Future full of eastern promise for Irish-based dairy companies

There is ample room in the Chinese market, writes Eamonn Pitts, for Irish dairy industry players to flourish.

CAN the difficulties of New Zealand, which dominates in the Chinese dairy market, present opportunities for Irish dairy industry players?

In 2008, a Chinese subsidiary of Fonterra — the leading New Zealand dairy company — was found to have added melamine to baby food products.

This chemical, commonly used in plastics, increased the protein level of the baby food at minimum cost. At least six babies died and thousands were hospitalised.

The company SanLiu, subsequently went bankrupt.

That scandal played a big part in stimulating awareness among Chinese consumers, who are now extremely sensitive about quality issues in baby food and in particular in infant formula.

Three other issues have hit the New Zealanders in the last six months, and in each case, they reflected on the quality of the basic raw material supplied from New Zealand, making them potentially more damaging.

In February, it was reported that traces of dicyandiamide were found in milk products from New Zealand.

Fonterra and the New Zealand government moved quickly to reassure the public and overseas buyers that there was no risk to health.

Three weeks ago, Fonterra was again in trouble. A whey product, used to make infant formula and sports drinks, was found contaminated with clostridium, a bacteria that can cause potentially fatal botulism. Although the product was successfully recalled by Fonterra, there appeared to have been delays in doing so.

An apparent cover-up, in the hope that the problem would go away, does not suggest the lessons of the melamine scandal were well learned.

This scandal led to a temporary ban on Aug 4 of imports of whey powder, whey protein concentrate (WPC), and powders containing WPC to China from New Zealand. On Aug 28, it was announced that the contaminant was not the potentially fatal clostridium botulinum, but a milder bug called clostridium sporogenes, for which there are no known food safety issues. But damage had been done.

Next, Fonterra’s much smaller competitor, Westland, had its own scandal. The New Zealand ministry banned the export of four consignments of lactoferrin, a dairy ingredient, bound for China, because of “higher than acceptable” nitrates. Nitrates, which occur naturally in the environment, are used as a food preservative, but have been linked to cancer.

All of these events have damaged the image of New Zealand dairy products in China. Its reputation has been damaged, if not yet its sales. There was a high expectation in China that New Zealand produced ‘pure’, high quality, healthy, and safe products. Such a ‘promise’ was always going to be easier to maintain than to restore.

But what are the alternatives for Chinese buyers?

Is there room for other suppliers in that market?

Milk production in China was about 37.5m metric tonnes in 2012, an increase of 5% on the previous year.

Demand increased however to about 40m metric tonnes — and is projected (by Fonterra) to increase to 70m tonnes by 2020. Milk production is growing, thanks to government initiatives on dairy farms, based on US-style, intensive, grain-based production.

Local milk processing is predominantly focussed on fresh milk and yoghurt markets But imports are growing much faster than production.

In 2012, China imported over 400,000 tonnes of whole milk powder (of which 96% came from New Zealand), compared with 50,000 tonnes in 2008; 170,000 tonnes in 2009; and 300,000 tonnes in 2010 and 2011. Imports of whey powder grew to 378,000 tonnes in 2012 (up from 200,000 tonnes in 2008). Nearly half of the whey powder comes from the USA, and 15% from France.

Infant formula imports doubled in the same five-year period, to 91,000 tonnes.

Nearly one quarter of this came from Netherlands, and 17% from France, with New Zealand supplying 18%.

With some 16-18m babies born in China each year, there are more than 70m 0-3-year-old-infants. China has overtaken the US as the biggest consumer of infant and young child formula milk powder in the world.

The sales volume of infant formula has been increasing by more than 10% annually in China, driven largely by rising incomes and urbanisation. This growth seems set to continue, driven by rapid growth in ‘follow-on’ and ‘toddler’ formula products.

The Chinese market for infant formula is keen interest to western companies, for its scale, and its growth.

The Illinois-based Mead Johnson Nutrition Co had a 14% share in the Chinese milk formula market last year. Hangzhou Beingmate Group Co was second, with a 10% share, followed by Danone’s 9.2%, and 7.8% for the Inner Mongolia Yili Industrial Group.

Where are the Irish in this market? On the surface, we are invisible. We pride ourselves as the number one exporter of baby milk formula in the world. One-in-seven children in the world drink products manufactured in Ireland by Danone, Nestlé, and Abbott (and expansion of the Danone plant in Macroom may raise this proportion to one-in-five).

However, as yet, no Irish dairy company has a manufacturing or branded presence in China, although Irish-made formula or ingredients may appear on the market through multinational food companies. Ireland is the second largest supplier of infant formula ingredients to Danone worldwide.

The opportunity to market our green, pollution-free, grass-based dairy production is lost, when the product is sold through a multinational company. It is noticeable that Dutch and French dairy firms have branded presence in the Chinese dairy market, and that other EU companies, including Denmark’s Arla, are active in this vast and growing market.

None of these countries are likely to expand their supply at the 50% rate projected for Irish milk production growth after abolition of EU milk quotas. Undoubtedly, the Irish dairy industry has profited in recent years from its strategic change in direction into sophisticated dairy ingredients, including infant formula and sports nutrition.

But the evidence from the Chinese market would seem to suggest that much of the “cream” in this business is being siphoned off by multinational companies located or trading here.

The IFA recently called for a common front between Irish co-ops in negotiating milk prices with these firms.

So, can Ireland profit from New Zealand’s difficulties in the Chinese market? The expected growth in the market is so great that there is likely to be room for many more players. And the position of the leading player has been weakened.

However, the structures are not in place for Ireland to emphasise its advantages in greenness, lack of pollution and grass-based production. A job of work for the industry and Bord Bia!

Chinese consumers confused about foreign infant formula

Survey after survey have revealed that about 90% of Chinese consumers have more trust in and prefer foreign-produced infant formula, but there is confusion amongst consumers over what exactly constitutes foreign infant formula.

Many confuse a foreign brand name with foreign origin.

The Chinese consumer often fails to differentiate clearly between the following:

* Foreign produced and packaged products at the premium end of the market, wholly manufactured and packaged overseas.

Brands include Wyeth (Nestlé, but formerly Pfizer), Karicare (Danone), and various Chinese own brands manufactured abroad by Fonterra or Murray Goulburn, an Australian co-operative.

* Bulk imported infant formula, which is packaged in China.

* Bulk imported powdered milk, which is blended locally. These brands don’t purport to be foreign infant formula, but use a large amount of foreign milk powders in the manufacturing process.

* Foreign brands that use all Chinese milk, powder and other ingredients. Nestle and Fonterra have large operations in China doing this.

* Infant formula using plant fat powder rather than animal fat. While most Chinese brands use animal fat, some such as Beingmate (second for market share) and American brands use vegetable fat.

International infant formula commands a price premium of 25% in the market.