* New strategy allows for dairy production in China
* Company says securing the milk supply critical after
* Higher productivity the key to govt call to boos dairy
By Lucy Hornby and Jane Lanhee Lee
TANGSHAN, China, March 22 The Hangu dairy farm
was all that remained from the ruins of Fonterra's NZ$200
million investment in China after its state-owned partner Sanlu
collapsed in 2008 following revelations that its baby formula
was contaminated by the chemical compound melamine.
The farm, on brown fields northeast of Beijing, is now the
breeding ground for a new international investment strategy by
the New Zealand company, the world's biggest dairy exporter.
Post-melamine, Fonterra is building and operating
its own large-scale dairy farms overseas, so it can be certain
of the quality of the dairy products it sells.
"There were 21 companies in China that had melamine in their
milk. One company chose to do something about it," Fonterra's
China president Phillip Turner told Reuters.
"We blew the whistle. We kind of blew our own foot off
because it destroyed our investment. But I think that's the way,
I think consumers appreciate it."
While Fonterra bets that Chinese customers will trust in its
quality, China is betting the future of its dairy industry on
farms like the 3,000-head operation at Hangu and an even newer
prototype at Yutian in Hebei Province.
The government wants to boost annual milk output to 90
million tonnes by 2030 from 30 million now. Given limited
pastureland, the only way to do that is by building large-scale
farms and sharply raising herd productivity.
A Chinese cow generally produces about half the milk of her
American or European cousin. Llower output is largely due to
genetics and feed.
Fonterra's cows in Hebei are black and white Friesians which
have travelled by ship from New Zealand. They are crossed with
American stock bred for life in long, concrete-floored barns.
Fonterra chose the Tangshan area of Hebei in part because of
the easy availability of water and corn for feed. It supplements
with imported alfalfa.
It ultimately plans to build four or five hubs, each made up
of about 16,000 cows across several farms, in the plains that
stretch northeast of Beijing.
Fonterra sells about $2 billion of imported milk products in
China, its biggest market. The hubs would allow the cooperative
to produce in China, using its own milk, in a departure from its
practice in New Zealand of buying from independent member farms.
"Melamine changed our view a little bit in that getting the
milk supply right is our priority in any country," said Peter
Moore, who heads Fonterra's international farming division.
"We are looking to go into India. Now, the first thing we
would do is secure the milk supply."
For the time being, milk from its farms is sold to nearby
Chinese and foreign dairy processors to raise the average
quality of their milk.
"We have a clear plan to develop our own supply, either
through our own farms or farms we control. We are very clear we
need to control our own milk supply," Moore said.
Four years after the melamine scandal, China's dairy
industry has barely recovered. Milk production was basically
flat at around 35.5 million tonnes from 2007 to 2010, before
ticking up by about 3 percent in 2011.
Milk product exports crashed from 134,500 tonnes in 2007 to
36,800 tonnes in 2009, and have only just begun to revive.
Imports have soared to almost a million tonnes a year, after
briefly losing ground to Chinese-made products in 2007.
Chinese travelling overseas come back laden with boxes of
milk powder to give to friends and relatives.
"Food safety is one of the most sensitive topics in China,"
said Chen Lianfang, dairy analyst at Beijing Orient Agribusiness
"So any foreign investors in China's big dairies, including
Fonterra, need to make safety and quality the top priority."
China's planners had fixated on dairy as a way to modernise
the farming industry and raise nutrition levels in a population
that does not traditionally drink products made from cows' milk.
A new taste for sweet yoghurt and ice cream has expanded
along with growing cities and stores with refrigerators. Chinese
dairy consumption more than tripled from 2001 to 2010.
But in the past decade, the expansion of the herd outpaced
the availibility of good feed and refrigerated collection and
distribution networks. Subsidies meant farmers with little
experience invested in dairy cows, producing poor quality milk
which they sold to middlemen with even poorer safety standards.
That all came to a head in 2008, when reports surfaced of
babies developing kidney stones after drinking tainted milk
formula. In a subsequent trial, Sanlu executives said they
reported the problem to the government, but the public was not
told until after the Olympic Games wrapped up in Beijing.
At least six Chinese infants died and 300,000 were made ill.
Trade partners briefly closed their markets to Chinese milk. The
United States and European Union still impose stricter checks on
Chinese-made dairy products than on other Chinese exports.
It has been more than a year since the EU detected any
melamine traces in Chinese milk exports, EU Commissioner for
Health and Consumers John Dalli said on Wednesday.
But just last April, Chinese authorities seized 26 tonnes of
melamine-tainted milk powder that was sold to an ice cream
producer in the southwestern city of Chongqing.
Dairy firms Mengniu and Yili together
account for 44 percent of dairy products markets in China. They
source their milk from a combination of large-scale suppliers
and communities of small farmers that keep up to 10 cows in
(Editing by Ron Popeski)