Fonterra wants total control

Andrew Ferrier says Fonterra's first task is to expand the number of farms in China. Photo / Dean Purcell

As Fonterra rebuilds its presence in China chief executive Andrew Ferrier says the dairy giant wants to control all aspects of its supply chain.

In 2008 Fonterra owned 43 per of Chinese dairy company Sanlu - one of 22 firms caught up in a melamine contamination scandal in which at least six infants died.

Sanlu went bankrupt and Fonterra wrote off its $201 million investment.

"Anything that's going to be sold we need to be assured that our management stamp is all the way through, and that's a result of what we learned from two years ago," Ferrier said.

"What it did is it underscore the importance of getting right on-farm, securing safe milk right on-farm."

The co-operative would be in control of the farms producing the milk and the processing of products, he said.

The strategy had always been to build a safe supply chain, although in the past the company did not control all aspects of it, Ferrier said.

"We had an interest in it but we didn't run it and we're saying now we've got to run it. That's the lesson we learned."

Fonterra was the majority owner of one farm in China and was looking to set up two more.

"It was the beginning of part of the strategy that got so badly interrupted through the events of two years ago," Ferrier said.

Fonterra did not necessarily need to own 100 per cent of the farms to control them and could bring in an investment partner, he said.

"We would look after the farms ... we would run the farms. It would be our systems, it would be people that we hire."

The first task was to expand the number of farms and then to work with customers on how to use the fresh milk, which could include drying it for infant formula, UHT milk or yoghurt, he said.

Fonterra was replicating in other parts of the world a model in which it collected milk for its local consumer business, supplied ingredients to customers and, where appropriate, exported.

"It's about growing with customers, and where it's impractical to supply New Zealand milk you supply milk from the other regions."

The cost written off in China had been offset by the growth in profits in Fonterra's other international businesses, Ferrier said.

Fonterra's revenue for the year ending July 2009 was $16 billion, including its consumer brands businesses with $3.1 billion from Australia/New Zealand, $1.7 billion from Asia/Africa and the Middle East, and $749 million from Latin America.

The prospect of foreign investment into New Zealand made headlines in March with news that Hong Kong stock exchange-listed Natural Dairy (NZ) Holdings was trying to raise $1.5 billion to fund an acquisition spree, including dairy farms and plans for processing facilities.

Ferrier said there was plenty of room for outside investment in New Zealand, and Fonterra was not against anyone buying land if it was within the Government's parameters.

"What we're nervous about though is investment where there's totally different economic criteria," he said.

"If there's an industry which is subsidised and has a high domestic price, and they come in and they put in all sorts of processing here in New Zealand because they can sell in their home market at a higher price - that can then create an economic [model] that I can't necessarily match."

New Zealand removed its tariffs and subsidies in the 1980s.

The creation of Fonterra - the world's biggest dairy exporter - in 2001 needed legislation.

Ferrier said to prevent an indirect subsidy Fonterra had been prevented from owning too much of the domestic consumer product market and that it was also required to sell milk at cost to other companies wishing to establish operations.

"In the creation of Fonterra there was nothing from the Government to give us a unique competitive advantage that would help us abroad."

ANDREW FERRIER

Fonterra chief executive

Age: 51.
Born: Canada.
Family: Married with three children.
Career: 2003-present: Chief executive Fonterra. Previous roles include president and chief executive of GSW, a Canadian manufacturer of rain gutters and water heaters; president and chief executive of Tate & Lyle North American Sugars; vice-president at Lantic Sugar, Montreal.
Education: Master of Business Administration, Concordia University, Quebec; Bachelor of Business Administration, University of New Brunswick.