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Current as of 19/09/14 07:40PM NZST

Christopher Adams

The Business Herald’s markets and banking reporter.

White gold rush: Shady traders put cloud over dairy exporters

Chinese demand for quality infant formula has created a lucrative opportunity for New Zealand - and for suspect operators.

Farmers are concerned about infant formula issues, says Federated Farmers president Bruce Wills. Photo / APN
Farmers are concerned about infant formula issues, says Federated Farmers president Bruce Wills. Photo / APN

New Zealand's white gold rush is gathering momentum.

Ever since melamine, a toxic industrial chemical, got into China's milk supply in 2008 many parents in the world's second-biggest economy have been unwilling to feed their children Chinese-manufactured infant formula brands.

Despite Fonterra getting caught up in the scandal through its part ownership of Sanlu, one of the companies found to have contaminated products, New Zealand-made formula is in high demand and dozens of brands - some operated by Kiwis, others by Chinese firms - are getting in on the action.

Companies belonging to the newly formed New Zealand Infant Formula Exporters Association, which has 10 founding members, say they are collectively exporting $30 million of product a year, with most going to China.

Total formula exports are thought to be more than $180 million, a drop in the ocean of the Chinese infant formula market, estimated to be worth US$6 billion ($7.4 billion) a year and projected to double by 2016.

The demand gives New Zealand opportunity to add value to its bountiful dairy resources, with imported baby formula retailing for up to $70 a can in Chinese supermarkets.

But like any gold rush, this one is attracting questionable players who some local exporters say threaten the reputation of New Zealand's more than $2 billion dairy export trade with China.

The registrar of companies last month initiated action to strike one formula firm, Wisdom Dairy, off the New Zealand companies register after it was found to have set itself up using a false address in Hokitika.

The company, whose sole director is Yan Zhou, had its formula recalled by Hong Kong's Centre for Food Safety in September after it was found to have insufficient iodine levels - a health risk for babies, as iodine deficiency can cause mental impairment and stunted growth.

Wisdom Dairy had also given a false address for its registered office, which turned out to be a section in the Central Otago town of Omakau owned by a transportation firm. It had also created fake shareholders.

When contacted by The Press, Yan said he had given the false details to stop his Chinese rivals from using the Companies Office website to gather information about his business.

The fake shareholders had been created to make Wisdom Dairy seem larger than it was, Yan said, and the iodine levels in the formula were found to be sufficient when re-testing was carried out in New Zealand.

Last month China's People's Daily reported that 26 tonnes of Ioland baby formula, made in New Zealand, had been rejected by Chinese import authorities for low iodine content.

The Ministry of Primary Industries (MPI) says products that have been rejected for the same reason in China have later been found to be in compliance with both Chinese and New Zealand standards when re-tested here, suggesting different testing regimes in the two countries.

Like most of the proliferation of baby formula brands being exported from New Zealand, Wisdom Dairy was - and possibly still is - getting its products made on its behalf by a local contract manufacturer.

Tim Knox, the Ministry of Primary Industries' director for market assurance, declined to name that contract manufacturer, citing commercial sensitivities.

Asked if Wisdom Dairy continues to export product from New Zealand, Knox's answer is a little unclear.

"Wisdom Dairy is not registered with MPI as an eligible exporter of dairy material. However we are aware of a brand of infant formula marketed under the name Wisdom Dairy.

"In the past this product has been manufactured and exported on contract by a company who, in addition to having a risk management programme registered with MPI, is also an MPI-registered exporter."

A spokesman for the Ministry of Business, Innovation and Employment says an objection to the move to strike Wisdom Dairy off the companies register has been received.

Formula exporters who spoke to the Business Herald say the problem of Chinese formula firms creating "false fronts" - building a facade that they are bona fide New Zealand companies - runs much deeper than Wisdom Dairy and many more Chinese operators are using deception to capitalise on the country's reputation as a producer of safe dairy products.

"The problem is if companies are prepared to fake where their offices are and where their shareholders live, if they're prepared to fake all of that ... what else are they doing?" says one exporter, who didn't want to be named.

The Business Ministry spokesman says the Companies Office has not been advised of any other formula companies giving misleading information.

"However, we continue to work with other agencies to identify similar breaches and the registrar will take any necessary enforcement action as appropriate."

Knox says New Zealand officials across a range of agencies are working on brand development and protection issues in China, in consultation with their Chinese counterparts.

The ease of doing business in New Zealand, where anyone can register a firm, makes this country susceptible to operators with few scruples.

Federated Farmers president Bruce Wills says farmers are "very concerned" about some of the issues in the infant formula trade.

"It's very worrying to see people piggy-backing on the hard work of dairy farmers," Wills says.

"This stuff, potentially, could be quite damaging if we have people using the New Zealand brand for a low quality product. That's high risk stuff."

But Guy Wills, general manager of NZX-listed contract manufacturer New Image Group, which manufactures around 12 infant formula and nutrition brands for export to China, says the industry in New Zealand is well regulated and has high standards.

New Image carefully vets prospective customers, he says, and has a list of up to 300 questions it asks them.

"We like to supply customers who have experience in the marketplace and have relationships with the Chinese regulators and Government," Wills says, adding that the firm regularly turns away prospective clients. "Like all industries everyone has been through a learning curve."

In media reports this week, Canterbury dairy processor Synlait - which sells its own formula brand in China - said the activities of some infant formula exporters could damage this country's brand image and called for more collaboration between the Government and industry.

The Infant Formula Exporters Association was formed following the Mother and Baby Expo in Shanghai earlier this year, where roughly 20 Chinese manufacturers were found to be blatantly promoting products as "New Zealand made".

Association chairman Michael Barnett says the group aims to set standards for infant formula producers in this country and give Chinese consumers a set of brands that are "100 per cent New Zealand and not just using the New Zealand brand".

James Shortall, spokesman for Sutton Group, another contract manufacturer, says his company also vets its customers and works closely with them. "All the products that go out of here are tested by New Zealand agencies."


Wet blend V dry blend

*Most infant formula exporters source something called wet blend base from dairy processors such as Fonterra, Synlait, Westland Milk Products and New Image Group.

*The base is created though mixing ingredients including milk and nutrients in a liquid form, which is then spray dried into a powder.

*The wet blend base is about 90 per cent the finished infant formula product.

*Contract manufacturers will add additional ingredients to the wet blend base, as specified by individual brands, to create the finished product that is then canned for export.

*Wet blend formulas are generally viewed as superior to "dry blend" products - in which all the ingredients are mixed in a dry form - as the mixing process is more homogenous and thorough.


Fonterra opts out of China cash cow

China might be the land of milk and honey for baby formula exporters, but Kiwi dairy giant Fonterra isn't cashing in with its own brand of formula.

The co-op has an infant formula brand, Anmum, which is sold in Malaysia and Indonesia but not in China, the world's biggest market for the product.

A Fonterra spokesman would not comment on why Anmum had no Chinese presence, but the answer is likely to lie in a single word - Sanlu.

Fonterra's connection with the 2008 melamine disaster through its part ownership of Sanlu, one of the firms with contaminated milk products, put a big dent in its plans for China.

The spokesman said Anmum also markets tailored milk products for expectant mothers that are sold across Asia, including in China.

"Pediatric and maternal nutrition is a clear focus in Fonterra's refreshed global strategy and we are actively seeking new opportunities in this space," he said.

The spokesman said the co-op supplied milk powder and ingredients to a number of the world's leading infant formula manufacturers.

Fonterra also offers contract baby formula manufacturing and canning services at its Canpac plant in Hamilton.

- NZ Herald

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