Fonterra is now in discussions with government authorities on the land that will be used for 3,000 cows under a plan to start production in October 2007.

A Sanlu Group representative surnamed Cui said the farm will be in Tangshan, where several domestic dairy companies are already located.

Fonterra invested US$107 million for a 43 percent stake in Sanlu a year ago.

Fonterra Milk Supply Director Barry Harris said in a statement that the farming operation would use Fonterra's agricultural knowledge and production expertise to provide quality milk for Sanlu and meet the increasing demand for high-quality milk in China.

"China's dairy industry is expanding rapidly, and milk production is expected to increase from 22 billion liters to 40 billion liters in seven years," Harris said.

Fonterra holds a one-third share of the world dairy trade.

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