Chinese are buying up infant milk powder everywhere they can get it, outside of China. And that has led to shortages in at least a half-dozen countries …
A man was arrested at the Lok Ma Chau border [between Hong Kong and China] on Monday and accused of attempting to smuggle $HK24,940 worth of milk powder into the Chinese mainland …
South China Morning Post, February 26, 2013
RANDY Cowan recalls the day his town got its first taste of the Chinese mania for Australian infant milk powder. It was late 2011 and Cowan was working as a caretaker of the abandoned dairy that had once been the main employer in Toora, a community of roughly 600 people on the windswept coastal plains of southeast Victoria. As a younger man Cowan had worked at the factory in the 1970s, bagging milk powder, just as his father had worked there in the 1950s when its towering white tin-and-timber buildings and brick smokestack were first built. The plant’s closure in 2002 gutted Toora, and ever since it has loomed over the town like a ghostly reminder of the dairy industry’s heyday. Then Dajian Li turned up from Melbourne with a grand plan.
The 45-year-old Chinese-Australian took a tour of the dairy’s 0.8ha site, with its cracked windows and rattling corrugated-iron storage sheds, and asked Cowan how much it might cost to get it back up and running. “I said, ‘If you’ve got a spare $100 million it’d be easy,” recalls Cowan, a grizzled 64-year-old with an asthmatic chuckle. “His response was: ‘No problem’.”
By October 2012, Li had bought the dairy and was having his photo taken with Victoria’s deputy premier Peter Ryan and local shire officials. Busloads of would-be Chinese investors began turning up to tour the site as Li talked about spending $76 million to bring back Toora’s glory days, when truckloads of cheese, yoghurt and bottled milk left the town each day. This time, though, there’d be no coal-fired drying plant belching smoke and dust; this would be an environmentally friendly, 21st-century production line churning out tonnes of infant formula, the white powder that’s become so popular in China it’s now akin to contraband.
“He said there was good demand in China,” recalls Cowan, who went on to help Li’s company find tradesmen to refit the factory. One local councillor almost wept while talking about the dairy’s reopening, for even here in Gippsland – the richest dairy region in Australia – the previous decade has been a hard grind for farmers. Suddenly, China is being touted as their saviour and milk is being touted as “white gold” in the business pages. Sixty kilometres up the road from Toora, the Burra Foods factory has spent $70 million installing a new milk powder processing operation, which last week produced its first consignment of infant formula for Chinese babies. In nearby Poowong, United Dairy Power has been bought by Hong Kong businessman William Hui for $70 million. In Tasmania, a new $75 million plant on the site of an abandoned timber mill is processing 150 million litres of milk a year into powder for export. In NSW, the dairy industry is talking up plans for $200 million of Chinese investment.
Everyone is chasing the same dream: cashing in on the rocketing demand for milk and infant powder among the middle-class of Asia, particularly China, where 16 million babies are born annually and parents are paying up to $70 for a tin of “clean and green” imported baby formula that costs $20 in Australia.
It’s a stampede that could hit some potholes, if Toora’s experience is a guide. For while Dajian Li’s new company, Viplus Dairy, has started shipping pallet-loads of formula to China from the town, the operation has some curious aspects. The website paints a seductive picture of Toora’s entire population happily toiling in the dairy while fat Gippsland cows laze around waiting to be milked, but on a recent March afternoon there were just a handful of workers inside the largely abandoned factory and not a cow in sight. Instead, milk powder from New Zealand was being mixed with nutrients to make baby formula packaged in tins with an “Australian made” certification. Dajian Li had suddenly become unavailable for interviews and it was difficult to determine who was running the company. “Mr Li is behind the scenes in many ways,” explained the administration manager, Marion Hannon, in her office in the draughty and half-finished administration building. Viplus is “wholly and solely” an Australian company, she emphasised as she offered a guided tour of the factory, although who finances the operation is unclear. “I can’t really comment on that,” she said. “But there’s a lot of money being spent on the project.”
Down the road, dairy farmer Ray Argento is one of many locals watching the rebirth of the Toora dairy with a mixture of hope and bemusement. Like most of his peers, the 46-year-old has struggled to make a living as the price he was paid for milk waxed and waned over the past decade. He’s heard the stories about how Asian demand could spark a renaissance in Australian farming to rival the mining boom; he’s watched the share price of Australian dairy companies rising; he’s spoken to local farmers who are buying up neighbouring properties in anticipation of the good days to come. Still, he doesn’t sound convinced. “You look over the fence and you wonder: Do they know something I don’t?”
