New Zealand’s dairy products trade internationally accounts for about 35% of the world trade. The dairy industry has been growing and it remains the largest exporter of dairy products (ABARE & MAF, 2008). Its major dairy products are exported in Latin America, China, Japan and the United States.
Fonterra is the largest milk production firm in New Zealand and handles over 90% of the country’s milk production (Dairy Companies Association of New Zealand, 2010). To raise capital Fonterra may sometimes issue dry shares and sell rights to its suppliers who are the farmers (The National Business Review (b), 2010).
However, lately, the firm has been attracting foreign investors. Foreign investments such as mergers have enabled domestic companies to expand their operations abroad. For example, Fonterra’s joint farm with Sanlu, a Chinese Dairy Company has enabled Fonterra to establish dairy farms in China (China Daily, 2011).
Besides, it sells its raw milk as dairy products around the production areas in China. Foreign investment has several advantages to Fonterra and the dairy industry as a whole. Foreign investment increases the firm’s ability to expand its foreign market in other countries such as Chile, China, Japan and the US (Chisholm, 2011).
New Zealand exports over 95% of all its dairy products (Dairy Companies Association of New Zealand, 2010). Chinese dairy companies have greatly expanded their investment in the dairy industry in the country which help increase the capital ability of the dairy firms to produce more and export to other countries.
Foreign companies as Bright Dairy as well as Hong Kong-based Natural Dairy New Zealand source New Zealand’s milk powder and sell them in China. For example, New Zealand has experienced substantial increase in cheese products manufactured in the country. Today earnings from exports of dairy products represent about 7% of New Zealand’s GDP (Dairy Companies Association of New Zealand, 2010).
Foreign investments also enable the dairy industry to export value-added products. About half of the country’s dairy products are value-added products as a result of advanced processing equipment as well as packaging of value-added products produced in the country’s owned offshore companies.
Large milk production firms like Fonterra have increased investment on putting up more dairy farms in New Zealand as a result of the entry of foreign firms. According to the National Business Review (2010) Fonterra is increasing its dairy farms so as to satisfy the needs of Chinese dairy firms.
Chinese dairy firms investing in New Zealand offer ridiculous prices for the farms. Foreign investment therefore encourages domestic milk production corporations to increase dairy farms so as to be able to maintain the extensive foreign interests in New Zealand’s dairy industry. Foreign investment also negatively impacts on New Zealand’s dairy industry.
It reduces the domestic dairy milk production firms to effectively compete in the market. According to the National Business Review (2011) Fonterra is not able to fully implement its investment plans on dairy products since Bright Dairy, a Chinese company has increased the capital capacity of Synlait to increase its milk processing plant and Fonterra has to continue supplying milk to the company even though Synlait has a dairy farmer supply base.
The competitors whose production capabilities have been expanded by the foreign investors use the Dairy Industry Restructuring Act which allows independent dairy products manufacturers to acquire a maximum of 50 million litres of non-processed milk production companies to obtain milk from milk production firms even during times of the year when milk supply is low (The National Business Review, 2011).
This is unfair to local milk production firms with processing plants considering that the foreign companies also have their milk farmer supply base in their own countries. By taking advantage of the provisions of the Dairy Industry Restructuring Act it lowers the ability other domestic companies such as Fonterra to maximize income for their stakeholders who are the milk farmers.
Reference List
ABARE & MAF. (2008). Agricultural economies of Australia & New Zealand. Web.
China Daily. (2011). Fonterra invests $30m in Hebei dairy farm. Web.
Chisholm, E. (2011). Fonterra in Latin America: A case study of a New Zealand company abroad. Wellington: Victoria University of Wellington.
Dairy Companies Association of New Zealand. (2010). New Zealand dairy industry. Retrieve
The National Business Review. (2011). Fonterra finds Chinese dairy giant on its doorstep. Web.
The National Business Review. (2010). Fonterra boss casts doubt on Chinese plans. Web.
The National Business Review. (2010). North Island farmers soak up dry Fonterra shares. Web.