From The Farm: Felt in Hong Kong

By Jonathan Underhill

There’ve been some well-written columns on Fonterra Cooperative Group’s handling of the DCD scare. It is a pity that trace amounts of dicyandiamide residue were only there because fertiliser companies are looking for ways to limit the amount of nitrate runoff from farms – the source of the dirty dairy jibes. You can’t win.

It isn’t an understatement to say the DCD reports were noticed globally. China’s Yashili, the company planning to build a $210 million infant formula plant at Pokeno, told the Hong Kong stock exchange on Jan. 25 that the detection of DCD had “aroused wide concern and led to a decrease in the price and an increase in the trading volumes of the shares of the company.”

Yashili, which is awaiting Overseas Investment Office approval for its plant, says it sought and obtained from Fonterra written confirmation that no raw milk products it bought had DCD residue. The Chinese company is right to be concerned about bad publicity because Fonterra is its key supplier from New Zealand and the safety of New Zealand product is a key selling point for infant formula to Chinese consumers.

Some 45 million Yashili International shares changed hands on Jan. 25, the biggest volume since March 23, 2011. The stock dropped almost 13 percent to HK$2.44 that day. A further 35 million traded on Jan. 28.

Since then Yashili shares have recovered most of their lost ground, to trade at HK$2.69 yesterday. To put the blip in Yashili’s share trading in a longer perspective, the price on Jan. 24 of HK$2.79 was the highest in almost two years. The stock has more than doubled in the past 12 months though it has yet to recover back to its 2010 initial public offering price of HK$4.20.

I suspect the market impact of the DCD scare in the Chinese market will prove to be only a blip as well, notwithstanding comments from Graeme Clegg of New Image Group that the colostrum product maker lost an order because of it.

China has made a major commitment to New Zealand dairy products and Chinese entrepreneurs have backed it with cash.

Apart from Yashili, Shanghai-based Bright Dairy & Food spent $82 million buying a controlling stake in Synlait Milk, which had failed to find equity capital in New Zealand. China's Shanghai Pengxin invested a reported $200 million in the 16 Crafar Farms. Chinese dairy firm Inner Mongolia Yili Industrial Group is spending $214 million building an infant formula plant in South Canterbury in a deal that will see it take over Oceania Dairy Group.

A far bigger problem for New Zealand is how it will lift milk production enough to keep pace with soaring global demand. Yashili New Zealand, which has a target of producing up to 52,000 tonnes of milk products a year, plans to put its milk supply out for tender.

In isolation, the projected global growth in demand for dairy calls for a massive intensification of production in New Zealand.

While the government’s intervention in the regulation of water in Canterbury has ensured more water for irrigation and a quicker track for approvals of water rights and schemes, total milk output is projected to grow at only a tepid pace in coming years.

For example, the Ministry of Primary Industries projects total milk solids produced to climb about 4 percent between 2012 and 2014.

Looking back decades though, you can see the massive transformation of New Zealand’s rural landscape. The country processed 5.2 billion litres of milk in the 1977/78 year. By 2011/12, processing had quadrupled to 19.1 billion litres, a record.

The jump in the milk pool reflects dairy conversions as farmers and investors moved away from sheep, the conversion of former forestry land but also improvements on production, breeding, genetics and management.

The total number of cows only doubled in the same three decades to sit at about4.6 million last year while the number of dairy herds fell to 11,798 from 18,540 - testament to the level of consolidation in the industry.

It is hard to see similar exponential growth in coming decades. The supply of land is finite. There needs to be a new discussion about intensification if the country is going to try.

(BusinessDesk)

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