The announcement of the group’s move into the South Island came only days after the Chinese government revealed it would slash the tariff on imported infant formula from 15% to 5%.
Because the site is over 6ha and therefore is classed as “sensitive land” under Overseas Investment Act regulations, the company will require Overseas Investment Office (OIO) approval before turning the first sod.
This investment was announced only weeks before a similar decision by Yashili International Holdings for a plant, most likely in the North Island (see story page 11).
Ryan O’Sullivan, Federated Farmers Dairy chair for South Canterbury, said farmer interest in supplying such a company would be sharpened by recent movements in the Fonterra share value. The share unit float has seen prices surge to around $7.50, and with greater farmer share trading still to take off, there is speculation over what it will cost to “share up” new conversion operations.
“As it stands at present we could be looking at that increase adding from $500,000 to $1m to the average-sized conversion,” he said. “That is not small change.”
The new share structure did provide greater flexibility over when those shares had to be purchased across three years, he acknowledged.
“They seem expensive at the moment, and we don’t know where they will be in a year’s time. Investor sentiment is driving it, that is the biggest realisation farmers are having right now. The tail seems to be wagging the dog.”
However supplying Fonterra remained a strong business proposition, given farmers’ ability to enjoy a milk price, dividend and share price growth. He felt Chinese ownership of the plants was an expected part of the two-way relationship NZ was enjoying with China.
“If we were not allowing this (investment) to happen they may shun us in the future. We need a good relationship both ways.”
A dairy industry source supported O’Sullivan’s view on a small investor market driving farmer share value, maintaining the NZ capital market is “pretty gutless”. Fonterra’s unit trust had provided an outlet for any appetite into dairy investment, leaving little capital left for wholesale plant establishment.
“For Chinese investors, the price of the milk is not such a major factor in the process due to the business being value-added,” he said.
Yili Industrial intends to invest $214m into the Waitaki plant, and process around 30,000 tonnes/year of product in its first year which kicks off next June. Full capacity of 47,000t is anticipated to be reached by 2016/17. Infant formula is the main product to be manufactured.
In its announcement to the Shanghai Stock Exchange, Yili has indicated it intends to draw on Fonterra’s requirement to provide start-ups with a minimum of 50m litres of milk/year under Dairy Industry Restructuring Act (DIRA) regulations.
Unlike the vague and unproven record of attempted Crafar farm purchaser Natural Dairy, Yili has an established track record in the dairy sector. It was established in 1993 and is based in Inner Mongolia.
But the company was one of many implicated in the 2008 melamine scandal that rocked the Chinese dairy sector, forcing the closure of many smaller operators and the loss of $250m in Fonterra investment in San Lu. Yili also reported detection of mercury in its baby milk formula last June, forcing the recall of product.
Bloomberg data lists the company with a market capitalisation of $9.5 billion, putting it on a similar footing to Fonterra for size. In the past five years it has enjoyed a dividend growth of 43%.