Yeah baby: Dairy industry to cash in on China’s demand for infant formula

Yeah baby: Dairy industry to cash in on China’s demand for infant formula  article image

Australian dairy farmers are expected to be among the big winners following the free trade deal with China.

Under the new agreement, tariffs will be slashed on dairy exports, with farmers set to take advantage of China's addiction to Western powdered milk.

The world’s second largest economy has had a growing thirst for western infant formula since a milk poisoning scandal in China in 2008 killed six children and left 300,000 seriously ill.

Demand has been so strong it has caused shortages in other countries and encouraged an illegal trade across the Chinese border.

In recent years New Zealand's dairy industry has been a major beneficiary of China’s love affair with powdered milk.

New Zealand signeda bilateral free trade agreement with China in April, 2008 – the first FTA China has signed with any developed country.

New Zealand dairy exports to China since a free trade deal was signed have increased tenfold and are now worth more than A$5bn.

By comparison, Australian dairy exports to China were worth A$450m in 2013.

Level playing field

However, Trade Minister Andrew Robb says the FTA signed between Australia and China last November, now puts Australian dairy farmers on a level playing field with their Kiwi counterparts.

Under the new deal, Chinese tariffs on Australian dairy products that currently range from 10% to 15% will be cut over a period of four to 11 years.

The 15% tariff on infant milk formula will be phased out within four years.

Mr Charlie McElhone, group manager of trade and industry strategy at Dairy Australia, said the benefits flowing from the FTA are substantial.

"There is a white gold rush and unprecedented demand and interest," says Mr McElhone. “The FTA is a good outcome. There are tariff savings and growth and investment opportunities, more exports and more profit," he told BBC news.

China's demand for milk powder and other dairy products has also been fuelled by a baby boom stemming from the relaxation of China's one-child policy.

Also, China's growing middle class is spending more on quality imported goods, with a shift toward a more protein-heavy diet.

Infant formula sales there have increased more than tenfold over the past decade and are expected to double again in the next three years, according to London-based market research firm Euromonitor.

Market to almost double in next three years

A 900g tin of infant formula sells for between A$20 and A$25 in Australian supermarkets. Trade and transport costs mean the same tin can cost up to A$100 when it reaches a breakfast bench in China.

New Zealand's Fonterra Cooperative Group, the world's biggest dairy exporter, estimates the Chinese market for infant formula will rise to A$31bn in 2017 from about A$17bn now.

Mr McElhone says Australia's FTA has prompted much interest from domestic and foreign investors in the Australian diary industry.

Australian mining magnate Ms Gina Rinehart has partnered with China National Machinery Industry Corp to invest A$500m in Hope Dairies in Queensland to supply 30,000 tonnes of baby formula to China starting in 2016.

And Linear Capital, a Tasmania-based private investment firm with links to Chinese state-owned consortiums, plans to buy 50 dairy farms in western Victoria to create Australia's largest dairy farming company. Together the 50 farms will run 90,000 cows and produce 500m litres of milk.

Linear plans to supply two new consortium-owned processing plants (to be built nearby) to process and export A$700m worth of infant formula to China and global markets.


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