The spark that lit China’s wildfire demand for Western milk powder came in July 2008, when 59 babies in northwestern Gansu province were diagnosed with kidney stones. The babies had fallen ill, it turned out, after drinking locally made infant formula made from milk adulterated with melamine, a toxic chemical which artificially boosted the milk’s protein count. By year’s end Chinese authorities were admitting that at least 22 dairy companies had perpetrated the heinous deception. One of the biggest food-tainting scandals in Chinese history, it caused six children to die and nearly 300,000 to fall ill.
Those poisonings and a series of subsequent food-tainting scandals led to skyrocketing sales of imported baby formula as alarmed Chinese parents abandoned local dairy products. Infant formula has been the preferred food for infants in China for several decades, with fewer than 16 per cent of urban mothers breastfeeding. Dr Mu Li, associate professor in international public health at Sydney University, attributes that to rapid urbanisation and a cultural resistance to breastfeeding in public. “Family income has increased significantly, which has made formula more affordable, and many women have moved from rural areas to major cities seeking work, leaving their infants behind to be cared for by grandparents,” she says. “Using imported brands also symbolises ‘privilege’, due to the high prices, or the fact that someone brought them from overseas.” Corruption has also played a role: health workers in scores of Chinese hospitals have accepted bribes from baby-powder manufacturers to encourage mothers to use formula, investigators revealed last year.
By 2012, demand for imported infant formula was running so hot that Chinese tourists travelling in the West were stripping supermarket shelves bare, buying tins by the dozen to pack into their luggage and distribute as prized gifts or sell at outrageous mark-ups. Shortages in Australia became so acute that the Safeway supermarket chain last year imposed a four-can limit on its customers, similar to restrictions imposed in New Zealand, Europe and the US. In March 2013, the Hong Kong government announced that outbound travellers would be limited to carrying 1.8kg of formula, a law that has kept border guards busy – in the first month alone they busted 879 people and seized nearly 9000kg of contraband infant powder. Last December a persistent smuggler was jailed for the first time; the 37-year-old woman had been caught with four tins of baby formula, her fourth offence following a suspended jail sentence handed down only a month earlier.
Behind these nutty tales of international baby-powder smuggling looms a question that could not be more serious for Australian dairy farmers: could this all herald a revival in their fortunes? The past decade has been a chastening one for the Australian dairy industry, which saw its global market share decline dramatically and thousands of dairy farmers move off the land. The shift began as overseas dairy companies merged into large conglomerates – Fonterra in New Zealand, Arla in Europe, Dairy Farmers of America in the US – with enormous economies of scale. The Australian dairy industry found itself facing tough international competition at a time of persistent drought and a high Australian dollar, along with depressed milk prices caused by the global financial crisis and the bargaining power of Coles and Woolworths, which control a massive share of domestic milk sales.
The result was that the Australian dairy industry shrank at a time when global demand for milk was rising. From 2000 to 2013, according to Dairy Australia, herd numbers dropped from 2.2 million to 1.6 million cows, milk production fell from 10.8 to 9.2 million tonnes and the number of dairy farms more than halved to 6398. Other countries stepped in to fill Asian demand, notably New Zealand, which signed a free trade agreement with China in 2008 and now accounts for nearly one-third of international dairy sales, producing 19 million tonnes of milk last year. New Zealand’s dairy exports to China have leapt from $520 million in the year of the melamine scare to $4.57 billion today; by contrast, Australian’s went from $337 million to $523 million. Last year, at a time when the global price for milk powder jumped 65 per cent, Australian production fell because of a drought-induced fall in milk supplies. “We have a very robust and efficient competitor across the ditch, and they’re leading the world,” comments Grant Crothers, CEO of the Victorian dairy company Burra Foods. “We are never going to be as dairy-centric as New Zealand, but they are showing us what can be done.”
Crothers has done better than most in the past decade; he and his brother William launched Burra Foods in 1991 with five employees in a converted butter factory in Korumburra, 118km southeast of Melbourne. In 2009 Japan’s Itochu Corporation bought a 45 per cent share of the business, helping to finance a $50 million milk powder factory and a $20 million infant formula facility, which went into production this month. Burra Foods now has 140 employees and hopes to export 15,000 tonnes of infant formula to China annually, but asked whether getting enough milk supplies might be a challenge, Crothers replies simply: “Yes.”
