Is Chinese takeover a direct attack on Fonterra?

The New Zealand dairy cooperative Westland Milk Products is acquired by the Chinese dairy giant Yili Group. The takeover is causing a stir in the New Zealand dairy sector, because there are fears that the Chinese want to tighten the thumbscrews at dairy giant Fonterra in this way. 

Last week, the 430 member dairy farmers of Westland Milk Products agreed with an overwhelming majority (94%) to Yili's offer: $588 million* (about €350 million). This offer was very tempting, as the converted $3,41 per share was more than 3 times the estimated value of $1. In addition, the dairy farmers are promised that Yili Group will pay at least the Fonterra farm price (the Farm Gate Milk Price) for a period of 10 years.

An average Westland member dairy farm, New Zealand media has calculated, will receive about $500.000 (almost €300.000) deposited into its account. That's a nice bonus, as things are not going very smoothly in New Zealand dairy farming. Add to this the fact that Westland Milk has been financially tight for some time now and has difficulty competing in the milk price with Fonterra.

Offer too nice
However, therein lies the snag among critics. They regard Yili's offer as 'too good to be true' and see the purchase as a strategic move rather than a commercial one. Westland is not Yili's first purchase in New Zealand. In 2013, the company, which is 25% owned by the Chinese government, acquired Oceania Dairy. There are now fears from various quarters in the New Zealand dairy, including members of the New Zealand Parliament, that the Chinese takeover will lead to a direct attack on Fonterra.

The cooperative dairy Fonterra is a showpiece for the New Zealand economy and the world's largest dairy exporter. One of the most important sales markets for Fonterra is China. Now that Yili has set foot on the New Zealand home market, it is feared that Fonterra's position will come under pressure. As with Westland, Fonterra's financial base is not very solid either.

Fonterra in foreign hands?
A New Zealand economist and adviser to the New Zealand government warned last week that Fonterra is at risk of falling into foreign hands. That report caused a lot of commotion in the sector and among the management of Fonterra† In a statement, the company said it is engaged in a strategic reorientation and has great confidence in the future.

Westland Milk Products achieved a turnover of $2018 million in 693 and collected approximately 2017 million liters in the 2018/689 season. The company exports to 40 countries annually. More than half of the range sold consists of butter, milk fat (AMF) and milk powders.

*These are New Zealand dollars.

Eric the Thrush

Eric is a member of the editorial staff of Boerenbusiness. As a descendant of an arable family, farmer's blood flows through Eric's veins. He considers himself a generalist, but with a preference for economics, trends, markets and marketing.

e.delijster@boerenbusiness. Nl

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