Arla Foods has signed a financing and supply agreement with signficant pediatric nutrition and baby care product producer Biostime International Holdings to supply the Hong Kong-listed company with infant formula.
Arla Foods said that the 10-year agreement (signed last night) would secure Biostime sufficient production capacity (up to 20,000 tonnes of infant formula per annum from 2015) at the former's Arinco facility.
The company will pay Arla DKK81.5m - which equates to 50% of Arla's total planned investment for capacity expansion at its Arla Foods Arinco infant formula plant in Denmark - to install processing and packaging equipment specific to Biostime's needs.
Through this financing, Biostime gains rights to specified volumes of infant formula products from Arla (with a maximum volume of up to 20,000 tonnes per year from 2015) and repayment of the financing by Arla within five years - via a price deduction (a fixed amount per kg) of infant formula supplied by Arla to Biostime.
Biostime is also obliged to purchase infant formula products from Arla Foods at a specified minimum purchase volume for each year during the 10-year term of the financing and supply agreement.
The Arla Foods Arinco plant in Videbaek (pictured below) is the firm's largest infant formula production site in Denmark, is equipped with full formula spray-dry technology and uses Danish milk from the firm's farmers.
Jens Jorgen Hjortshoj, vice president of Arla Food's B-to-B Nutrition Business Unit, said: “We are very pleased to sign this 10-years cooperation agreement with Biostime. This new cooperation will have a positive contribution into Arla’s business by enabling our company to produce high-quality dairy products with superior added value."
He added: "This partnership with Biostime, a leading player in China’s premium infant nutrition market, clearly reinforces our confidence in the long-term development of the Chinese premium infant formula market.”
The commercial agreement means that Arla is now Biostime's third European supplier in the infant formula field, where the firm signalled its intent to expand its business by co-operating with upstream suppliers as early as December 2010.
It said today in a statement that "the co-operation with Arla Foods can further enhance and secure the supply of premium quality infant formula products".
"The directors believe that this will also optimise the procurement costs of the company by economies of scale," the firm added.