Fonterra in $300m deal after China trade agreement

The Press | Friday, 30 May 2008

Fonterra in $300m deal after China trade agreement

By DAN EATON

Fonterra has scored the first big windfall from the Government’s free-trade pact with China, signing a deal worth more than $300 million.

The dairy giant was yesterday keeping details of the agreement under wraps but said it involved a contract to supply "a major multinational customer" with nutritional milk powders, beating stiff competition.

The deal is further good news for dairy farmers, with the co-operative expected to lift its payout forecast for this season by at least $30c a kilogram in an announcement today.

Fonterra’s Japan-based general manager of trade for Asia, Philip Turner, unveiled the deal during an appearance before Parliament’s foreign affairs, defence and trade select committee.

The committee was hearing submissions on the New Zealand-China free-trade agreement (FTA) before a party vote to ratify enabling legislation. Labour and National are supporting it, assuring the bill smooth passage.

Turner said the "commercially very valuable" deal came within weeks of the signing of the agreement in early April, locking in a schedule for eliminating tariffs on nearly all exports to China by 2019.

Tariffs on nutritional milk powders for infant formula, pregnant mothers and young children are to be eliminated by 2012.

"We’ve been able to conclude a deal recently on the basis of the FTA being signed, which results in a considerable volume of business and processing being done in New Zealand that would otherwise have gone offshore, in this case to Singapore," Turner said.

Fonterra’s written submission said the deal would generate more than $300m in revenue over four years.

"These value-added dairy products will be manufactured in New Zealand factories, using New Zealand milk, capital, labour and technology," it said.

"Without the FTA with China, lower-priced product from New Zealand would almost certainly have been processed offshore in Asia."

Trade Minister Phil Goff welcomed such a lucrative deal so soon after the agreement was signed.

"Fonterra’s submission to Parliament, and its announcement of this deal only weeks after signature of the FTA, is further evidence of the value of that outcome to New Zealand."

National Party trade spokesman Tim Groser said the deal was proof criticism of relatively long phase-out periods for the agricultural sector was misplaced. "This is, of course, a perfect illustration of why criticism of slow phasing out of tariffs is so wrong because once the market can see where it is going the market will go ahead," he said.

China is New Zealand’s fourth-largest export market for dairy products, earning $523m last year, up from $144m in 2001.

The phase-out of tariffs on all dairy products over the next five to 12 years will save Fonterra $56m on current export values.

Turner said China’s dairy production was "exploding", meaning Fonterra would need to continue to focus on quality niche products such as nutritional milk powders.

source: The Press