Synlait says it expects to get the milk supply it needs to expand its milk powder production from farmers it has already signed up ready to go.
The Canterbury dairy company has announced a partnership with the third biggest dairy company in China, Bright Dairy, which is investing more than $80 million in its processing plant at Dunsandel.
It will double milk powder production to about 100,000 tonnes a year, with the construction of a second drier that will allow it to manufacture specialised infant formulas to meet the huge demand in China.
Synlait currently gets about 20% of its milk from Fonterra, under regulations that require the co-operative to supply milk to independent processors.
However, chief executive John Penno reckons that its reliance on Fonterra milk will reduce as it expands its operation.
Mr Penno says the second plant will be commissioned in time for the next dairy season, in 2011-12.
No obstacles seen to OIO clearance
Bright Dairy is China's leading supplier of fresh milk, yoghurt and cheese. It operates 23 processing plants in China and has more than 200 of its own dairy farms.
It sees the partnership with Synlait as the means to secure a source of safe, high-quality milk, especially for infant formulas.
It will need Overseas Investment Office clearance, like the Hong Kong company Natural Dairy (NZ) Holdings that wants to buy dairy farms in the North Island.
But Synlait sees no obstacles to that, because Bright Dairy will be investing in manufacturing and not buying farmland.
Open Country Dairy also says the two deals have nothing in common.
Chairman Laurie Margrain says the Synlait deal is completely different because it is about investing in milk processing, not the emotive issue of owning farm land.
He says that if the investment was in any industry other than dairying, it would be regarded as a good thing.
Federated Farmers has questions
Federated Farmers, which has raised concerns about the Natural Dairy bid to buy farms, acknowledges the difference between that and the Synlait-Bright Dairy partnership.
But dairy chair Lachlan McKenzie still has questions about how much New Zealand will benefit.
While there is talk about consumer-ready products being produced in Canterbury for the Chinese market, he says, the reality is that economic conditions, including emissions and labour costs, make it cheaper to ship bulk milk powders to China for value-added processing there.
However, Lincoln University agribusiness Professor Keith Woodford says that the deal could be the sort of investment that New Zealand needs.
He says Synlait needed capital that was not readily available from within New Zealand, so an alliance with a major dairy company such as Bright would seem to make lots of sense.