Fonterra's infant formula sales in China are running ahead of its expectations, despite its Chinese joint venture partner running into a rough patch, chairman John Wilson said.
The co-operative's 18.8 per cent-owned partner in China, Beingmate Baby & Child, warned investors this month it was anticipating a first half loss of up to 230 million yuan ($48.7m), compared with a previous forecast for a profit of up to 100m yuan ($21.2m).
The Shenzhen-listed company blamed the downgrade on a fake infant formula scandal, as well as "industry disorder" in the fast-changing Chinese baby milk sector and new regulation including a requirement for brands to be registered with the China Food and Drug Administration.
Wilson told the Herald that the Chinese infant formula market was in a state of "flux" and that it would take six to 18 months to settle down.
"There is a lot of change going on in the Chinese infant formula market at the moment, with government regulation coming in, and that's causing quite a lot destabilisation for most of the infant formula sellers," Wilson said.
"Pleasingly, our Anmum sales, through Beingmate, are certainly increasing at a faster rate than our business plan," he said.
Wilson said many infant formula companues were selling their product now in anticipation of not being able to comply with regulations in the future.
"In the medium term, we have a lot of confidence around our business strategy for China but there is no doubt that the market is going through a lot of change at the moment," Wilson said.
China is regulating its infant formula market so that only a certain number of products can be marketed under a certain number of brands. Sellers of infant formula will need to be vertically integrated back to a manufacturing facility.
Nine people were arrested in China in April after more than 22,000 cans of counterfeit infant formula were found being sold under the brands of Beingmate and Abbot Laboratories.
Fonterra's tie-up with Beingmate, which operates four plants and 80,000 retail outlets across China, includes a distribution deal for Fonterra's Anmum infant formula brand and a joint venture manufacturing operation at Darnum, Australia.
Pleasingly, our Anmum sales, through Beingmate, are certainly increasing at a faster rate than our business plan.
The co-operative is a latecomer to China's branded baby milk market, having only launched Anmum there in 2013.
Fonterra this morning announced that it had stuck with its farmgate milkprice for 2016/7 of $4.25 per kg of milk solids and said it expected its earnings per share in the year ahead to be in a 50 to 60c range.
All up Fonterra expects the payout to farmers to be in a range of $4.75 to $4.85 per kg of milksolids in 2016/7.