Who’s really suffering in China after the botulism scare

One of the ironies of the recent botulism false alarm, Lincoln University’s Keith Woodford says, is Fonterra hasn’t suffered in China.

The professor of farm management and agribusiness, who returned from a two-and-a-half week trip to China on Wednesday, says upon discovering he was from New Zealand, Chinese taxi drivers would immediately bring up the milk powder botulism scare, which prompted infant formula and sports drink recalls in several countries.

“But they don’t necessarily associate it with Fonterra,” he told NBR ONLINE.

“The irony is that a lot of the Fonterra milk, because it’s being bought by Chinese companies, people don’t know that it is necessarily Fonterra milk.”

Like its Karicare infant formula brand in New Zealand, Prof Woodford says Danone’s Dumex brand has suffered in China.

“They had to withdraw quite a lot of that from the market because of the Fonterra scare, because they used some of that whey powder, and they have just been killed in China – a huge loss of market share."

Prof Woodford says in a Shanghai supermarket 10 days ago, the in-store radio was stating every five minutes that the New Zealand botulism scare was a false positive.

“There’s an irony there – the impact over there has been quite large but Fonterra itself has somehow escaped.

“Danone, as I understand it, they will still be considering their position in relation to Fonterra.

“New Zealand milk powder’s flowing in unimpeded.

"It certainly has done some damage to New Zealand’s image, there’s no doubt about that, but somehow it seems to be other companies that have paid the price for that."

Ahead of its annual result announcement this week, Fonterra said it was moving forward with plans to launch its own branded milk formula in China. In fact, it has been selling Anchor UHT milk there for weeks.

Fonterra chief executive Theo Spierings told Reuters he expects its Anmum brand of infant formula to be available in 70 Chinese cities within two-to-three years, as Fonterra tries to tap into a market expected to be worth almost $US25 billion by 2017.

Anmum’s formula has already been launched in Guangzhou province.

“I think there’s really good opportunities,” Prof Woodford says.

“One of the things that’s very clear is China is struggling to increase its own milk production and it looks, this year, as if Chinese milk production is actually going to be less than last year, so the opportunities are pretty high – the price of milk is high, the demand is high.”

This year will be difficult for Fonterra, he says, as high milk prices – and a high forecast payout to farmers – will eat into its margins, and it will be expensive to establish itself in the Chinese market.

Eventually, China is likely to become a cash cow for Fonterra, he says, probably at the expense of a swathe of smaller New Zealand infant formula makers who are trying to make a quick buck.

“Most of those are going to fail – and it will be a few big brands which come through.

“The Chinese are going to block them out, because the Chinese are not impressed with little brands that nobody’s heard of back here, that are specifically designed to create profits out of the Chinese market.”

Fonterra said this week it may have to draw from its balance sheet to pay the forecast 32 cent dividend.

Prof Woodford says Fonterra should be given credit for its strategy to develop farming hubs, with an announcement this month it was looking for partners in a second hub, in Shanxi Province, in addition to those in Hebei Province.

“They’ve tried it out, they’ve refined the method and they’re scaling it all up. I think they’re probably making good money there.

“Milk is just liquid white gold at the moment – and it’s the demand out of China that is making the difference.”

dwilliams@nbr.co.nz