Chief executive Miles Hurrell said it was premature to discuss any outcome of the review of the farms.
“But we do believe there would be good interest. When we have an update, we will let the market, our farmers and employees know.
“We don’t shy away from the fact that we’ve invested heavily in our China farms. Any player in China will tell you it’s hard to establish farms from scratch. Our total investment in our China farms, including establishment costs and operational losses, is around $1b over the past 10 years,” Hurrell said.
CHRIS MCKEEN/STUFF
Fonterra chief executive Miles Hurrell says more international assets are under review.
Speculation is mounting Fonterra may have found a buyer for its China farms, although analysts do not think the dairy giant will salvage the full $1 billion it has sunk into the business over the last 10 years.
Chief executive Miles Hurrell said it was premature to discuss any outcome of the review of the farms.
“But we do believe there would be good interest. When we have an update, we will let the market, our farmers and employees know.
“We don’t shy away from the fact that we’ve invested heavily in our China farms. Any player in China will tell you it’s hard to establish farms from scratch. Our total investment in our China farms, including establishment costs and operational losses, is around $1b over the past 10 years,” Hurrell said.
A Financial Times journalist based in Shanghai said he had been told there was a willing buyer, but that was based on purchasing them in an “as is” state.
Analyst Jane Li, who is a co-owner of the New Zealand Milk Bar business in China, said that, given the size of the land, the potential value could be high if all or part of it were rezoned.
Any number of Chinese state-owned enterprises could be attracted by the sale because once the land was rezoned, a new owner could then borrow a lot of capital for development.
She was concerned Fonterra was in too much of a rush to sell its assets, especially since it had high level support from the Chinese government to buy the large amount of land cheaply.
“The situation is a good example of the Chinese expression ‘using a golden rice bowl to beg for food’. Fonterra has a golden rice bowl but all they can think to do with it is beg for scraps,” Li said.
Harbour Asset Management funds manager Oyvinn Rimmer said according to its annual report Fonterra valued the seven farms in Hebei and Shanxi provinces at $750 million, but doubted it would achieve that price.
“They’ve never made a single dollar of profit ever on the farms, and they’ve made it more difficult to unbundle things because they started spreading it into three different reporting lines, so it’s very tricky to say authoritatively how big the losses have been. The reporting has been less than satisfactory on the economic performance of that business.”
Along with the $1b investment in the farms, Fonterra paid $750m for an 18.8 per cent stake in Beingmate but has written off $439m of that, and in 2008 it also wrote off a $200m investment in Sanlu.
“The ability to commercialise the milk has been tricky, the intention early on was to monetise it by putting it in to Fonterra’s own Anchor brand and into the food service business. Originally the intention was to own the farms 100 per cent but after the Danone food scare, they did a deal with Abbott, which is now a joint venture partner,” Rimmer said.
The farms carry 31,000 milking cows and are housed in a feedlot system, unlike New Zealand’s pasture-based farming. This was one of the factors making dairy farming in China a higher cost business.
Rimmer said few if any Chinese milk producers had performed well, most of them had gone bust and were investing more abroad than domestically. New Zealand was a case in point, with a number of Chinese players owning outright or having a majority stake in companies.
Asked if Fonterra’s high profile fresh milk sales through Alibaba’s Hema stores would be affected, Hurrell said its fresh milk products would continue to be sold and could be sourced from its two joint venture farms.
“Through our China farms we’ve proved that there is a valuable opportunity for fresh milk in China’s consumer market and this continues to be an attractive prospect. But it doesn’t necessarily mean we need large amounts of capital tied up in farms in China.”
Rimmer noted that Fonterra reports showed it used just 5 per cent of the milk from the farms for its retail products.
“They still have aspirations for growing that part of the business. I’m not privy to the performance of the Hema fresh milk. Let’s assume it’s going well, it would be good for a buyer of these assets to have an off-take agreement with Fonterra where Fonterra commits to take 5 to 10 per cent of the milk.”
Li suggested Fonterra could include the farms into the provincial or the city government’s 5- year plan with a project proposal in order to attract funding from Beijing.
“Chinese banks would happily lend against government backed projects so a relevant industrial park could be developed on part of the land to transform the region from low level farm hub to an agriculture centre of excellence,” Li said.
Rimmer speculated the likely buyer might be one of the largest Chinese corporates.
“There’s a consolidation happening where the largest corporate farmers are buying lots of assets so that would be the most logical thing to happen. Maybe Abbott who know these farms could see a future for them.”
Despite the unprofitable farms, China is still a key dairy market. Fonterra accounts for 36 per cent of all dairy imports into China and its Anchor brand has become the top imported consumer choice in just five years.
Last year, New Zealand exports to China were worth $16.04b, out of a global total of $80b, and $3.8b of the China trade was generated by Fonterra.
