Chinese giant New Hope will invest up to $500 million in Australian dairy farms and processing plants as part of a deal with ASX-listed Freedom Foods in what could be the first of many deals fuelled by the historic China-Australia free trade agreement.
Freedom Foods and the Perich Group said yesterday they had signed a memorandum of understanding with New Hope, China's biggest private company with interests in agriculture, financial services and real estate.
"With increasing demand from markets in China and south-east Asia for high-quality, value-added product, Australia through companies such as Freedom Foods and Perich Group is well placed to play an important role in the development of this supply chain," Freedom Foods managing director Rory Macleod said.
To secure milk supply, New Hope has established an investment fund of up to $500 million to invest in dairy farms and dairy processing.
Freedom Foods said it had built on its supply arrangements with New Hope for long-life milk and it was considering collaboration in other strategic branded dairy operations in Australia and overseas to take Freedom Foods products to China.
Perich Group, New Hope and other investors will contribute most of the equity for farm investment, which will start next year.
News of the deal comes on the back of the free trade agreement with China that gave Australia unprecedented access to the Chinese market.
Dairy producers fared particularly well, with all tariffs - up to 20 per cent - on Australian dairy eliminated in four to 11 years, depending on the product.
"We couldn't wish for a better deal. The agreement will do for us what it did for New Zealand. New Zealand [dairy] trade with China exploded after they signed their deal [in 2008]," Murray Goulburn managing director Gary Helou said.
Murray Goulburn collects almost 40 per cent of Australia's 9.1 billion litre milk pool and is the nation's biggest dairy exporter. The company plans to raise up to $500 million by listing a unit trust on the ASX next year. Mr Helou said he could buy a stake in a Chinese player or invest in distribution channels.
"We wouldn't rush into anything. But the capital raising is about funding our growth strategy and China is at the centre of those plans," he said.
Ten years ago China imported about $200 million in dairy product. Today it imports about $6 billion of dairy annually and growth is not slowing.
Barry Irvin, the chairman of ASX-listed Bega Cheese, said conversations were happening with Chinese partners all the time and the free trade deal had accelerated those talks. "It's the start of another phase in dairy. The most efficient and competitive supply chains can come through partnerships or contractual arrangements. There is great interest from Chinese dairy companies in Australia," he said.
In September Bega signed a $100 million UHT milk deal with China's Chongqing General Trading Group.
"You will see more announcements come [in dairy]. There is a ramp-up of inquiry [from China]," Mr Irvin said.
Not all investments will succeed. In February Hong Kong-based investor William Hui bought private processor United Dairy Power for about $70 million. The company went into receivership yesterday after Mr Hui's business Five Star Food was unable to provide more working capital.
