BusinessDesk: Fonterra flags $100M spend on two more Chinese dairy farms in push for farm hub with 15,000 cows

BusinessDesk: Fonterra flags $100M spend on two more Chinese dairy farms in push for farm hub with 15,000 cows
L to R: Nicola Morris, Fonterra General Manager China Farms, Fonterra CEO Theo Spierings, Fonterra Chairman Henry van der Heyden

By Paul McBeth

Fonterra Cooperative Group plans to spend $100 million to build two more farms in China’s Hebei Province as part of a plan to construct farming hubs to service the world’s most populous nation.

Chief executive Theo Spierings said the dairy exporter wanted to set up an integrated milk business in China as it seeks to tap into the growing middle class demand for high protein food.

Speaking at the official opening of Fonterra’s second farm in China’s Yutian County, Spierings said the extra two farms will create the first hub in the country with a herd size of some 15,000 milking cows producing 150 million litres a year.

The announcement coincided with the appointment of Craigs Investment Partners as market-makers for the forthcoming tradeable Fonterra units under the contentious Trading Among Farmers inititiative.

“Our intention is to develop separate farming hubs across China, with the ultimate goal of producing up to one billion litres of high quality milk every year by 2020,” Spierings said.

That indicates Fonterra wants to have about 33 farms with a herd of some 100,000 cows in China by 2020. Its plans coincide with attempts by Chinese investors to buy farmland for dairy production in New Zealand, the latest of which which has been caught up in legal challenges to the overseas investment regulations.

Last year, Fonterra signalled its intention to build a farming hub in the Hebei Province when it said it would spend US$40 million on a third farm in the region. Its original pilot project, which demonstrated it could produce high quality milk in China, was launched in 2007.

The dairy exporter is seeking to attract external investment to pay for its global aspirations with its controversial Trading Among Farmers project – a scheme that would enable farmers to sell the dividend rights of their shares into a fund, which would then become available for investors to purchase as units in a secondary market.

Craigs get TAF gig

In a separate statement, Fonterra announced it has appointed Craigs Investment Partners as the registered volume provider for the shareholders’ market, where farmer owners can buy and sell their shares among themselves.

Chief financial officer Jonathan Mason said Craigs’ role “will be a market maker in the Fonterra Shareholders’ Market, where farmer shareholders will be able to buy and sell among themselves” and “include responsibility for creating a transparent market, and ensuring there are sufficient buy and sell orders aimed at creating market depth so that prices don’t fluctuate unduly.”

Deutsche Bank/Craigs, UBS and Goldman Sachs were also appointed joint lead managers on Trading Among Farmers, and will assist and advise on launching the Shareholders’ Fund.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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More questions than answers.
What has/will the money buy.
Given they are not buying any land and construction in China is lower cost that NZ.
Is the money Fonterra's "equity" only, has any debt, or "local joint venture contributions" been used.
How does this fit with Manuka in Chile, does it mean that Fonterra will be putting $ into the Chile farms?
I think its yes to Fonterra being the Coca Cola of milk, but the way this is done is important.
The local example of factory owned farms is mixed:
and now there are director shopping trips in Manila;
But Richardson says real camaraderie is now building, pointing to the shopping expedition she enjoyed with Ke Li after a board meeting in Manila.

It doesn't fit with Manuka in Chile. Fonterra has no capital invested in farming in Chile. Feel free to get your facts correct before printing.
regards etc

Maybe not ITYS, but The current chairman, Mark Townshend a former director championing morphing capital structure into corporate, and other closely associated high profile Waikato based farmer do. I'd say that's compelling enough evidence.

Compelling evidence? Of what? Fonterra  does not have it's shareholder capital invested in Manuka Farming in Chile. End of story fact. The rest is devisive inuendo (but you would know quite a bit about that wouldn't you?)

ITYS, a mate in Chile told me that there were rumors around that Manuka farms were looking to sell or new investors, Ive no confirmation.

AJ, it's no secret that A. Manuka is short of capital to complete the development of Hacienda and B. have certain foundation shareholders that want out. Did you also know they paid a dividend last year as well? It has been described as a Ponzi scheme by one observer. Go figure! Interesting times....

