Keith Woodford says that Synlait is about to become the dominant New Zealand producer of infant formula

By Keith Woodford*

Synlait is currently undergoing a strategic restructure from a producer of bulk milk powders to a producer of consumer-packaged infant formula. These investments will make Synlait by far the largest New Zealand producer of infant formula.

So far, Synlait is still in the early stages of the transformation, but with a current construction contract with Tetra Pak to double their wet-kitchen capacity to 80,000 tonnes per annum, plus a foreshadowed announcement about doubling canning capacity to 60,000 tonnes, it is ‘all systems go’.

It is only a few months since Synlait was focusing in their public communications on building a fourth dryer on a new yet to be found site. Those plans now seem to be on the back burner. A new dryer may well come into focus again within the next year or so, but right now it is all about moving from volume to value-adding.

The key information comes from the ‘Leadership Statement’ within the latest half-yearly Synlait report, written jointly by Chair Graeme Milne and CEO John Penno, and released 29 March 2017. The general media appear to have missed the key messages which are somewhat buried on Page 9 thereof.

Milne and Penno write that the Australasian sector “is well over-capacity in terms of plant and equipment”, and that “in such an environment, it makes little sense to build new manufacturing assets ourselves”. They then say that “our Board has become increasingly focused on putting the company in a financial position to make strategic acquisitions as they become available”.

Elsewhere in the report, they describe how the need for a new stand-alone blending and packaging plant is not only to increase their infant formula capacity, but also to give them flexibility with the number of brands they can sell into China. If they want the flexibility to supply more than three brands, their site has to be stand-alone from the main Dunsandel site.

So where might this plant acquisition be located?

In answering that, it seems that Synlait’s reference to ‘Australasia’ is not co-incidental. My bet is that they are looking at an Australian blending and packing acquisition.  There may be multiple opportunities, but one stand-out opportunity is the south of Melbourne-based  ‘Blend and Pack’ which is currently on the market and has the relevant China registrations. There may well be others.

There will undoubtedly be competition from other potential purchasers, such as Australian-based Bellamys, which produces organic infant formula. Bellamys is currently in a pickle as it does not have access to a plant which can provide them with the China registrations they will require as from January 2018. Almost certainly, Bellamys will be bidding for these or other canning assets, but right now they are cash-constrained following their mis-steps of the last nine months.

Another option is that The a2 Milk Company (A2M) might choose to purchase an Australian-based canning plant either by themselves or in a JV with Synlait. These two companies are highly dependent on each other, with Synlait the manufacturer and A2M the marketer of the ‘a2 Platinum’ infant formula which drives profits at both companies. It is inevitable they will work together rather than compete.  Each has the financial resources to make a major purchase.

To understand the drivers of Synlait’s infant formula transformation, it is necessary to step back a little.  The starting point it to recognise that whole milk powder (WMP) which we focus on so much within the New Zealand dairy industry is in danger of becoming a declining product globally. It is only developing countries that are major importers of WMP, with China way out in front. Then comes Algeria a very long way behind, and then another big gap to the next group of followers.

Regardless of whether or not New Zealand produces WMP or infant formula, our dairy industry will remain highly dependent on China. It is a case of either producing commodities for China, for which there is minimal growth in demand, or focusing on value-add products for which demand has been growing rapidly.

However, the above statement does need some qualification. For differentiated products like the ‘a2 Platinum’, or ‘Munchkin Grass Fed’, the potential demand does go well beyond China.

Of course, producing infant formula is much more complicated than producing WMP. First there is a need for a wet-mix kitchen, then comes the drying, then comes the dry blend and then the canning.  Also, without development of a highly-regarded brand, none of the manufacturing processes will make any money.

Birth rates in China are currently on the rise, although that may be only short term. Of particular relevance, is that Chinese mothers use infant and toddler formulas through to three-years of age. Hence, the combined demographic of Chinese infants and toddlers using so-called infant formula is some 50 million. The total infant formula usage in China (stages 1, 2 and 3) is upwards of a million tonnes and growing.   To put that in perspective, the next biggest consumer of infant formula is the USA at about 145,000 tonnes.

Whereas WMP has a landed-value in China of about $US3000 per tonne, the infant formula has a value of four times that as it crosses the border.

The major dairy companies of the world are all capable of doing their sums, and so there is plenty of competition. There will be winners and losers. Both Synlait and Fonterra are at a disadvantage in that they lack a long-term track record for infant formula, but Synlait’s strategy is to be a manufacturer on behalf of others who do the marketing. That strategy means they clip the ticket along the way, but do not get the entrepreneurial profits with its associated risks.

Synlait’s current public communications focus is almost exclusively on two brands, these being ‘a2 Platinum’ and ‘Munchkin Grass Fed’ infant formula.  Previous consumer brands such as Akarola, Akara, and Pure Canterbury have largely fallen by the wayside.

Although there has been lots of talk about the American-owned ‘Munchkin Grass Fed’ brand, it is yet to get market traction. It is available in Australia, but apparently without significant success. It is yet to be registered by the American authorities for sale in the USA, although that should be achieved within the next few months.

My estimates are that Synlait currently has access to about 250 million litres of A2 milk and about one third that volume of specialist grass-fed milk. But possibly as much as 90 percent of the infant formula currently produced by Synlait is coming from the A2 milk, with much of the grass-fed currently going into standard milk powder production.

Now that China has stepped back (March of this year) from planned regulations restricting informal online-trading of infant formula, it is evident that Synlait and A2M are ramping up production of ‘a2 Platinum’ as fast as they can.

