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Global dairy companies offer China “safe” alternatives

Reuters – Global food and dairy companies are making another round of big bets on China’s fast-growing dairy sector, hoping to position themselves as safe alternatives even after a lethal baby formula scandal burned many of them the first time around.

They are lured by a projected 10 per cent annual growth and by Chinese consumers’ willingness to pay a nice premium for foreign brands as they remain wary of local brands’ safety records.

Just last week, China’s top-selling dairy firm Inner Mongolia Yili Industrial Group Co. recalled six months’ worth of one brand of infant formula after government tests found it was tainted with mercury, a heavy metal that can cause neural damage if ingested.

As if on cue, Danish-Swedish dairy group Arla announced June 15 it would pay 1.7 billion Danish crowns ($289 million) for what amounts to a six per cent stake in Yili’s main competitor, China Mengniu Dairy Co., a deal that will also enable it to expand the Arla brand in China.

“If you have an international brand, then there’s a premium in the market, because food safety is a concern,” said Kevin Bellamy, dairy analyst at Rabobank in the Netherlands.

For some global milk producers, finding new markets is also crucial as they consolidate and expand production faster than their traditional, and mature, milk markets can grow.

Milk and formula safety became a deep concern for Chinese parents after the 2008 scandal. At least six babies died and 300,000 became ill from drinking milk formula contaminated with melamine, a chemical used in fertilizer and plastic.

Mengniu last year destroyed milk tainted with aflatoxin, a carcinogenic mould found in corn grown in humid climates.

China is the world’s largest formula market and is expected to overtake the United States as the largest dairy market by 2020. Leading global food companies are jockeying to make sure they benefit from the rise in demand.

Nestlé’s sales in China are about to expand significantly, pending approval by the Commerce Ministry to incorporate the China operations of Pfizer Inc., which would boost its market share in infant formula to 12 per cent.

To keep up with that growth, it and other firms are looking to expand their production in China, but are taking pains to guard against quality problems.

Foremost in those efforts is the need to control the supply chain for raw milk.

Nestlé has already cut its small suppliers from nearly 30,000 to under 12,000, and plans to rehouse the rest in big dairy bases.

This month it broke ground on a 2.4-billion-yuan ($377-million) project invested with U.S. dairy and feed co-operative Land O’Lakes and other partners. It will house a training centre and two huge modern dairy farms, one with 2,400 cows, the other with 8,000.

“A model where you have small farmers having a few cows is not really sustainable any longer,” Nestlé’s China chief executive Roland Decorvet told Reuters at the groundbreaking in Shuangcheng, near the northeastern city of Harbin.

“The farmers are moving into the cities, the system is getting consolidated, so we are moving towards more middle- to large-size farms.”

New Zealand dairy co-operative Fonterra, which sells $2 billion a year of imported milk products in China, is also building large dairy bases near Beijing, the milk from which it sells at a premium to other dairies.

Another driving force for foreign firms to ramp up their presence in China is a coming surplus of milk in Europe.

The expiration in 2015 of national production caps in the European Union is expected to lead to a six per cent jump in European milk production, bringing an additional nine billion litres a year on to the market, said Bellamy of Rabobank.

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