You would think it was not a Ponzi scheme.
Your observer may have been looking to describe the drawing funds from new investors, while making payments to existing investors. In these situations it is sometimes clouded as to if some of the new money in was paid as returns to existing shareholders.
Folk making follow on investments, generally do not like to see insiders have cash returns while the whole venture is yet to find funding for its complete funding proposition - and they are out rattling the tin....
The associated circumstance is when dividends are paid out of equity. This is why many were displeased to see Fonterra made a divdend payment, and the equity balance decline by similar.
All these and the Synlait farms sale and Open Country losses and equity issue seem to show that they is not that much investment cash about, and profit margins not where people would like - one suspects...
And a sup. question, why are Fonterra and Fonterra associates diving money into farms, when Synlait/China Dairy Company are running the other way and selling up farms here.

In answer to your supplementary question - Synlait looking to raise capital for its farming ventures not by nature of divestment but again due to being A. Constrained by capital (too much debt) and B. Shareholders wanting to get out but no liquidity within the ownership model.

So both the bank and the shareholders want their money back, meanwhile RR is shopping in Manila. :(
plus see the earlier post for links
Whats happened to all the money of press release
Bright launched "Pure Canterbury" in Shanghai in mid-December. Cans of Pure Canterbury infant formula - complete with their image of the snow-clad Southern Alps rising out of the fertile green Canterbury Plains - are on Shanghai supermarket shelves. According to John Penno, 900g cans retail from between $92 for stage one infant formula, to $84 for stage three infant formula. This is clearly significant when compared to formula on New Zealand supermarket shelves priced between $15 and $30.
or does that all reside with HK/China "marketing offices" or other things of management.
But usually, as with Open Country ,(I won't post the link again) the bank asked to close the account and the shareholders subscribed an amount to approx. equal the trading losses, the bank taps the shareholders for further equity.

Synlait: The Canterbury-based company made a net loss of $3.1 million in the 12 months ended July 31 last year, smaller than the loss of $11.7 million a year earlier, according to financial statements lodged with the Companies Office.
"While New Zealand's competitive milk pricing environment means the company is yet to achieve a profit, we remain committed to our strategy of quickly moving into specialty and nutritional powders," chief executive John Penno said in his report
Penno said the company's growth aspirations will need "substantial ongoing investment
The milk processor was granted a waiver to a breach of its banking covenants by ANZ National Bank and Bank of New Zealand in June last year. As at July 31, its bank debt was $85.1 million. Interest and facility fees fell to $5.1 million from $9.1 million in 2010.
Thinking about ITYS comments, more constrained by too little capital. Is it any wonder shareholders would want to what they want to do...
And from previous posts. Remembering Bright funded their share purchase with a "blend" of debt and equity...
Chairman Graeme Milne said Bright Dairy's investment gave Synlait Milk the opportunity to get a foothold in Asian markets, and its board representatives have "contributed strongly to the direction and strategies" of the company.
Note to GM: Thats what people that own control of a company do.... and yes they would if it was making accounting losses....

Mist - not there yet.
Question 'capital'.
Question 'invest'.
Question the underwrite, and question it's ability to grow at x%.
Don't worry; the future will be smaller and smaller farms, better and better husbanded, more and more local purchasing. The just-in-time, global transporting, profit-taking food system cannot survive beyond a certain energy-availability, although a co-operative structure will have a lot of things going for it.

This link might help A.J.
 Extract...Outside processors are coming in and there are now several buyers for the milk flowing from the New Zealand ''Manuka'' project.
Read on from there...!!!

Fonterra does have shareholder capital invested in processing in Chile. Maybe I am guilty of devisive innuendo, but hopefully it will generate thought, and I'll be proven nothing more than a muckraker or my concerns will be valid. Given what has become apparent since the 08 financial crisis, and how the well connected and powerful behave, I think my concerns are valid.

So things settle down a bit at Prolesur for Fonterra then ...?
If I recall a bit of union muscle was getting to be the fly in the ointment.....made the investment proposals  look a little unstable....

