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(Updates with analyst comment in fourth paragraph.)
Nov. 25 (Bloomberg) -- Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, aims to double sales in China, Theo Spierings said during his first trip as chief executive officer to the nation where a 2008 tainted milk scandal led to the collapse of its local partner.
China’s dairy market will increase in value by more than 10 percent a year in the next few years and Fonterra plans to double sales by 2020, Auckland-based Spierings said in an interview on Bloomberg Television.
Fonterra, which accounts for about 40 percent of the global trade in dairy products, is expanding in China after melamine- tainted milk killed at least six infants. The ensuing investigation led to the collapse of partner Sanlu Group and the imprisonment of former chairwoman Tian Wenhua, as well as the trial and execution of two other people and a surge in the sale of imported milk.
“The scandal of a couple a years ago is pretty much imprinted on a lot of Chinese consumers’ minds,” said Michael Creed, a Melbourne-based agribusiness economist at National Australia Bank. “If you do have a foreign-owned dairy company producing milk and milk powders or dairy products in China there’s possibly a perception that their standards may be somewhat higher.”
Consumption of food commodities including dairy is rising in China as economic growth lifts incomes and spurs increased sales of protein-rich meals. China’s demand for New Zealand milk products last year surged more than fivefold from 2008 to about 353 million kilograms, according to the company.
“Demand in this country is growing at double-digits, so in that sense it’s fantastic,” said Spierings, 47, in the interview aired yesterday that continued the company’s expansion in China undertaken by his predecessor. “Supply is also growing in China, but supply will not be able to cope with demand.”
China’s imports have surged after milk powder in the country was found in 2008 to be tainted with melamine, an industrial chemical. Along with the deaths, more than 54,000 were hospitalized after 22 companies including Sanlu sold formula made from contaminated milk.
Global consumption of liquid-dairy products may increase by 30 percent over the next decade as the middle classes expand in China and India, Tetra Pak Group said July 11.
“The only direction for milk demand in China is up,” National Australia’s Creed said by phone. “You do have a combination of rising per capita income and increasing westernization of the Chinese diet as well as rising protein consumption.”
Fonterra will increase its sales through imports and also through expansion of local milk production via its three farms, Spierings said. The company agreed with Yutian county’s government in Hebei province to build a “world-class” farm, which will increase its milk production in China to about 90 million liters a year, it said July 19.
There is another farm in Hebei and one in Tangshan, which has doubled to more than 6,000 cows since it opened in 2007. Currently, the two farms are producing raw materials for other dairy makers such as Inner Mongolia Yili Industrial Group Co. and China Mengniu Dairy Co., Spierings said.
The melamine tainting caused the collapse of Fonterra’s local partner Sanlu and resulted in the execution of two people after a trial about their involvement in the poisonings.
The scandal “was a big hit for the dairy industry” in China, Spierings said. Fonterra will build a “fully integrated model in China in order to take full control of the supply chain” so that safety won’t be an issue, Spierings said.
In the aftermath of the poisonings, “consolidation of the fragmented, small producers will continue as the regulation will be tighter and tighter,” he said.
Chinese urban dwellers consumed 22.72 kilograms of dairy products per capita in 2008, up 57 percent from 2000, according to the Ministry of Agriculture. The rural population consumed only 4.81 kilograms per capita in 2008, ministry data showed. China demand will continue to “outpace its own supply and imports will grow,” Spierings said.
Spierings previously headed Dutch co-operative Royal Friesland Foods.
--Elisabeth Behrmann, Feiwen Rong, with assistance from Phoebe Sedgman in Melbourne. Editors: Andrew Hobbs, Jarrett Banks
To contact Bloomberg News staff for this story: Elisabeth Behrmann in Sydney at firstname.lastname@example.org; Feiwen Rong in Beijing at email@example.com
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