Wellington, Dec 31 NZPA - Farm lobby, Federated Farmers, has welcomed Fonterra's announcement that it is expanding its play in pharmaceutical-grade lactose.

"It is extremely positive to see Fonterra making such a strategic investment," said Lachlan McKenzie, Federated Farmers dairy chairman.

"As a cooperative, this proves Fonterra is not just capable of but is making investments that will benefit its farmer-shareholders and New Zealand as a whole".

Fonterra is paying $53 million, half the cost of its 50:50 joint venture DMV-Fonterra Excipients (DFE) buying the product range of FrieslandCampina Domo-Pharma, the pharmaceutical lactose business of Dutch dairy group Royal FrieslandCampina, which is the parent of its joint venture partner, DMV.

The total transaction value is $106m -- more than the $100m value which Fonterra put on the entire global pharmaceutical lactose business when it initially announced the joint venture in April 2006.

The transaction is subject to regulatory approvals but is likely to complete in March 2010, according to Fonterra's managing director for ingredients, Andrei Mikhalevsky.

Synergies would be created by combining the two companies' knowledge bases and research and development capabilities. These would benefit the shareholders of both Fonterra and Royal FrieslandCampina, as well as customers, Mr Mikhalevsky said.

Fonterra began its expansion in the sector in 2005 when it built a $25m factory at Kapuni for its subsidiary Lactose New Zealand to supply GlaxoSmithKline with half its global requirement for inhalation-grade lactose. The NZ lactose is used as a carrier for the active ingredients of a medication -- such as asthma treatments and other inhaled medicines.

Royal FrieslandCampina is the world's largest dairy cooperative..

Mr McKenzie said the joint venture was "high frontier stuff" involving advanced pharmaceutical applications.

Fonterra said in 2007 that its business strategy to aggressively pursue growth opportunities offshore required $3 billion to $5 billion over the following five years, and Prime Minister John Key called in November for Fonterra to have a capital structure which put it in as strong a position as possible to maximise those opportunities.

But Mr McKenzie said today the Government had to recognise that cooperatives were a valid vehicle for economic development.

"This fixation with trying to list Fonterra ignores the fact it has a business model that actually works," he said.

"You don't have to be a listed company to have good management and governance," he said.