 2016 when it kicks off production.
The price farmers will get for their milk will be "competitive" he says, although he added that He Run "did not want to be seen to be competing" with other dairy companies in the region.
"The industry standards for New Zealand are much, much higher than other countries, and that's why [farmers] are getting paid a premium for [their milk]," Carey says.
He adds that "the [Chinese] investors are tied to a huge chain of supermarkets, and they've got their own brand but they do want a very, very good supply of New Zealand dairy products".
While farmers are signing up to new milk contracts now, He Run had been talking to suppliers for some time, and Carey confirmed it already had a line up of farmers wanting to provide milk.
"People have known for some time and already we've been approached by numerous farmers saying 'hey, when you get going, can you please contact us?'" Carey says.
The factory will be the third Chinese-owned operation announced in the Waikato in as many years, with Waikato District's $212m Yashili infant formula plant ready to kick off production in October, and Allied Faxi Food Company having just announced the contractors for its $10m ice-cream and frozen cream factory in Hauraki District.
And it's unlikely to be the last investment of its kind in the area.
Hauraki District Mayor John Tregidga travels regularly to China, and says there is "absolutely" hot interest in New Zealand.
"There is definitely a lot of interest from our contacts in China at looking at further investment in New Zealand, and not just Hauraki, right round New Zealand.
"We're talking to government agencies in Beijing...I do believe that there are other investment opportunties that they are definitely looking at."
He says he is "quite confident" Kiwis will soon see more investments by Chinese players here.
His fellow Mayor in Waikato District, Allan Sanson, says he is also aware of other Chinese investors checking out the Waikato.
New Zealand Trade and Enterprise general manager of capital Quentin Quin says in the last five years "the China New Zealand relationship has come alive". Over the past two years, around 90 business visits - almost one delegation a week- had passed through the country from China that it was involved in.
More dairy factories could provide a challenge to Fonterra if - like He Run - they chose to head straight to farmers for supply.
Already the co-operative's suppliers are feeling the pain after losing money on shares, and for many of them, the payout this year. While Fonterra says 87 per cent of the country's dairy farmers are still on board, companies such as Open Country Dairy and Tatua have waiting lists of farmers wanting to join them.
The newest producer has also arrived in town just as Fonterra's special status under the Dairy Industry Restructuring Act is under scrutiny. Should its proportion of New Zealand's millk supply fall under 80 per cent, rules governing its operation will no longer apply - potentially thrusting the New Zealand's dairy industry through its biggest change since the co-operative was formed.
Attempts to contact Fonterra chairman John Wilson were unsuccessful.
Waikato University's Professor of Agribusiness Jacqueline Rowarth - herself a Fonterra sharesholder - says the new factory marks a significant moment for the New Zealand dairy industry.
It will spark fierce debate on whether Fonterra should be bound by special rules, which saw "the guts of it hucked out" by competitors who were free to operate as they wished.
Rowarth says because of that, there is "increasing a feeling that actually Fonterra should let it [supply] go to below 80 per cent and then they would lose quite a lot of their restrictions".
"That might be overall a better thing for the country," she says.
However, it would also likely mean farmers a good distance away from Fonterra factories might have to start paying for milk pick up, and would change the way the co-operative worked, she says.
All three factory builds also follow several food scandals involving Fonterra, including a tainted milk scandal in 2008 in which six Chinese infants died, a scare over lethal bacteria poisoning in 2013, and a 1080 poisoning scare earlier this year.
He Run has confirmed the food scares are partly behind the new factory in New Zealand.
Otorohanga quick facts
Hoi Fung Holdings Limited 70 per cent owner of He Run International Investment
David Carey, Russell Bayley and Hamish Putt 30 per cent owners
$70-$80 million build
Employes 50 people
Produces 25,000 tonnes per year
Initially 20 per cent of output will be organic
Exported into eight countries, and New Zealand
Build prompted by food scares