Global leader in dairy suffers from struggling Chinese expansion plan
Fonterra, the large New Zealand dairy co- operative, which has long been admired by the Irish dairy industry, has issued a second profit warning in three months.
Last year the dairy giant reported its first annual loss in its 17-year history. Unsuccessful investments made in pursuit of the Chinese market are partly the source of its problems.
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It has announced plans to sell some of its overseas businesses as well as closing processing plants overseas. Its shares fell to an all-time low and credit rating agencies last week warned of possible downgrades in its debt rating.
Although Fonterra's milk volumes in New Zealand alone are several times larger than the total Irish milk volumes, Irish dairy processors have for many years seen Fonterra as an efficient and innovative exporter and they have studied its business carefully.
Irish dairy farmers have also sought to learn from their New Zealand counterparts who supply milk to Fonterra.
While Brexit is a significant source of concern for the industry in Ireland, sources close to the industry noted that the current difficulties in Fonterra underlined the precarious nature of expanding and investing in international dairy markets.
"When rapid expansion in markets such as China does not go according to plan, the thin margins of dairy processors leave little room to absorb the losses," said a source.
Irish processors have been cautious in their overseas expansion and are well served by Ornua in their export operations.
Fonterra has invested NZ$1bn (€585bn) in its China farms division over the past decade, as it sought to build a milk supply business in a major export market for New Zealand and Fonterra.
However, the division has continued to be an under-performer and its seven farms have not delivered a profit.
"China farms has been an integral part of Fonterra's strategy, which was aimed at buying goodwill in China by teaching their farmers dairy techniques," said Oyvinn Rimmer at Harbour Asset Management, a New Zealand funds manager, told the Financial Times. "But it is very capital intensive and has never made them a dollar."
The Irish dairy sector is not the only Irish food business seeking growth opportunities in China. The Irish beef industry is also targeting in significant growth there. For example, Larry Goodman's ABP is currently supplying the Chinese food service industry. Already this year Ireland has shipped more than 2,000 tonnes of frozen beef to China while the number of Irish factories approved to export to China in increasing.
Sunday Indo Business
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