Bright Dairy & Food, China's third-biggest dairy company by volume, has agreed to buy a majority stake in Canterbury milk processor Synlait Milk for $82 million.

Synlait, which abandoned a planned $150 million share sale last year due to a tepid response, will be a joint owner of its processing company with Bright Dairy, though it will keep and operate its farms through a separate company.

Work on a new milk powder processing plant is underway, and is expected to double the company's capacity by the 2011/12 season.

The Synlait deal is Bright Dairy's first investment in processing facilities outside China.

"This accelerates our value-added strategy and is aligned with Bright Dairy's strategy of introducing a range of premium infant formula and milk powder products through its leading brands and retail distribution channels in the burgeoning eastern seaboard domestic markets of China," said John Penno, Synlait Milk chief executive in a statement.

"Synlait Milk will help Bright Dairy establish a market leading position in the infant formula and milk powder category with a planned co-branded range."

The Bright Dairy deal is the second Chinese bid to capitalise on New Zealand's dairy production, with Hong Kong-listed Natural Dairy looking to inject $1.5 billion in a buy-up of land and facilities, including the 16 Crafar family farms.

Federated Farmers issued a press release this afternoon saying that " the weakness of New Zealand's capital markets has been exposed" by the Bright Dairy investment.

"After last year's abandonment of an Initial Public Offering, it's a damming indictment on our capital markets that Synlait couldn't rely on New Zealand to provide the investment capital necessary to fund its expansion," says Lachlan McKenzie, Federated Farmers dairy chairperson.

"With a majority of Synlait Limited's processing arm being bought by Bright Dairy & Food Co Limited, I think New Zealanders should be thankful Fonterra Cooperative Group, Westland Dairy Cooperative and Tatua Cooperative Dairy Company are Kiwi owned by Kiwi farmers," said McKenzie.

He said Federated Farmers hoped Synlait Milk would look to work with local cooperatives to develop the quality end of the Chinese market.

"New Zealand can only meet a small part of China's total needs so developing the value end of the market is in our interests," said McKenzie

He said Bright Dairy had a huge advantage with its Chinese distribution channels and he'd "like to extend that same message to Natural Dairy" - the company bidding for the Crafar farms.

The Natural Dairy bid has sparked controversy from all quarters, with Federated Farmers joining calls from the Green Party to block Chinese interests purchasing New Zealand land.

Bright Dairy is listed on the Shanghai Stock Exchange with a market capitalisation of $1.7 billion, and is a subsidiary of Bright Food Group, the biggest food company in Shanghai. Earlier this month Bright Food unsuccessfully tried to buy CSR's Australian sugar unit.

Synlait, which aims to expand its milk powder capacity, is seeking funds to build a second drier at its main site. It currently processes 70 million litres of milk a year, according to its website.

Present shareholders include Japan's Mitsui, which acquired a 14 per cent stake in 2007 for $13.5 million, implying a capitalisation of $96 million. Mitsui also made a further $16.5 million loan available to Synlait at that time.