Theoretically this is all good for farmers, given that they are supplying a relatively scarce commodity to an increasingly competitive industry. Burra isn’t the only company investing heavily in milk. Last March, Tasmanian Dairy Products officially opened its $75 million milk powder facility in northwest Tasmania, a joint venture with Mitsubishi. Tasmania’s biggest dairy farm operation, the Van Diemen’s Land Company, is seeking $180 million from investors to expand, and even smaller infant formula operations such as Bellamy’s Organic in Launceston now has an office in Shanghai and sales approaching $50 million. In January the Canadian company Saputo paid $530 million for a controlling stake in the 120-year-old Victorian dairy firm Warrnambool Cheese & Butter.
The selling point for all these companies is Australia’s international reputation as a place that’s free of pollution and stringently regulated. Since 2008 several new businesses have appeared in Australia, selling baby formula to Asia via websites that lean heavily on our “clean and green” image, replete with photos of rolling verdant paddocks and coastal backdrops. These aren’t dairy companies, strictly speaking; they are more like canning facilities that turn powdered milk into formula. Milk powder is expensive to make – drying plants cost $50 million and upwards, which is why there are only a handful in Australia – but making infant formula is a straightforward task of mixing nutrients and milk powder, albeit in sterile conditions to local and international health regulations.
Dajian Li’s company Viplus launched its website, milkformula.com.au, last year. “Blue sky and clean water is the most attractive feature in Toora,” reads the spiel. “Cows lying on the ground, enjoying the sun, eating natural grass with relax [sic] lifestyle. Toora produced the best quality cow milk in the world. Only 600 local residents live in this small town who are all working for the factory.” The website goes on to promise that “only the best local quality ingredients will be used into [sic] our infant formula”.
The reality, as the company freely admits, is that only a handful of Toora’s residents work at Viplus and no local farmers sell their milk to the dairy, for the simple reason that milk isn’t processed there yet. The company’s sales manager, Jenny Fang, says the website is referring to future plans, when milk-drying and powder production begins. As for the claim about the 600 townsfolk, it was meant to convey that the dairy “directly or indirectly” supports the whole town. Fang acknowledges that Viplus has primarily been using New Zealand milk powder in its formula, but says the company complies with its ‘Australian Made’ logo because 50 per cent of manufacturing costs are Australian.
Viplus is now shifting to Australian milk powder, according to Fang, but the website isn’t the only aspect of Viplus’s operations that has raised eyebrows in Gippsland. Randy Cowan fell out with the company early on, after Dajian Li enlisted him in mid-2012 to find contractors to clean up the old dairy site and begin the fit-out. Things got off to a strange start, Cowan recalls, when Li said his company didn’t yet have an Australian Business Number and needed to pay employees and contractors through Cowan’s bank account. By December 2012, Cowan and many other employees were owed thousands of dollars, and after leaving Viplus that month he won a case against the company in the Victorian Civil and Administrative Tribunal for $7740 in unpaid wages. In October, another group of employees and contractors accused the company of failing to pay them.
Cowan still hasn’t been paid, but Fang says the company is in the process of resolving all those disputes, which were a result of language difficulties and early management problems. Viplus now has new Chinese and Australian investors, she says, and Li is no longer the owner of the business. “Overseas investors coming to a small town in Australia, working in a different language and different culture, you can imagine there were difficulties,” she says. The cultural differences do seem acute: a photographer from this magazine was shooting pictures of the factory when a Viplus employee demanded he leave or he would be “thrown to the pigs”.
Some established dairy industry figures privately worry about the effect of inexperienced operators cashing in on the white-powder boom. “There are a number of Chinese companies setting up here,” says one, “and I don’t know how to say this politely, but how do we ensure they comply with our regulations and standards?”
Just how important quality control can be was shown last year when New Zealand giant Fonterra mistakenly announced botulism-causing bacteria had been found in milk powder ingredients it supplied to companies in seven countries. A massive recall of several brands of infant formula was ordered, until Fonterra discovered that the bacteria was in fact a different and harmless strain. The incident rocked New Zealand’s dairy industry – China suspended imports and Fonterra’s milk division head, Gary Romano, resigned. One customer, the French company Danone, says it is planning to sue the company for 350 million euros in lost sales.
