News: BGA BREAKINGVIEWS-China setbacks spoil Australia’s dairy strategy

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Katrina Hamlin HONG KONG, Sept 5 (Reuters Breakingviews) - Australian farmers have tried to milk China’s hunger for infant formula. Rising incomes and a baby boomlet made this an appetising prospect. But their dairy dreams have turned sour. The demand is there. China welcomed nearly 18 million babies in 2016, when the end of the one-child policy let births rise 7.9 percent. Many are slurping foreign formula milk, because memories of a fatal scandal involving tainted local products are still fresh in parents’ minds.

Working mums feed the habit and help to pay rich prices. China imported more than 221,000 tonnes (243,611 tons) of baby milk powder in 2016, up 26 percent from a year earlier. Families spent $18.7 billion on formula last year, Euromonitor says.

But new rules demand producers register recipes and limit how many brands a company can sell. Although the deadline is 2018, sellers have already slashed prices to cut inventory, flooding the market with cheap formula.

Australians are among the hardest hit. The largest dairy producer Down Under, Murray Goulburn, just reported an annual loss, and could now be sold. Rival Bellamy’s (BAL) also bet on China. It likewise booked a loss and has been scrambling to secure the China licence for a crucial factory. Sales also suffered at peer Bega Cheese (BGA).

Graphic: Tough competition and regulation in China have hurt Australian dairy share http://reut.rs/2iI5h1E

The rules will probably only tighten. The earlier scandal and vulnerable consumers make this ripe for greater oversight. And China could tilt the playing field in favour of domestic underdogs, by imposing new restrictions on foreigners. As in other industries, Beijing is keen to see local interests succeed.

Australia has prospered selling all kinds of things to China – first iron ore, then Sydney flats, vitamins and fresh produce. So it’s surprising that its companies have come so unstuck here. Other competitors, like the Dutch, seem to be doing better. But this is hardly the first industry to find that the massive promise of the Chinese market is undercut by strict rules and fierce competition.

There is no use crying over spilt milk: better to focus on the growing market for grown-up dairy, such as yoghurts and UHT drinks. That could be the Australians’ best hope for a cheesy happy ending.

On Twitter http//twitter.com/KatrinaHamlin

CONTEXT NEWS - MG Unit Trust, the listed unit of Australia's largest milk processor, Murray Goulburn Co-operative, on Aug. 22 reported a A$371 million ($294 million) net loss for the year ended June 30.

- The company also said it had received approaches from "a number" of suitors. In May, it dropped a push into high-end dairy products for Asian consumers after disappointing sales in China.

- The China Food and Drug Administration announced new infant-formula regulations in June 2016. These include new rules on registering infant-formula recipes and labelling products, and will limit the number of brands a company can sell. The deadline for compliance is January 2018. Some companies have skipped registering and dumped infant formula, triggering a sharp price drop.

- Infant-formula maker Bellamy’s Australia made an annual net loss of A$809,000 for the last financial year, compared with a profit of A$38.3 million last year. It has blamed China’s new rules for a supply glut that hurt sales. Bega Cheese, which makes dairy products including infant formula, on Aug. 23 reported $8.1 million of inventory losses and said sales were missing forecasts after the regulatory change.

- China imported more than 221,000 tonnes of infant formula in 2016, up 25.8 percent from a year earlier, according to the industry data service China Chemicals Market. The estimated retail value of the infant milk formula market in China was $18.7 billion in 2016, according to Euromonitor.

- For previous columns by the author, Reuters customers can click on [HAMLIN/]

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Australia's Murray Goulburn considers interest from an array of 

suitors Bellamy's Australia swings to annual loss after China strategy came unstuck Graphic: Tough competition and regulation in China have hurt Australian dairy shares Eikon http://reut.rs/2iI5h1E

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