Scare or no scare, customers have little choice but Fonterra

Thu Aug 29, 2013 4:53pm EDT
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By Naomi Tajitsu and Adam Jourdan

WELLINGTON/SHANGHAI (Reuters) - However much China and other big customers strive to rely less on Fonterra after a global food contamination scare this month - now downscaled to a 'false alarm' - the New Zealand firm's grip on the global dairy trade is unlikely to be loosened.

While many countries such as India, China and the United States produce more milk, New Zealand, a small island nation of 4.5 million people, exports more than 90 percent of its output and controls a third of the global dairy trade. Most of those exports from what is dubbed the 'Saudi Arabia of milk' come from Fonterra Co-operative Group Ltd (FSF.NZ: Quote), which is owned by its 10,500 farmer suppliers.

China, New Zealand's biggest customer, is particularly exposed. Annually, it spends around $1 billion on imported milk powder, used in infant formula, sports drinks and confectionary, with some 90 percent of that coming from New Zealand.

Despite Beijing's rhetoric about expanding domestic supply, skimmed and whole milk powder production has risen just 9 percent over the last five years to an estimated 1.28 million tonnes, while consumption has almost doubled to 1.9 million tonnes, data from the Foreign Agricultural Service show.

While Chinese firms increasingly look overseas to secure supply - building processing plants in France, the Netherlands and New Zealand, for example - the country's milk formula market alone is set to double to $25 billion by 2017, and will likely remain dependent on Fonterra.

"If you're not going to source from Fonterra, where are you going to source from? That's the issue," said Shaun Rein, Shanghai-based managing director at China Market Research Group, who describes even big global food and beverage companies as "beholden" to Fonterra.

Inner Mongolia Yili Industrial Group (600887.SS: Quote), one of China's biggest milk powder producers, said it had not seen any increase in orders for its milk powder. "Nothing has changed in the wake of the Fonterra issue," a spokesperson said.

China was one of a number of countries including Russia, Sri Lanka, Malaysia and Vietnam to restrict imports of Fonterra products after the company said batches of its whey protein may be contaminated by a bacteria that can cause botulism, a potentially fatal disease. No one fell ill, and independent tests on another 195 samples showed the contamination actually involved a far less dangerous bacteria.   Continued...

The Fonterra logo is seen near the Fonterra Te Rapa plant near Hamilton August 6, 2013. REUTERS/Nigel Marple