But Grant Crothers of Burra Foods plays down the dangers of new operators in Australia sullying our green image in the rush to supply China. “I don’t agree that we are seeing infant formula companies pop up everywhere,” he says. “We’ve got four sites where formula or nutritional powder are made, Burra being the latest. Then you’ve got 10 to 15 canners, who are a bit more entrepreneurial, but they are subject to rigorous food safety and audit regimes.”
If anything, the “white gold” fever is likely to ratchet up in coming years, given that financial analysts are predicting China’s annual baby formula consumption could reach $25 billion by 2016, double what it was in 2012. Last December, the National People’s Congress announced a loosening of China’s one-child policy, which will allow couples to have a second child if either parent has no siblings – a change that could result in 1-2 million additional births per year.
The Australian dairy industry, meanwhile, is hanging on a promise that Tony Abbott made before he became prime minister – a free trade agreement with China in his first term. Such a deal would put Australian dairy operators on an equal footing with New Zealand, although the prospect of international investors swooping on Australia to “buy the farm” is one that sends a shiver through many a rural community. State-owned Chinese businesses currently cannot invest in Australia without approval from the Foreign Investment Review Board and private Chinese companies require approval before acquiring a substantial or controlling interest in a business worth more than $248 million. In theory, any loosening of those rules under a free trade agreement would allow the Chinese to acquire large chunks of Australia’s dairy industry.
Last year the state-owned China Investment Corporation was reported to be considering a buyout of the Van Diemen’s Land Company in Tasmania, which did not eventuate. More recently, Chinese investors toured several dairy regions in NSW to assess plans for $200 million in milk-powder facilities in the state. But David Williams, a Melbourne investment banker who has advised dairy companies during recent takeovers, says fears of a Chinese takeover are a furphy. “The Chinese have been making noises about companies they are going to buy, but they’re too late to the party, and they’re typically not well advised,” says Williams. “Mostly what they are doing is buying broken-down dairies no one else wants.”
China will have a significant influence on the dairy industry, says Williams, but indirectly through its demand for powder, along with the rest of modernising Asia. He points to Tasmania, where new milk-processing projects have fuelled a resurgence in dairy farming and where the government is aiming to lift milk production by 40 per cent. “If you wanted to buy a farm, the thing to do right now would be to buy a dairy farm in Tasmania,” he says.
This month, the farm-gate price for milk leapt to 50 cents a litre, a rise of nearly 50 per cent on last year. The dollar has dropped and, according to one survey, 52 per cent of dairy farmers feel optimistic about the future – the equivalent of an outbreak of wild jubilation in any other industry. In Toora, the old dairy still looks dilapidated, with its empty car park and abandoned guard-house, but Viplus is sticking to its talk of revitalising the plant, and the town.
“We’ve come through a difficult period as a new company trying to resurrect an old beast,” insists Marion Hannon. “Mr Li and his associates are the only ones who’ve put their hands up to do anything down here for 10 years.” The milk-drying plant should be built by the end of the year, says Jenny Fang, and the company is already talking to farmers to secure supplies.
On his farm a little way down the road, Ray Argento says ruefully that he’s not sure if he’d sell his milk to Viplus, should the dairy start processing milk. All those stories about people not being paid have made the locals wary, and Argento is a hardened sceptic after 30 years in dairy farming. He got his start as a teenager on the farm his Italian-immigrant father owned in Gippsland, but the 20 years he’s lived on his own 110ha in Toora have been hard. Right now he’s getting 43 cents a litre for his milk, a nice step up from the 30 cents he was getting at the bottom of the financial crisis, but not much of a living for a 46-year-old with three kids.
“All of a sudden dairy is flavour of the month,” he says. “But for us at ground level, well, I like to say I’m not sure whether my milk glass is half-full or half-empty. People in the industry paint an optimistic picture of us becoming the food-bowl of Asia but we’re just not seeing it in our returns.” Back in 2010 a sustained revival was predicted, he recalls, only for drought to send supplies tumbling.
Argento’s 16-year-old son recently started a boilermaker’s apprenticeship. “He wanted to come home and work on the farm but at this point it’s just not financially viable for him,” says Argento. “I look at the hardships we’ve gone through and I don’t want that for my son. He might earn enough to own a farm through his trade one day, but in the current circumstances it’s hard to see how he could save any money farming.”
Still, he says, if the Asian boom continues, maybe his son will come back to the land. In the meantime, Argento has one eye on the old dairy up the road. “I really hope that they can double or triple production and in 10 years’ time there’ll be a hundred people working there.” He smiles wryly. “Once again, we live in hope.”
Source: The Australian