China is working – Fonterra

China is Fonterra’s largest market, accounting for nearly $4 billion of sales last financial year; normalised earnings exceeded $200 million.

But Wilson admits the co-op’s joint venture with dairy company Beingmate is a “significant frustration and concern” for everyone.

Speaking to farmers at a recent Northland Dairy Development Trust conference in Whangarei, Wilson said Beingmate’s performance will be discussed with farmer shareholders after the release of its interim results next month.

“Rightfully, we should expect individual parts of our integrated China strategy to deliver returns to farmers. But it’s important that we measure the success of our China business against the entire integrated strategy over the medium term.

“There will be bumps on the road from time to time; I don’t like it all but there will be,” he conceded.

“That integrated strategy has helped China become our largest global market, accounting for just under $4b sales revenue which contributed to the milk price and delivered a normalised earnings contribution last year greater than $200m. 

“So the overall strategy is working very well, but there are a few pieces we would like to be doing better,” Wilson told farmers.

Fonterra invested at least $750 million on a 18.8% stake in Beingmate in 2015; the co-op paid 18 Chinese yuan per share and last week the share price was hovering around 4.5 yuan.

Last month, the listed Beingmate company issued a downgrade, putting its projected loss at $171m - $214m for the December year, against a prior forecast loss of $75m - $107m.

The extent of the writedowns on Fonterra’s 18.8% investment will be revealed when the co-op releases its interim financial results next month.

Wilson was careful not to comment on Fonterra’s write-downs before the half-year results.

“We will spend some time talking to our farmers in our interim results; typically we do not comment on performance leading into half-year results,” he says. “But of course Beingmate is a significant frustration and concern for farmers and for the board and management team.”

Market booming

China's infant formula market is booming.

Fonterra chairman John Wilson says the China market is growing rapidly; within five years forecast demand for infant formula and baby dairy products will exceed the total of all other global dairy markets.

Wilson says Fonterra chief executive Theo Spierings is working with Beingmate’s founder and cornerstone shareholder Sam Xie to improve the business.