Wednesday, July 6, 2022

Chinese company plans dairy factory in South Canterbury

The price spike in Fonterra shares resulting from Trading Among Farmers (TAF) could be the catalyst for dairy farmers to take up a new milk supply opportunity looming in South Canterbury.

One of China’s largest dairy processors, Inner Mongolia Yili Industrial Group, is awaiting New Zealand Overseas Investment Office (OIO) and Chinese Government permission to proceed with a $214 million investment to set up an infant formula facility at Glenavy, near the Waitaki River.

The proposed sale deal includes Oceania Dairy Group Ltd’s land and resource consents, which are already in place. The facility will be built on 38ha of land, with construction expected to be complete by June next year.

South Canterbury Federated Farmers Dairy chairman Ryan O’Sullivan said a new industry player was welcome in the region.

If the processing plant went ahead it would give local dairy farmers choice. There would be competition that had potential to improve payouts and there would be an option for farmers to supply without buying shares.

“This (new player competition) presents an opportunity for farmers to look at choice,” O’Sullivan said. “In South Canterbury we don’t currently have that choice at the back door. Post TAF, with the spike in share prices, this could be very attractive to farmers in terms of cashing in.”

For new farmers converting, competition such as this would be a strong attraction, not having to front up the cash for shares and also in respect to improving the payout, he said.

“It will keep Fonterra honest.”

With Fonterra buying the former Russian-owned New Zealand Dairies (NZDL) plant at Studholme last year there were now a lot of farmers committed to Fonterra through the

buyout, he said.

“And in due respect to Fonterra, I understand there was a very good package put together that rescued farmers financially. While they are tied into contracts now it will be interesting to see if farmers leave Fonterra once they are able, in favour of a new opportunity to get the best value for their milk.”

O’Sullivan said despite the Fonterra/NZDL contracts tie-up, there would still be enough supply to support a new plant in the region.

It is understood that about 35 farmers are signed to a six-year contract with Fonterra, meaning they would not be in a position to switch companies.

But two months after TAF, for farmers with the ability to leave Fonterra and cash in at the current share values it could be a good proposition.

“Fonterra suppliers may relinquish their shares and support the foreign-owned company,” O’Sullivan said. “At the end of the day it comes down to individual circumstances and choice. Change can be good – it’s just when is change good? It’s wait and see really at this stage.”

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

While dairy development in the region has been rampant, O’Sullivan said there were reports of a slowing down in recent months following the new compliance rules in the recently released Regional Land and Water Plan.

“This could be just early days as people get their heads around the plan but definitely there is a lot more awareness and caution around conversions. Certainly there is potential for further development, especially with the irrigation development under way in the region,” he said.

The Chinese dairy firm said it was attracted by New Zealand’s relatively cheap raw milk and the prospect of the free-trade agreement, with China removing import tariffs by 2020.

The plant is scheduled to be completed by June next year operating at 60% capacity, with annual full capacity of 47,000 tonnes expected in the 2016-17 year.

Yili said it had a preliminary cooperation agreement with some local farmers to supply the plant and indicated plans to draw on Fonterra’s regulated supply of raw milk.

The Inner Mongolia Yili Industrial Group Co is principally engaged in production and distribution of dairy products and mixed foodstuffs, including milk powder for infants, and distributes its products primarily in domestic markets.

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