Milking the market

Source:Global Times Published: 2013-10-11 0:18:01

Insert: A package of Anchor UHT milk, a brand owned by Fonterra
 
Cows in a Fonterra farm in New Zealand    
Insert: A package of Anchor UHT milk, a brand owned by Fonterra  Photos: Zhu Jialei/GT

Cows in a Fonterra farm in New Zealand Insert: A package of Anchor UHT milk, a brand owned by Fonterra Photos: Zhu Jialei/GT 


A group of dairy cows, walking down the path toward the automated milking room in the center of a farm on the North Island of New Zealand, were on their last trip to the milk collecting area before sunset. The farm is owned by Murray Shaw, a shareholder and supplier for New Zealand-based dairy giant Fonterra. He owns and operates the farm with his brother and two other employees.

The Fonterra Co-operative Group is owned by 10,500 local farmers, and exports dairy products to more than 100 countries and regions, as well as supplying 90 percent of China's milk powder imports.

However, Fonterra, the world's largest dairy exporter, made headlines for the wrong reasons recently.

The company announced in August that it suspected there might be a potentially harmful bacterium in three batches of its raw milk powder, and launched recalls of infant milk formula in nine countries and regions including China.

The Chinese government also issued a ban on milk powder imports from New Zealand on August 4.

New Zealand's Ministry for Primary Industries (MPI) confirmed on August 28 that additional independent testing confirmed that the harmful bacteria was not present in Fonterra's raw milk powder, but the incident has damaged the company's reputation and caused financial losses as well.

"It was a false alarm… but has certainly damaged our reputation, making us increase our focus on food safety," Ian Palliser, group director of Fonterra's food safety and quality department, told the Global Times on September 30 at the company's headquarters in Auckland.

The company also has a long-term goal in China, "to establish an integrated milk business that processes milk from local farms into dairy nutrition for Chinese customers and consumers," Kelvin Wickham, president of Fonterra Greater China and India, wrote in an e-mail to the Global Times on Wednesday.

Quality concerns

The quality scare and product recalls have not slowed down Fonterra's expansion in China. Shortly after the incident, Fonterra launched 250 milliliter packages of Anchor UHT (ultra high temperature treated) milk in the Yangtze River Delta region and online.

However, some analysts have expressed concerns about Fonterra's expansion plans in China, as well as doubts about its potential success.

Fonterra's own-brand products are likely to face skepticism in the Chinese market, as many people are still wary of dairy products that use Fonterra's raw milk, Wang Dingmian, chairman of the Guangzhou Dairy Industry, told the Global Times Monday.

Also, the government has not yet lifted the ban on milk powder imports from New Zealand, Wang noted.

During a meeting on Sunday with John Key, New Zealand's Prime Minister, Chinese President Xi Jinping said that he expected New Zealand to take tough measures to guarantee food quality.

Wang also said that the company will face fierce competition in China's UHT liquid milk market, which has seen the arrival of more and more foreign brands recently.

For instance, 33 foreign UHT brands entered the Guangdong market in 2012 and Wang expects the amount to climb to over 40 this year.

Fonterra has said it will try to convince Chinese dairy consumers that they can trust the company's products.

But analysts have noted that as the company is busy setting up new milk farms outside New Zealand, it may be hard to maintain the same quality standards.

Global farms

Fonterra was formed in 2001, when emerging markets in Asia were expanding fast. China is now the No.1 market for Fonterra, and global demand is expected to continue growing.

The company noted that the annual growth rate of New Zealand's milk output is only 2 to 3 percent, which is not enough to meet the increasing global demand. So Fonterra has been looking for resources in other countries and regions.

 It opened its first farm in Tangshan, North China's Hebei Province in 2007. It now has five farms in China, with three of them already put into operation. All the raw milk produced in China is used in the Chinese market by being sold to other companies like the French dairy maker Danone to produce dairy goods.

The company's Chinese farms operate in a different way, but "all the calves and dairy cows are shipped from New Zealand," Peter Moore, general manager of international farm advisory and assurance for Fonterra, told the Global Times on October 1.

He noted that the raw milk produced at the China farms is tested on site and adheres to the same quality standard as those in New Zealand. The five farms in China require a yearly investment of $40 million to $45 million, Moore also said.

According to the standard issued by New Zealand's MPI, the number of colony forming units (CFU), an estimate of viable bacterial or fungal numbers, in every milliliter of New Zealand raw milk should be less than 10,000.

"The average figure for raw milk produced by New Zealand dairy cows is around 5,000, while the standard in China is 2 million," Margaret Malloch, general manager of Milk Test New Zealand, the country's leading milk testing laboratory, told the Global Times on October 1.

Local difficulties

Moore said the company recognizes the need to establish good communication with local residents, and reassure them that the farms will not adversely affect the local environment.

However, the different climate and feeding model have presented something of a challenge at Fonterra's farms in China.

Wang Dingmian of the Guangzhou Dairy Industry said that as the farms are close to Beijing, they can benefit from strong demand. But the different methods of farming in China make it hard to guarantee the same level of quality as milk imported from New Zealand, Wang said.

Thanks to its geographic location and heavy rainfall all year round, New Zealand is the perfect place to grow grass and raise cows. Also, the pasture grazing farm model offers the best living conditions for dairy cows, Wang noted.

In China, cows are raised mainly in stables and the lack of sunshine and outdoor movement means it is easier for them to get diseases, so they need more vaccine injections, which could result in more antibiotic residues remaining in the raw milk, said Wang.

The company also faces significant costs from operating in China, Wang noted, partly from the different feed required for the cows.



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