Fonterra gets praise from the highest level, writes Fran O’Sullivan.

Fonterra chairman John Wilson was buoyed by the confidence Alibaba's founder has shown in one of its prime dairy brands.

"Jack Ma made some very positive comments around Anchor's clear leadership position from their perspective in Alibaba and Tmall," Wilson relates. "We just have to be right at that leading edge."

Wilson is confident that Fonterra's China strategy is bearing fruit. "The numbers are certainly in line with our strategy. We focus a lot on the change in ingredients buying patterns, but, of course, we've got a sizeable consumer and food service business underneath that."

He found it invaluable to take part in John Key's recent mission to China.


"When you talk to our key customers in China and the other people that you meet when you are on a trip with the Prime Minister, many of the things that affect our lives here in New Zealand on a month-by-month basis - because of the sheer scale of the Chinese dairy industry and the Chinese economy - have a big impact on us because of the short-term impact.

"But really it's just their very large market just breathing in and out.

"And that's what we're seeing at the moment, where the increase in milk supply had quite a big impact of build-up of inventory ... but we are seeing that come back down and from our key customers' perspective they see that as a "moment in time" over a much longer time period.

"But of course it has significant short-term impacts on the wider global dairy industry, and, that's one of the key reasons why we've had such a change in supply and demand - but only one of the reasons."

Key fed back to news media that President Xi Jinping had commented to him on the importance of Fonterra's investment in China.

Wilson says the company has significantly over a billion dollars invested in China; created more than 1600 jobs and is making investments alongside the China dairy industry in food safety centres, educating graduates and technology.

"The relationships - while they're business to business - they also quite quickly from-time-to time become government-to-government, and there's a lot of government-to-government interest in it."

His confidence in the Chinese market is underscored by the rough doubling of the average disposable income of urban Chinese consumers in the past five years.

The Chinese middle class now numbers 250 to 300 million and is forecast to grow by another 150 million in 10 years. Wilson says with 6 per cent forecast growth for the next five years; a wider consumer base and increasing wealth and affordability levels, there is a lot of interest in fresh dairy.

"At the same time as we've still got the underlying food security issue and there's a lot more interest in our ingredients into China. "

He is confident Fonterra's vertically integrated strategy is paying off. February imports were up 14 per cent on February 2015.

Wilson has talked previously about the importance of getting UHT product to China swiftly. Fonterra is now able to get more product pre-approved to move faster through the border.

"If you look at consumer demand there for fresh dairy from a New Zealand perspective - even though our supply chain is very long, getting, for example, our UHT product out of Waitoa pre-cleared and through Customs makes a significant difference to its shelf time when it turns up on a consumer shelf.

"There is very good work from MPI and MFAT and Chinese authorities to speed this up ... but like all these things it takes time."

There are some niggles.

The lengthy commodity slump is hurting Fonterra's farmer shareholders.

That's why dairy "safeguards" were at the top of John Key's list when it came to discussing the potential to upgrade the 2008 China New Zealand free trade agreement in talks with President Xi Jinping last month.

The FTA provides for safeguards - in essence higher tariffs - to kick in at various trigger levels depending on the product. For most forms of milk, they kick in at 140,358 tonnes.

Under the agreement these trigger thresholds increase each year leading up to 2022/2024 when the tariffs on the various dairy products are phased out.

Wilson says the safeguards have a big impact on NZ dairy and he was pleased the Prime Minister and President Xi had committed to more talks on the issue.

"Importantly these roll off in 2022 and 2024 ... but there is certainly significant cost for New Zealand dairy relative to Australian dairy currently with the safeguard that is in place.

"The other just as important factor, is it certainly creates distortion in buying patterns, because we see that significant amount of buying at the start of January each year to purchase a product before the safeguard kicks in," he explains. "It would've been good to see safeguards being able to be addressed, but pleasingly we've still got good dialogue going on on removing what is basically a distortion on the market."

Wilson says New Zealand has to ensure that high-level conversation about the safeguards continues.

"But I think we're looking at a world globally now, where unfortunately there just is a lot more protectionism.

"Barriers seem to be going up rather than coming down and we saw that through TPP as well didn't we?

"And look, there has been some gains - it's good to see some very good gains for the meat industry, for example. As always for New Zealand - for our agriculture products in particular - we just have to continue to stay at the table."

The other just as important factor, is it certainly creates distortion in buying patterns, because we see that significant amount of buying at the start of January each year to purchase a product before the safeguard kicks in.


The Chinese Government has indicated it wants New Zealand to do more to assist its own dairy industry - a move that China-watchers suggest is an informal quid pro quo which may yet pave the way for movement in the safeguard triggers.

Wilson acknowledges a lot of Chinese farmers are also not earning enough money.

"The (Chinese) Minister of Agriculture talks about two million farmers - where the price is too low for them. At the same time you are seeing a demand for consolidation in the number of farmers within China.

"So how is that playing out? What we're seeing is the inventory that certainly grew within China as their milk production grew over the last 18 months is coming down to more historical levels.

"That's what our customers are reporting, and you are also seeing - up in Heilongjiang for example - some of the provinces really looking to drive investment in dairy to meet this fresh demand.

Fonterra in China

Fonterra is building an integrated business model in China made up of ingredients, consumer brands, food service, farms and its Beingmate partnership.

It says its unique advantage in China is this collection of businesses and the integration between them.

• Fonterra employs more than 1000 people across China
• China accounted for 15 per cent of revenue (six months ended 31 January 2016)
• China ingredients delivered growth in both volume and value to support the global Ingredients business
• Ingredient volumes into China of 814,000 metric tonnes (18 months to 31 January 2016)
• Consumer and foodservice business are performing strongly - volumes up 24 per cent to 440 million liquid milk equivalents (LME) with normalised EBIT up 353 per cent (to NZ$68 million)
• Sales volume from China farms increased to 103 million LME (six months to 31 January 2016)
• Beingmate partnership - enables Fonterra to capitalise on a rapidly changing regulatory environment as it builds market share in infant nutrition by selling its Anmum paediatric products through Beingmate's wide distribution channels, including e-commerce.

Foodservice snapshot:

• Half of all the pizza sold in China has Fonterra cheese on it
• Half of all the cheesecakes sold in China use Fonterra cream cheese
• Together with quick service restaurants, Fonterra has market shares of between 40-80 per cent in the premium dairy segment.

China's NZ Dairy Footprint:

• Yili
China's largest dairy company (2014 revenue)
- World's 10th largest
- Headquartered in Inner Mongolia
- Market cap US$15.7 billion
- Investing $400 million in Canterbury plants.
• Mengniu Dairy
- Second-largest Chinese dairy company (2014 revenue)
- 11th largest in the world.
- By end of 2015, annual production capacity was 8.68m tonnes.
- Has majority stake in Yashili, which has a $220 million plant in Pokeno (NZ)
• Bright Dairy and Food
- China's third largest milk producer by market value (as of July 2015).
- 39.12 per cent stake in Synlait (NZ).