Fonterra Co-operative, the world's largest dairy exporter, said it will accelerate investment in milk-powder production to meet global demand after first-half earnings slumped.
Profit in the six months to January 31 fell 53 per cent even as revenue jumped 21 per cent, because a lack of capacity meant about a quarter of the milk collected had to be made into loss-making products such as cheese, the Auckland-based firm said yesterday.
Fonterra said it will spend an additional NZ$400 million (HK$2.65 billion) to NZ$500 million over the next three to four years to increase milk powder production.
"About 25 per cent of our portfolio is product which we potentially would not like to make at this point in time," said chief executive Theo Spierings.
"We will fast-track investments to create flexibility so we can optimise our product mix."
Soaring demand for milk powder from China is boosting New Zealand exports and helping to drive one of the fastest economic expansions among developed nations this year. With milk prices near a record, it costs Fonterra more to make other products with the milk it can't process into powder.
Fonterra opted to accept lower margins to protect market share rather than attempt to recover costs by raising prices, Spierings said. It earned negative returns on cheese and other products that do not track milk powder prices, he said.
Prime Minister John Key was in China last week to strengthen ties with New Zealand's biggest trading partner, which were threatened by a Fonterra contamination scare last year. The incident was later found to be a false alarm.
Spierings says Fonterra's relationships in China are "very good" and it is on target to produce one billion litres of milk from its own farms there by 2020.
Since its inception in 2001, Fonterra has invested NZ$1.8 billion in extra capacity at its sites.