Scandal-hit dairy industry looks to NZ for clean assets

PUBLISHED : Monday, 09 August, 2010, 12:00am
UPDATED : Monday, 09 August, 2010, 12:00am

China's burgeoning dairy industry is expanding into the clean green pastures of New Zealand as it seeks to put the melamine poisoning scandal behind it.

The country of four million in the Southern Pacific - which brands itself and its produce as 'pure' - is seen as the perfect investment opportunity for an industry that was hard hit by the melamine scandal in 2008.

Mainland-backed Bright Dairy and Natural Dairy (NZ) Holdings are both eyeing New Zealand's dairy assets, and the scale of foreign investment in the country's most profitable sector is raising eyebrows.

It is not hard to see why mainland players are looking offshore. In 2008 milk powder produced by Sanlu Group was found to have been adulterated with the industrial chemical melamine, causing the deaths of at least six children and making more than 300,000 others ill.

The melamine scandal was one of several 'incidents' in China's food sector in recent years. Mainland food producers' use of pesticides and other chemicals has also come under fire.

Ironically, Sanlu, China's third-biggest dairy producer, had a New Zealand partner, dairy giant Fonterra, which held a 42 per cent stake. Sanlu was declared bankrupt in December 2008.

Fonterra is the world's largest dairy exporter, with between 33 per cent and 40 per cent of the global market. It is New Zealand's largest business and accounts for a large chunk of the country's gross domestic product and foreign exchange earnings.

The two new entrants into the New Zealand market are very different companies.

Bright Dairy, China's third-largest dairy operator in terms of volume, is 65 per cent owned by Bright Food (Group), a state-owned company based in Shanghai.

Bright Dairy was the first mainland dairy producer to venture offshore. Last month it announced a 382 million yuan (HK$438.07 million) investment in New Zealand's Synlait by taking a 51 per cent stake.

Synlait, 22.5 per cent owned by Japan's Mitsui, said Bright Dairy would only focus on the processing business.

Analysts said Bright Dairy was putting its brand on the finished product of Synlait, as a way to restore the trust of mainland customers. The deal gives Synlait access to the huge China market where Fonterra chief executive Andrew Ferrier expects demand to triple over the next decade, to be worth about US$70 billion.

But they warn that Chinese consumers' trust in locally produced milk products has been shaken and will not be restored overnight.

'It will take quite a long time for the industry to get sales back to the level they were at before the melamine scandal,' said analyst Wang Jianhui at Southwest Securities. 'Consumers' trust and confidence will recover only after the government sets up a more comprehensive monitoring system for food safety.'

Bright Dairy reported net profit of 122 million yuan last year, bouncing back from a 286 million net loss in 2008, but some analysts remained sceptical.

'[Its] 2009 sales growth remained unexciting,' Goldman Sachs analyst Deng Yifan wrote in a report. '[That] implies bumpy expansion in the post-melamine scandal era.'

The Synlait acquisition, which hinges on regulatory approval, offers Bright Dairy good quality sources of milk powder and infant formula.

While the 382 million yuan is not a big cash investment, it is an important step for Bright Dairy.

While Bright Dairy's foray into the New Zealand market has met with little or no criticism, a separate deal involving Natural Dairy, formerly a Hong Kong-based engineering company, is meeting more resistance.

The receivership of a group of farms controlled by the Crafar family has raised fears of deep-pocketed Chinese bidders buying prime New Zealand real estate.

UBNZ Assets Holdings - which is 20 per cent owned by Natural Dairy - agreed in May to buy 16 Crafar dairy farms.

Natural Dairy has applied to buy the remaining 80 per cent of UBNZ Assets, which already owns four farms purchased from the Crafar family interests in February.

That has brought the deal to the attention of the Overseas Investment Office (OIO). which is studying Natural Dairy's bid.

'The Government has very suddenly woken up to the concern that the upside from the dairy industry - which is considered economically vital to New Zealand's future - might be lost to other players if this country does not hurry up and get its act together,' wrote business commentator Fran O'Sullivan in the New Zealand Herald last week.

'The dairy industry is responsible for around 25 per cent of exports and has the potential to be a strong long-term economic growth driver for New Zealand as global demand gradually grows on the back of a snowballing world population.'

Prime Minister John Key questioned the rising tide of foreign money flowing into the sector last month.

'If we ended up in a position where New Zealanders are tenants in their own country, I can't see how that would be in New Zealand's best interests,' he said.

The plan has also drawn criticism from both the Green and Labour political parties.

But Natural Dairy vice chairman Graham Chin said people 'need to keep a sense of proportion'.

'In the last 12 months the OIO has approved the sale of 80,000 hectares of land to foreign interests, our OIO application only relates to the purchase of just 8,615 hectares out of more than 2 million hectares of dairy farmland in New Zealand. It involves only 25,000 cows in a national herd of around 5 million cows,' he said in a statement.

Federated Farmers president Don Nicolson said he could see why foreign investors were drawn to the dairy sector, which had massive potential.

'There's just this feeling - as I understand it - that New Zealand is losing control of its trump card, which is the land,' he told the Post.