China Business:Kiwi entrepreneur's sustainable approach

Howard Moore. File photo / NZ Herald

Kiwi entrepreneur Howard Moore is taking New Zealand-style dairying to China's far north. Bucking the trend of procurement farming in China, Moore is banking on his cost-effective and sustainable approach taking off in the northern natural grasslands.

Less than three years on from the successful launch of his first venture in Heilongjiang, Moore now has the experience that comes with completing two farms in the region. He is in the final stages of launching his newest farming venture. With a plan for 45,000 New Zealand-sourced cows across nine farms, the scope is sizeable. Construction is planned in Jiamusi Province, Heilongjiang in China's far northeast, bordering Russia.

The region has been a hot spot for dairy farming since the World Bank completed a five-year investment programme improving the financial viability of dairying. Local government has played its part, offering cut price access to high quality land and a resource rich area - particularly when it comes to water access. "We're close to getting the Tangyuan project under way, which I think will serve as a model project for China and Heilongjiang in particular," says Moore. "It's going to demonstrate that the grasslands in Heilongjiang have a lot of potential for dairy farming. The significant cost advantages we will have and higher profit margins will put us ahead of other farms in China."

The biggest decision for the new venture is what form the investment model will take. Moore says food giants Nestle & Bright had both indicated that they are interested in investing to secure long-term supply arrangements. "The approach we had been taking was to bring in partners as strategic investors, but the lead investor we're currently working with doesn't want to bring in Bright or Nestle, so the market can dictate the price of milk and we remain totally free to sell to whoever."

Shortages of suitable cattle feed in China have led to steep price hikes for imported alfalfa, 95 per cent of which comes from the United States. Feed costs are 70 to 80 per cent of total farm costs and on large farms in China can run as high as 50 cents per litre of milk produced.

"Fonterra have very high feed costs as well, they might be able to justify it because they can charge a premium for their milk, but the fact is they are high," says Moore.

Compared with New Zealand's average cost of 15 cents per litre, it's easy to see why selling milk to China can be so profitable. Moore's system for his new venture will integrate forage and milk production - similar to what is done in New Zealand. Moore estimates the feed costs will be 30 cents per litre - a steal by Chinese standards.

"It's a problem widespread in China, going down the wrong path," says Moore. "Building very large farms and not associating them with large areas of suitable land. It has to be grasslands for disposal of effluent.

"Under the procurement model you have very high feed costs and also very high effluent costs. That's a problem for Fonterra. They've gone down the wrong path by locating farms in areas where effluent costs are very high. It has to be treated to a very high standard."

The integrated model reduces the costs of effluent disposal. By establishing farms in the grasslands, effluent is dumped directly on the grass as a natural fertiliser for the forage.

Moore started his first venture in China, Taranaki Dairy Technologies, after Fonterra turned the opportunity down. Investors from Fortune Link came from China to pitch a plan to start industrial farming in Heihe - a city sitting on the Russian border in the far north of China.

"Fonterra wasn't interested because they were already committed in Hebei," says Moore. "The investment opportunity was dairy farming and processing in Heihe, because the government was prepared to provide cheap land for the venture.

By September 2011, Fortune Link had raised the capital and Moore's Taranaki Dairy Technology formulated the business plan. The first farm was developed and Moore appointed Chief Technology Officer. With two farms now and more in the pipeline, the venture continues to grow while operating under a traditional Chinese procurement-farming model.

The benefits

Government incentives make farming a lucrative business in Heilongjiang.

• Farming businesses do not pay income tax in China - only when milk is processed are companies subject to tax on their profits.

• Cows which produce more than 20kg of milk/day are eligible for a one off payment of 3000 RMB (NZ$556)

• For farms larger than 300 cows - the Government will provide land for crops and farm buildings.

• For farms between 300 and 2000 cows, the government will subsidise 10 per cent of farm construction costs.

• For farms with more than 2000 cows, incentives are considered by the government on a case-by-case basis, but stand to be no less favourable than those on offer to smaller farms.