When dairy farmers on this island nation banded together in 2001 to create Fonterra Co-operative Group Ltd., the world’s biggest dairy exporter, they saw it as a chance to forge a New Zealand version of Swiss food giant NestléSA.

Over the next decade the co-op lost sight of that goal as it bet the farm on rising demand from China for a single commodity, milk powder, instead of diversifying into higher-value dairy products such as dietary supplements and medical foods as it had planned.

Fonterra was caught out by the rapid rise, and then decline, in Chinese demand for raw ingredients: a global supply glut sharply lowered milk prices and made many farms unprofitable.

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