Do enlighten me. What has become apparent since the 08 financial crisis with respect to Fonterra?

Got me again ITYS, I suppose the only change in behaviour I can say is the realisation of the value of a strong balance sheet. Co-ops manage their balance sheet via retained profit. I don't think Fonterra did this prior to 08, but since then this practice has done wonders. Apparently the balance sheet is always at risk as a co-operative, so we're in the process of hybridising into a corporate, and as farmers in the UK and Ireland tell us, this ends badly for farmers (hands on farmers anyway).
As far as the capital structure undermining the co-operative, this has been an issue since formation of Fonterra, so nothing has changed in this respect since 08. John Storey admitted prior to formation (Dairy News April 10) they knew it would be, I assume Henry van der Hayden also knew. If a co-operative structure best serves supplying shareholders, why wasn't it sorted prior?
Another thing in relation to the discussion in this thread that has become apparent to me since 2008 is the destructive nature of debt, not just in nz agriculture, but globally. I've read and heard about repected economists (Steve Keen, Ha-Joon Chang), that mock the neo classical economic principles that promote a casual attitude towards debt, and which I'll hazard a guess underpin the rational behind the corporate behaviour driving Fonterra, whether that be the government, board or executive. When I read in this thread, from you actually, about the highly leveraged  investments that close associates of Fonterra leadership have in Chile, and their support for changing the capital structure more in line with the leveraged corporate model, as a small scale supplying shareholder with a relatively strong balance sheet, unlike aforementioned, such a prospect makes me both nervous and suspicious, hence your accusation of peddling devisive innuendo.
I'm guessing you've got some good friends in the dairy industry who think very differently to me. So please enlighten me and ease my mind, as it's not nice to be thought of as devisive.

No worries, its just the Chairman p a/c ......
Chile is a significant destination for New Zealand investment, particularly in the agricultural and energy sectors. Fonterra owns a 99.4% share of Soprole, Chile’s largest dairy processor. There are also significant farming investments in southern Chile, for example, New Zealand company, Manuka, purchased Chile’s largest farm (19,000ha) in March 2008.
So, a group of mainly large New Zealand dairy farmers, including the Fonterra Chairman, Henry van de Hayden, put together a group to buy Chilean land suitable for development as New Zealand type dairy farms. The results after just four years have been fascinating. It is not often that you can see agricultural and national history in the making.
While a few isolated farms were bought earlier, the key acquisition was in March 2008, the key part of an old estate. Of the original 115,000 acres, the New Zealand group bought 19,000 acres or 7,200 ha. The progress in just 3.5 years has been enormous.
In 2010, 79 million litres were produced from 22,000 cows. 2011 should see 90 million. The group is now trying to raise more capital.
One of the major shareholders, a New Zealand dairy farmer of Irish extraction, wants to sell his 8% shareholding, not easy at this stage in any development.
Broadly, the group invested $150m of their own funds and borrowed another $100m from a consortium of banks.
Chief Executive, Juan Carlos, says the group really needs to invest another $100 million and is open to new investment.
Rabobank, the owners of ACC, has 1% of the loans and is being used by the group because of their worldwide agri business expertise and detailed farm knowledge.
now who has just got a seat on the Rabo board..

yes to the  Coca Cola of milk, yes to ruling the world, if you are going to have a dream why not make it a big one. Just got to get rid of those pesky farmer/shareholders and transfer the wealth to...

 The gargantuan caterpilla A.J. that is Fonterra has outgrown it's host ......ravenous, it has little choice but  to move in max consumption mode, awaiting  the morph when it will discard a little more than just it's skin........
Will it fly....?

