Abbott, Fonterra to Add 16,000 Cows in Venture for Chinese Dairy Farms

July 11, 2014 05:02 AM

The companies will form a joint venture to run as many as five dairy farms, with the first farm opening in 2017.

Abbott Laboratories is planning its first foray into China’s dairy market through a $300 million joint venture with Fonterra Cooperative Group Ltd., the world’s largest milk processor.

The companies will form a joint venture, which must be approved by Chinese regulators, to run as many as five dairy farms, they said in a statement yesterday. The operation will involve more than 16,000 milking cattle, with the first farm opening in 2017. The effort is eventually expected to produce up to 160 million liters of milk a year.

Fonterra, a farmer-owned New Zealand co-operative, already runs two dairy hubs in China’s Shanxi and Hebei Provinces. The joint venture will import cows or obtain them from Fonterra’s existing farms. Abbott, the largest maker of adult nutritional beverages in the world and a leader in infant formula, has allocated more than $400 million to its Chinese operations so far this year.

"This is a very important step in our growing commitment to Chinese consumers," said Abbott Chief Executive Officer Miles White. "We’re committed to using our science, our product quality and educational efforts to raise the level of health in China and around the world."

The move comes as other food and nutrition companies have also been boosting investment in China and its $16 billion infant formula market. Danone, the Paris-based maker of Activia yogurt, earlier this year invested $663 million to double its stake to almost 10 percent in China Mengniu Dairy Co., the country’s biggest dairy producer.

Good Move

The move is a good one for Abbott Park, Illinois-based Abbott, said Larry Biegelsen, a Wells Fargo analyst in New York.

"This joint venture should provide Abbott with access to high quality milk for its infant formula business, which is important given the dynamic Chinese regulatory environment," he wrote in a note to clients yesterday. "The Chinese government has signaled its intention to develop the local dairy industry. It’s possible that the Chinese government could at some point require infant formula to be made with local milk."

Both Fonterra and Abbott have had problems in China. Fonterra, based in Auckland, said last August it found bacteria that can cause botulism, a rare and deadly condition, in whey protein concentrate it produced. Abbott did a precautionary recall of milk powder because of potential contamination. The products and the ingredients were subsequently found to be safe.

Milk powder tainted with melamine caused an industry-wide scandal in China in 2008, prompting the collapse of Fonterra’s partner Sanlu Group. Twenty-two companies including Sanlu sold formula made from contaminated milk, killing six infants.

Abbott and Fonterra acknowledged the need for high quality milk products produced locally in China. Demand for dairy has been steadily rising for the past decade, and safe products are needed to foster the local industry, the companies said.

"Farming hubs are a key part of our strategy to be a more integrated dairy business in Greater China, contribute to the growth and development of the local Chinese diary industry, and help meet local consumers’ needs for safe, nutritious dairy products," Fonterra Chief Executive Officer Theo Spierings said in the statement.

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