Under the five-year agreement, Fonterra will be the "dedicated and exclusive sales channel" for infant formula base ingredient, demineralized whey, and lactose-based prebiotic, GOS, produced by Dairy Crest at its Davidstow cheese plant in Cornwall, England.
Dairy Crest unveiled plans last year for a £45m (US$77m, €56.5m) investment at its Davidstow plant to kick start the manufacture of demineralized whey powder from whey generated during cheese production. The British dairy now intends to plough an additional £20m ($34.3m, €25m) into Davidstow to manufacture GOS.
It expects the plant to begin operations in 2015.
"This agreement aligns with Fonterra's global business strategy to develop leading positions in infant formula and growing-up milk powders and to extend and grow our infant formula business-to-business ingredients business in China, Europe and other key international markets," said Fonterra CEO, Theo Spierings, who signed off on the deal.
Added value sales
In addition to the strategic partnership signed with Fonterra, Dairy Crest has also entered into a joint venture with British firm Fayrefield Foods, which will provide it access to the enzyme necessary to produce GOS.
As well as its marketing and selling responsibilities, Fonterra will supply lactose, the raw material for the manufacture of GOS, produced at it's under-construction plant in Heerenveen, the Netherlands.
Welcoming today's tie-ups, Mark Allen, CEO, Dairy Crest, spoke excitedly of increasing the British dairy's access to global demand for infant formula.
"Demineralized whey powder and GOS form an important part of Dairy Crest's strategy to grow added value sales," he said.
"We are excited to be working with Fonterra and Fayrefield Foods to bring these two innovative new products to market. These partnerships, with leading experts in the field, give us exposure to global growth opportunities."
Weighing in, Shore Capital equity analysts, Clive Black and Darren Shirley, branded the tie-ups secured by Dairy Crest "important strategic initiatives that add value to its cheese production activities."
"The announcement provides the icing on the cake for a program of work that management has spoken of for some time," Black and Shirley said in a note.
European sourcing
Reports that Dairy Crest and Fonterra were on the verge of signing a deal emerged last week.
Even yesterday, both companies declined to comment on the deal.
With the deal now sealed, Fonterra adds Dairy Crest to its growing list of European partners.
The New Zealand-based dairy exporter's European sourcing efforts began in 2011 when it formed a joint venture with British dairy First Milk.
Since then, Fonterra has partnered with Lithuanian dairy Rokiškio, and teamed-up with Dutch firm A-Ware Food to establish “mutually-beneficial” neighboring cheese and dairy ingredient plants in Heerenveen.