What Would Synlait Be Worth to Fonterra or a2 Milk?
Speculation of a possible joint move by Fonterra and a2 Milk to buy Synlait raises a much bigger strategic question, says agribusiness expert Dr Nic Lees.
The cooperative is offloading three farming hubs to Chinese companies for $555 million. Over the past 10 years it has invested over $1 billion in the farms with very little return.
The sale of China Farms was part of a review announced 18 months ago, where Fonterra halted overseas expansion and moved away from overseas milk pools in favour of growing its New Zealand milk base.
Fonterra farmers were unhappy with the co-op’s investments like China Farms, which ran at a loss.
Fonterra’s 2020 annual report reported that China Farms’ gross profit was $11 million compared to a $14 loss the previous year.
Federated Farmers dairy section chair Wayne Langford told Dairy News that overall the response from farmers has been positive towards the sale of the farms.
He noted that the farms have “been a constant burden on the balance sheet and a talking point at most shareholder meetings I have attended in the last 10 years”.
“While the farms have struggled to make money and pay themselves off, I think most farmers are aware of that the role they played for the co-op was not just for financial returns.
“The farms opened up many new doors and trading opportunities that need to be factored into the assessment of performance over time.”
He says Fonterra is an evolving cooperative and it’s great to see strong decisions being made.
“They will make good investments and poor ones, just as our farmer shareholders do. So it’s great to see that these are being analysed and evaluated with a clear focus towards future direction.”
Fonterra chief executive Miles Hurrell says, in building the farms, Fonterra has demonstrated its commitment to the development of the Chinese dairy industry.
“We’ve worked closely with local players, sharing our expertise in farming techniques and animal husbandry, and contributed to the growth of the industry.
“We don’t shy away from the fact that establishing farms from scratch in China has been challenging, but our team has successfully developed productive model farms, supplying high quality fresh milk to the local consumer market. It’s now time to pass the baton to Youran and Sanyuan to continue the development of these farms.”
Hurrell says the sale of the farms will allow the co-op to prioritise the areas of its business where it has competitive advantages.
“For the last 18 months, we have been reviewing every part of the business to ensure our assets and investments meet the needs of the co-op today. Selling the farms is in line with our decision to focus on our New Zealand farmers’ milk.
“China remains one of Fonterra’s most important strategic markets, receiving around a quarter of our production. Selling the farms will allow us to focus even more on strengthening our Foodservice, Consumer Brands and Ingredients businesses in China.
“We will do this by bringing the goodness of New Zealand milk to Chinese customers in innovative ways and continuing to partner with local Chinese companies to do so. Our investment in R&D and application centres in China will support this direction,” says Hurrell.
Completion of the sale, which is subject to anti-trust clearance and other regulatory approvals in China, is expected within this financial year.
