Fonterra Cooperative Group Ltd., one of the world's largest dairy exporters, is investing 557 million yuan ($88.3 million) to expand operations in China in a major push to gain ground in the country after a 2008 milk contamination scandal tarnished its growth plans.

The New Zealand company will open two new farms in China's northeastprovince of Hebei, said Theo Spierings, Fonterra's chief executive, at a ceremony marking the opening of Fonterra's second farm on Thursday. Fonterra plans to have a total of five farms in China and a herd size of 15,000 cows within the next few years, Mr. Spierings said, compared with about 8,000 currently.

The milk company is making a second major attempt to expand in the country after its first push was thwarted in 2008, when revelations about its state-owned partner dairy company Shijiazhuang Sanlu Group Co. having sold baby formula contaminated with the chemicalcompound melamine disrupted its rise.

Building its own herds will enable Fonterra to ensure a secure milk supply.

'An integrated business all starts with a safe, high-quality local milk supply,' Mr. Spierings said.

He added that the company's ultimate goal is to produce up to one billion liters of milk in China every year by 2020. Production by the end of this year is expected to be around 60 million liters by year end. The five farms, when fully established, will be able to produce 150 million liters per year. To reach one billion liters, Fonterra will need to open more farms, a company spokeswoman said.

China's agrarian landscape has historically been dominated by small-scale farms, using different feed and different varieties of cattle, which has made quality control difficult. Now regulators overseeing the dairy industry are shutting down small farms and pressing others to combine into larger-scale operations that will be easier to police.

Analysts say success in China is critical for Fonterra, which sold around 2 billion New Zealand dollars (about US$1.64 billion) worth of products, including milk powder and fresh dairy, to the country last year.

China is Fonterra's single-biggest market and many dairy companies have their eyes set on the market due to an increasing thirst for milk there. China's overall dairy sales jumped 8.5% in 2011 to $28 billion from a year earlier, according to research firm Euromonitor International.

LAURIE BURKITT

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