I agree with the sentiments in above posts. It certainly seems all that glitters is gold with Fonterras expansion plans. I can't blame the executive (and financial media acolytes) getting excited about expansion and growth opportunities, as that is what they are programmed to do . However if it serves NZ farmer shareholding suppliers of a co-operative and NZ, or conversely yet another stock standard corporate model, is what makes me nervous.
Fonterra was enabled through the successful history of a co-operative dairy farming model for over a century, and now the government and MAFT ('Clayton' board of director) and our own 'elected farmer representative' board of directors want to scuttle the co-op in favor of world domination aka coca cola of milk. While the aspiration sounds marvellous, it should be able to be achieved without putting supplying shareholders control of milk produced in NZ at risk. Let whoever wants to invest in China invest, leverage Fonterra expertise and contacts if necessary, but use your own capital.
In the debate surrounding TAF and the governments attempt to scuttle the co-operative structure that's just hanging on within Fonterra through yet another amendment of DIRA (which is intricately linked to TAF), it has become apparent that this has been the governments and boards agenda scince formation of Fonterra. There is ample international evidence of destruction of co-operatives and resultant suppression of supplying shareholders when morphing capital structure to corporate as appears to be happening now. Yet my fellow suppliers either have total faith that the elected board and 'clayton' board (govt and MAFT) are executing their obligatory duty of care, or they are suckers, and just want to be shown the money.
AndrewJ, I always enjoy and respect your and Colin Ridens commentary, but I question wisdom placed in associates with links to a previous MAF official now moonlighting for 'independent' (foriegn) processors, which the government wants to support ahead of welfare of NZ.

Ok so look at the price difference and I ask myself who's making the money? Will Kiwis ever get a cut,will it all be made by Chinese middle men with political links?
Bright launched "Pure Canterbury" in Shanghai in mid-December. Cans of Pure Canterbury infant formula - complete with their image of the snow-clad Southern Alps rising out of the fertile green Canterbury Plains - are on Shanghai supermarket shelves. According to John Penno, 900g cans retail from between $92 for stage one infant formula, to $84 for stage three infant formula. This is clearly significant when compared to formula on New Zealand supermarket shelves priced between $15 and $30.

just the nz middle folk with political connections.......
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The public relations team are working to their zenith,and they have done a bloody good job. I suspect that if Theiring takes one step out of line,he is done for.A lot of Fonterra owners are severely pissed off with the contempt  shown towards them by  their elected directors.

Agree with you on the first point bruno32, but in my attempts to canvas opinion on TAF, half have faith, half don't or struggling to understand, and a very small percentage are dissapointed with prospects. Maybe different in other areas.

At a Southland meeting a supplier (Dutch immigrant) got a standing ovation when he somewhat forcefully  reminded the Director and Fonterra staff in attendance, that Fonterra was owned by shareholders, and was a co-operative and they had better start to sit up and take notice of supplier feelings.  Reminds me of when I lived in the Central Plateau - they can be a bit of a bolshie lot there too. :-) 
I have yet to met a supplier who isn't wary of Spierings.  He is too close to Henry and can't see the wood for the trees.  Once Henry goes he will feel the full force of supplier dissatisfaction. Could be some interesting, if not turbulent times ahead for Fonterra governance.

Encouraging comments from Southland, good to hear CO. I'm in contact with a movement trying to muster support for an open and honest debate on TAF through proposing another shareholder vote. They are pretty wary of Fonterra leadership, in scuttling their effort to try and achieve this. They are absolutely staunch in there belief and willingness to support the continuence (renewal maybe a better word) of a co-operative Fonterra. However they don't have much presence in Southland, and it is said Fonterra leadership and PR machine have done alot of work their to promote the cause of TAF. I don't know what you think of this assertion?
Not many bolshie shareholders in my neck of the Central Plateau woods CO, unfortunately, as so long as it's civil, makes for a robust co-operative. Most influential suppliers around my way either grew up in Henry's neck of the woods or were probably going through Young Farmers with him at the time he was earmarked for leadership, and would follow him through thick and thin ("theirs not to reason why").
Reference often made to Theo's co-operative foundations, so one would hope he stays true to his foundation principles in relation to TAF and Fonterra. I have doubts, he doesn't own a farm or milk cows. I would hazard a guess the driving force behind his motives apart from our chairmen and associated politicians, are more related to growth and world domination, than supplying shareholder interest. And although we are told they are linked, it is valid to suggest corporate executive interest does not always align with that of the shareholder.