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Fonterra

Formed in 2001 to represent most New Zealand dairy farmers, Fonterra is the world’s biggest dairy exporter. It suffered a setback in China in 2008 after an adulterated milk powder scandal affecting Sanlu, 43-per-cent-owned by Fonterra. The milk powder was adulterated with melamine, affecting thousands of Chinese infants and killing six. Sanlu was declared bankrupt and several managers were sentenced to prison. In 2013, Fonterra also sought to reassure the market after Dicyandiamide, also known as DCD, was found in exported New Zealand milk. DCD is used to stop nitrogen leaching on farms. In August 2013, some of its products were withdrawn in selected Asian countries including China after it said it had found bacteria which can cause botulism in some of its dairy products.

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Fonterra's dominance of milk under threat

Chinese buyers of New Zealand dairy giant's milk powder are trying to diversify their suppliers so they are not reliant on one single source

PUBLISHED : Wednesday, 18 December, 2013, 6:13am
UPDATED : Wednesday, 18 December, 2013, 6:13am

Milk powder buyers in mainland China are starting to cut their reliance on New Zealand's Fonterra, opening the way for US and European firms to break the dairy giant's grip on an infant milk formula market set to double to US$25 billion by 2017.

Mainland drinks maker Want Want has said it plans to reduce imports to diversify its supply chain, and at least two multinational infant formula sellers have cut supply from Fonterra or plan to diversify supply for the China market, said industry sources.

A drought in New Zealand earlier this year curbed milk powder production, highlighting the risk of over-reliance on one supplier. Those concerns escalated in August when Fonterra said it had found a potentially fatal bacteria in one of its products, triggering recalls of infant milk formula and sports drinks in several markets, including China. Tests later revealed the initial finding was incorrect.

"They know they're reliant on 80 per cent of their imported milk powder from one place - and 80 per cent of that from one company. That's just not a healthy position to be in," said William Baker, a Beijing-based investment professional who focuses on the Chinese dairy industry.

The mainland's appetite for foreign milk powder has soared in recent years, spurred by distrust in local products since a scandal in 2008 when milk laced with the industrial chemical melamine killed six infants and made thousands more ill.

Fonterra said it was normal that some customers would look around for other supply options. "It's not so much that they're wanting to diversify, it's that they know that if they're growing faster than we are, they're going to have to see volumes of product coming out of Europe and the US to fill what would be a supply gap," said Tim Deane, director of global sales at Fonterra.

Abbott Laboratories and Mead Johnson Nutrition of the US, Danone of France and Switzerland's Nestle are among the major sellers of infant milk formula in China. They buy base milk powder from Fonterra to process into infant milk formula for sale in China's US$12.4 billion market, the world's biggest.

One large US infant formula firm plans to increase the proportion of supply it gets from Europe, especially Ireland, a person with direct knowledge of the plan said.

A spokeswoman for Hong Kong-listed Want Want, which uses Fonterra milk powder in some of its drinks, said it had a "diversified strategy" to manage supply chain risk.

Over the past year, Inner Mongolia Yili Industrial Group has set up an alliance with Dairy Farmers of America, while China Mengniu Dairy has announced tie-ups with Danish dairy group Arla Foods.

Some Chinese buyers are also building their own facilities in New Zealand, which could help them bypass Fonterra.

But analysts said breaking Fonterra's dominance would not be easy, and it was unclear if Europe and the US could significantly raise their export capacity.

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