China’s Inner Mongolia Yili Industrial Group Co. is setting up a milk-powder factory in Kansas with Dairy Farmers of America Inc., building out its year-old strategic alliance with the U.S. cooperative as part of a trend of Chinese dairies expanding abroad.
The plant will be able to produce 80,000 metric tons of milk powder a year, Yili said in a filing late Wednesday to the Shanghai Stock Exchange. The company didn’t specify how much of the plant’s milk powder will be sold in China.
Under the terms of the deal, Yili will invest $30 million in the venture, and Dairy Farmers of America will invest $70 million, the Chinese company said in the filing. Yili is China’s second-largest dairy producer by revenue after China Mengniu Dairy Co.
Dairy is one agribusiness benefiting from changing diet demands among increasingly wealthy developing economies. While dairy sales have largely stagnated in developed markets, consumption in China is growing about 10% a year, with demand for premium milk brands rising at twice that rate, according to data provider Euromonitor International.
China’s 2008 melamine scandal, in which tainted infant formula killed six babies and sickened 300,000 people, bolstered the country’s interest in pursuing cooperation with overseas producers, which consumers see as safer than domestic counterparts. A drought last year in New Zealand—China’s top supplier—underscored the need to diversify China’s resource imports.
Global mergers and acquisitions have become an attractive way to increase sales in the industry. Chinese companies court foreign know-how and offer the fastest way for global firms to break into China’s far-flung and fragmented market. “There are still a lot of mom-and-pop shops in China and while e-commerce has grown, multinational [dairy producers] are still going to come back to bricks and mortar in order to do distribution well,” said Jeremy Yeo, dairy-industry analyst for Mizuho Securities.
China has been pursuing a rising number of overseas deals in the agribusiness and dairy sectors over the past five years, data from information provider Dealogic shows. Chinese companies invested $8.4 billion in 11 deals so far this year, compared with $86 million in three deals in 2010, it said.
Yili signed a strategic cooperation agreement with Dairy Farmers of America in July last year.
In January, Mengniu set up a joint venture with U.S. producer WhiteWave Foods Co. to market and sell a range of dairy products in China. Last month, Royal FrieslandCampina NV agreed on a deal with China Huishan Dairy Holdings Co. to produce infant formula in China, with an intent to leverage the Dutch company’s expertise and sales networks.
Foreign companies also are helping Chinese businesses set up milk plants onshore. Last year, private-equity firm KKR & Co. said it would lead a $140 million joint venture with China Modern Dairy Holdings Ltd. and Chinese private-equity firm CDH Investments to build two dairy farms in the world’s second-largest economy. French dairy giant Danone SA has also invested in two joint projects with Mengniu.
Dairy Farmers is one of the largest milk-producing cooperatives in the U.S., representing nearly 13,000 producers across 48 states and accounting for a third of raw-milk output in the world’s largest economy, according to the cooperative. It buys raw milk from its members and processes it into dairy products for wholesale.
New Zealand has traditionally been China’s go-to supplier, accounting for 80% of the country’s milk-powder imports, Mr. Yeo said. But interest in U.S. supplies rose sharply after China found bacterial contamination in whey products imported from New Zealand’s Fonterra Cooperative Group Ltd. in August last year. Fonterra’s chief executive publicly apologized for the food-safety scare, attributing the problem to a pipe that hadn’t been sufficiently cleaned.
The U.S. and New Zealand are two of a handful of nations in the world with a surplus of dairy products for export, according to Mizuho.
By Chuin-Wei Yap