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By Naomi Tajitsu
WELLINGTON (Reuters) - New Zealand's Fonterra on Wednesday said it will take a stake in Chinese baby food and formula maker Hangzhou Beingmate Group in the dairy giant's first tie-up with a Chinese processor since its involvement in a tainted infant formula scandal in 2008.
The announcement came as the world's largest dairy exporter is trying to expand into China's lucrative milk formula market. It also said it would invest NZ$555 million (279.98 million pounds) to increase dairy processing capacity in New Zealand.
The farmer-owned New Zealand dairy co-operative (NZ:FSF) said it would take a stake of up to 20 percent in Beingmate <002570.SZ>, China's biggest domestic milk processor, and that Beingmate would distribute Fonterra's Anmum infant formula brand in China.
"By working together with Beingmate, we will strengthen our infant formula brand presence in China and link China to high quality ingredients from New Zealand (and other countries)," Fonterra CEO Theo Spierings said in a statement.
While Fonterra is a major supplier of bulk milk powder products used in formula in China, it had stayed out of branding space in the country after Chinese dairy company Sanlu, in which it had held a stake, was found to have added toxic melamine to bulk up formulas in 2008.
"It got burned with Sanlu so it wasn't in a hurry of getting back into China," ANZ rural economist Con Williams said.
"There are (product quality) challenges, but they must be pretty confident that they can navigate those."
China is a crucial market for Fonterra, as the world's No. 2 economy imports about one quarter of New Zealand's total dairy exports to feed growing demand for milk products, particularly milk formula, from the country's booming middle class.
New Zealand exported around NZ$4 billion in milk powder products alone to China in 2013, as Beijing continued to source from Fonterra in the wake of a recall of infant formula and other dairy products across Asia triggered by a food safety scare which turned out to be false.
The Fonterra-Beingmate tie-up continues a trend of foreign dairy producers partnering with established Chinese players to increase market share in China's fast-growing dairy market. French dairy giant Danone SA (PA:DANO) in February paid $665 million to lift its stake in China Mengniu Dairy Co Ltd (HK:2319).
Fonterra reaffirmed its forecast for its farmgate milk price for the 2014/15 season at NZ$6 per kilogram of milk solids, and added that it expected global milk prices to improve later in the year after falling nearly 70 percent since the start of 2014.
(Reporting by Naomi Tajitsu; Editing by Michael Perry and Stephen Coates)