BEIJING - New Zealand milk giant Fonterra Co-operative Group Ltd will invest 260 million yuan ($40 million) in its third dairy farm in China, part of the company's strategy to enhance the quality of fresh milk supply to the Chinese customers after a series of milk scandals, the company said on their website.

Fonterra had signed an agreement with the Yutian county government of North China's Hebei province to develop a 40-hectare farm, which is expected to increase Fonterra's overall milk production in China to around 90 million liters, or 360 million cups of fresh milk every year, the company said.

Fonterra signed an agreement with the Yutian county government of Hebei province to develop a 40-hectare dairy farm. [Photo/Agencies]

"Our future in China is underpinned by our ability to grow high-quality local milk production for our customers and by playing a strong role in the development of the local dairy industry," Philip Turner, president of Fonterra China, said on the company's website.

The new farm, which will house around 3,200 milking cows, will begin construction in November 2011 and is slated for completion by late 2012. The company's first farm was established in 2007 and the second farm, also in Hebei province, is still under construction.

"Our pilot farm project, established in 2007, demonstrated we can successfully produce high-quality local milk profitably. The construction of our second farm is also progressing well. Today's announcement of our third farm investment agreement is the next step in our plans to build a hub of farms in Hebei province in the next five years," said Peter Moore, chief operating officer of Fonterra International Farming Ventures.

Fonterra, which produces about a third of the world's traded dairy products, generates about $14.4 billion of revenue and supplies milk, cheese and yogurt to over 100 markets worldwide every year. Fonterra is owned by 10,500 farmer shareholders, and was formed in 2001 through the merger of the New Zealand Dairy Board, New Zealand Dairy Group and Kiwi Co-operative Dairies.

Turner said China has huge growth potential and forecast the country's dairy market is on track to triple in value from around $22 billion in 2009 to $70 billion by 2020.

"The demand for milk in China is expected to triple over the next ten years, and much of this demand is for liquid and fresh milk products," Turner said.

Fonterra's confidence is also fueled by a series of high-profile milk scandals, which led to a lack of trust for made-in-China dairy products.

In 2008, six infants died and 860 babies were hospitalized with kidney stones and other renal damage after ingesting milk and infant formulas that contained the toxic chemical melamine.

In a separate incident four years before, a batch of watered-down milk resulted in the deaths of 13 infants from malnutrition. Meanwhile, in July last year, the authorities reported the seizure of dairy products contaminated with melamine.