Reading ‘between the lines’ of the numbers within Synlait’s half-yearly report, it looks like a2 Platinum production is planned to increase from about 6000 tonnes in the first half-year of 2016/17 to about 10,000 tonnes in the current second half. And then in the 2017/2018 year the projections are for something more like 25,000 tonnes, followed by around 50,000 tonnes in the 2018/19 year.  These ‘A2 numbers’ are not explicit, but it is the only sensible interpretation that can be put on Synlait’s overall projections of consumer-packaged infant formula.


*Keith Woodford is an independent consultant who holds honorary positions as Professor of Agri-Food Systems at Lincoln University and Senior Research Fellow at the Contemporary China Research Centre at Victoria University.  His articles are archived at http://keithwoodford.wordpress.com

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

9 Comments

Great article Keith, thanks.

I have major doubts about China as a stable market, command economies have history of being highly inefficient. This is an economy that added 548 billion of debt in housing, just in January. Chinas love of money could be there undoing, http://blogs.wsj.com/wealth/2012/02/27/are-chinas-politicians-the-riches...

Grain sellers all rushed into China and now there are mountains all over the world, it was only recently that Fonterra decided that WMP was the way to invest and had the best future.

http://www.businessinsider.com/global-corn-wheat-rice-soybeans-surplus-s...

the USA chased by Sth America

http://www.missourifarmertoday.com/news/crop/south-america-muscles-in-on...

http://www.farmfutures.com/story-chinas-magic-corn-mountain-17-134931

The corporates run the world grain markets and they are now chasing opportunities outside grain, so we just go from one oversupplied crop to the next all though it's called n opportunity before the bust.
What the world needs is growth but markets are starting to flatline. Everyone is chasing rainbows, technology is racing ahead of demand growth. Even minor developments like the hoop barns for cattle have a ripple affect in a market dependent on a bad year to get a decent price. Hoop barns are enabling cropping farmers outside traditional feedlot areas to fatten cattle using surplus or second grains.
https://www.youtube.com/watch?v=pA5w8cMvL3Q

My friends in the States tell me that Blockchain will change our world more in 20 years than in the last 50. I don't have the knowledge to make the call, this documentary has just been released.

http://blockchain-documentary.com/

http://dimsums.blogspot.co.nz/2017/04/corn-purchases-wind-down-auctions-...

BOA , sums agriculture up.

http://www.zerohedge.com/news/2017-02-27/baml-explains-why-ag-economy-is...

"focused on putting the company in a financial position to make strategic acquisitions ..."

Yes - Manufacturing overcapacity combined with weak demand everywhere. The above is the right strategy but system wide its only false growth. Growth is well and truly dead.

Could someone please explain where Fonterra is in this market ?

But while the producer of Enfamil infant formula is “moving in the right direction,” Mead Johnson is still playing catch up, says Susquehanna’s Pablo Zuanic

The bifurcation of the IMF market in China continues to unfold, with mass players like Yashili posting a 26% drop in IMF sales for 2016, while more upmarket players are faring better (in relative terms); for example, Biostime’s IMF sales (-4.5% for the year) increased 5% in 2H16 after a -12% drop in 1H16. The latter company projects 8% annual RMB growth for the IMF market as a whole through 2020 (with faster growth with the premium segments). Regulatory changes are gradually helping weed out smaller players, although we expect cross-border e-commerce to remain a problem for the larger players (as per MoC adjustments made this past March 17th). Clearly, Nestle/Wyeth and Abbott seem to be further ahead in terms of adapting to the market changes (super premium, exposure to mom-baby stores, e-commerce); MJN, while moving in the right direction, is still catching up (we wonder about transition/integration risk as Reckitt Benckiser takes over the business).
http://blogs.barrons.com/emergingmarketsdaily/2017/03/31/mead-johnson-ca...

With only 2.5% of Hong Kong mothers breast-feeding, there seems to be a cultural stigma against breast-feeding particularly among Hong Kong women. Breast-feeding babies is natural around the world. Why do Hong Kong women not breast-feed?
http://www.scmp.com/news/world/united-states-canada/article/2047143/milk...

REPORTING CASH PRICES WITH A BLOCKCHAIN

The solution to the reporting problem exists and can be quickly implemented. It is called a block chain and takes each transaction for cattle either fed, feeder or stocker and creates a block transaction, confirmed by buyer and seller, then linked to a chain in time order. Transactions would be posted in a linear time line and would include the delivery period, by week for the first 30 days then by two weeks, up to 60 days then by month. Industry participants could view the blockchain but not individual transactions or names. They could review transactions by region, by delivery period, or nationally. The block chain would serve as a cash settlement tool for the CME live cattle contract that is struggling. Industry leaders say it is a good idea but needs to be studied and will take years to implement.

A group of Aussie wheat farmers didn't agree. They were unable to find prices offered by grain terminals in different geographic locations. They were forced to simple accept the local bid. Furthermore, once they accepted bids for their wheat, the settlement and clearing of the transaction took 45 days. In six months they put in place a blockchain that now allows them to view bids from locations all over their area and has decreased the settlement and payment to two business days.

http://www.agcenter.com/newcattlereport.aspx

People being what they are I would expect the China consumption to trend towards the US consumption and we shouldnt be optimistic about birth rates either.
https://www.google.co.nz/search?q=china+birthrate&ie=UTF-8&oe=UTF-8&hl=e...

Given that a blockchain is moreorless a list of transactions, what does it mean to 'view the blockchain but not individual transactions or names?