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.
In the last financial year, ending July 31, 2015, the co-op spent $360m developing farming hubs in China; normalised earnings before interest and tax (EBIT) was -$44m.
The co-op is blaming the loss on the low milk price in China, a drop in livestock valuation and farm development costs.
However, Fonterra chairman John Wilson expects the Chinese farm operations to return to profit this financial year.
Wilson says the co-op hopes the milk price in China will reach sustainable levels within six months.
"It's hard to predict how milk prices will move," he told Rural News. "But our Chinese farms are efficient, safe and have good environmental credentials and we are happy with that."
Some Fonterra farmers have questioned the investment in China and the lack of returns.
Wilson says Fonterra farmers understand how important the farms are as part of its commitment to China's dairy industry.
"They also know how important it is to source own milk for value added products in China. Just like farmers in NZ, farmers in China are facing low milk prices and are not making money."
Fonterra has nearly completed its second hub in Ying County, Shanxi Province. Like the first Yutian Hub, near Beijing, the hub will end up with five farms of 3000 cows each.
Sales volume of raw milk for the year increased to 164,000 million tonnes largely due to additional capacity coming online. This equates to 12m kgMS of milk produced for the year.
Fonterra has signalled the future investments in China farms may include funding from strategic partners as well as the co-op, enabling continuing integration.
Despite the loss in the China farming business, Fonterra reported a net profit after tax of $506m for the financial year, 183% more than the previous year.
