Whey scare to hurt Chinese taste for foreign dairy

(AgriMoney.com) – The contamination scare at Fonterra, the New Zealand-based dairy exporter, has corroded the halo over dairy products from foreign producers, which has allowed them to charge premium prices.

Moody’s, the ratings agency, flagged a “credit positive” on Bright Food, one of China’s top three dairy groups, from the tainting furore after bacteria which can cause botulism were found in Fonterra whey protein concentrate, an ingredient for products including infant formula.

“Because Fonterra is a key supplier to some popular foreign baby formula producers in China, their operations will likely be disrupted and their brand images will be tainted,” Moody’s said.

“The incident will likely drive consumer from those brands in trouble to leading domestic brands, ie Bright Dairy,” the dairy division of Bright Foods.

Foreign vs domestic

Bright Foods, based in Shanghai, actually sources milk through Synlait, a New Zealand-based rival to Fonterra.

Synlait has seen its shares show a small rise since the Fonterra scare broke 10 days ago, outperforming shares in the Fonterra shareholders’ fund.

Nonetheless, a switch in Chinese consumer preference towards domestic brands would represent a significant change in consumer mindset, with foreign labels enjoying a strong premium since the 2008 melamine scandal involving the country’s own supplies.

Chinese authorities last week landed fines of $110m on six foreign makers of infant formula, including Fonterra, with Abbott Laboratories, Danone, FrieslandCampina, Mead Johnson and Hong Kong-listed Biostime International.

The clamour for foreign milk powder has also created a vibrant trade in smuggling dairy products into China.

Sir Lanka rumpus

Moody’s comments came amid continued pressure on Fonterra, with New Zealand’s government launching an inquiry into the contamination, expected to take some six weeks.

Fonterra – which processes nearly 90% of milk in New Zealand, the top dairy exporting country – is also the nation’s biggest company, whose performance has a considerable influence on the domestic economy.

The co-operative also unveiled its own inquiry, saying that it was “critical that we identify lessons quickly so our farmers, governments, customers, consumers and unit holders can again have full confidence in Fonterra and its products”.

Separately, Fonterra on Sunday that it had withdrawn milk powder under orders from Sri Lankan officials, over claims of contamination with dicyandiamide (DCD), a pasture promoting chemical which was the subject of a tainting scare in New Zealand earlier this year.

Fonterra has denied any DCD tainting in shipments to Sri Lanka.