Fonterra finds Chinese dairy giant on its doorstep

Fonterra executives planning a $200 million milk processing plant in Canterbury found out today their nearest rival for the region's milk, Synlait, has been backed by Chinese investors.

And Fonterra is not pleased it will have to keep supplying the Synlait plant -- at Dunsandel, 40km southwest of Christchurch -- even though it is being taken over by China's third-biggest milk company, Bright Dairy.

Chinese cash will double its capacity and fund a move into the most lucrative segment for exports to China -- ingredients for infant formulas.

A growing middle class seeking western-style foods, and food safety concerns in the wake of the 2008 melamine adulteration scandal have fired up demand in China for imports of "safe" overseas milkpowders.

Investors, such as Bright Dairy, and Hong Kong-based Natural Dairy NZ have taken increasing interest in sourcing New Zealand milkpowder they can sell in China at a premium.

Fonterra planned to open a mid-Canterbury plant by September 2012 to process up to 2.2 million litres of milk a day -- equivalent to the milkflows from 200 farms -- and managing director of trade Gary Romano predicted the plant would soak up some of the region's growing milkflows.

Canterbury produces about 15 percent of the country's milk for export, with this production growing at a rate of more than 5 percent annually, and Fonterra was thinking about also taking milk to make high-value nutritional powders.

But as the Chinese today promised to ramp up Synlait's production in the same milk catchment as the new Fonterra factory, Mr Romano was not happy that Synlait will continue taking deliveries of Fonterra milk to supplement its own production.

Under Fonterra's enabling legislation, the Dairy Industry Restructuring Act (DIRA), independent processors can each seek up to 50 million litres of raw milk.

Mr Roman said the Synlait announcement reinforced the need for the Government to review the law.

"Fonterra will continue to supply DIRA milk to Synlait," he said.

"However ... DIRA milk should not be available to established players like Synlait who have their own milk supply.

"We don't believe it is right that Fonterra should be required to supply raw milk to Open Country Dairies, Westland, Tatua, Synlait or New Zealand Dairies when they have their own farmer supply base.

"It actually decreases competition."

These competitors used the regulations to acquire milk at times of the year when supplies were low, he said: "This damages Fonterra."