The Fonterra Cooperative Group Ltd may sell its stake in a Chinese dairy venture at the center of the milk scandal that killed four babies and sickened 53,000 children.

Fonterra, the world's biggest dairy exporter, said talks are under way on a third-party acquisition of the Sanlu Group Co. The Auckland, New Zealand-based group owns 43 percent of Sanlu, which was the first of 22 companies in China identified as producers of contaminated baby-milk powder.

"Discussions are continuing around a number of facets of Sanlu's future," Fonterra Chief Executive Officer Andrew Ferrier said. "These include the possibility of Sanlu being acquired by a third party."

Last month, Fonterra wrote down the value of its Sanlu stake by 69 percent, or NZ$139 million (US$85 million), because of the affect of the scandal on the company's brand. Selling the stake may enable Fonterra to re-invest in China, provided it can prove to the New Zealand farmers who are its shareholders that it can guarantee a secure supply of quality milk.

"There are some farmers saying 'we've been burnt, let's get out of there'," said Lachlan McKenzie, chairman of the dairy section of Federated Farmers Inc. "It will be up to the company to show it can manage these risks."

Chinese officials are investigating how melamine, a chemical used in making plastics and tanning leather, was added to raw milk before delivery to Sanlu's plant. Melamine artificially raises the protein content in diluted milk, allowing sellers to cut costs. In China, agents for processing plants collect milk from thousands of small farmers.

"There has to be a change in the supply chain and the company has to demonstrate that" before farmers will support new investment in China, McKenzie told Bloomberg News.

Newspaper reports said Beijing Sanyuan Foods Co and Hangzhou Wahaha Group Co are interested in buying Sanlu. Pan Chang, chairman of Inner Mongolia Yili Industrial Group Co, said yesterday his company was also invited to a meeting, adding he "hasn't thought about" buying Sanlu.

(Shanghai Daily October 20, 2008)