By Wayne Arnold
Georgina "Gina" Rinehart, Australia's wealthiest person, has
apparently seen the future. And it says "Moo."
Rinehart this weekend struck a deal to invest AUD500 million
($436 million) alongside state-owned China National Machinery
Industry, or Sinomach, in a 5,000-hectare dairy farm in Queensland
to produce and export up to 30,000 metric tons of infant formula to
China, as well as boxed milk, most of it produced from 15,000
Holstein cows.
Rinehart, who became Australia's wealthiest person by helping
feed China's appetite for iron ore, joins the growing list of
companies competing to feed China's 1.36 billion people. Just last
month, Danone paid $550 million for a 25% stake in local baby
formula maker Yashili International Holdings (ticker: 1230.HK
).
Investing in baby formula seems like a no-brainer, and not just
because there are so many mouths in China to feed. Rising Chinese
incomes have pushed up demand for a more protein-rich diet. But
population expansion, rising costs and pollution have hurt China's
ability to produce enough food at home. A series of food safety
scares have undermined public trust in the domestic food
supply.
And who are China's most finicky, most pampered bunch of diners?
Babies.
Investors not in a position to buy their own dairy farm may
want, instead, to consider incumbent players like Fonterra
(FCG.NZ), the listed New Zealand dairy cooperative, Hong
Kong-listed Natural Dairy (0462.HK) or Australian Dairy Farms
(AHF.AU), which went public last month after raising AUD9.3 million
in a backdoor listing.
Some might worry that Rinehart is investing in a sector already
suffering from oversupply. Prices for milk have been falling since
early this year -- not for the fresh stuff, but for the powdered
milk that can be shipped abroad without curdling. Supplies finally
caught up to the boom in China's demand. And when prices started
falling, Chinese importers stocked up, so imports have been falling
for the past three months.
And while China earlier this year said it would relax its
one-child policy, it won't be enough to reverse the broader decline
in potential milk moustaches. The United Nations projects its
population of infants and toddlers will begin declining in 2016. If
China's mothers -- less than a third of whom breastfeed -
rediscover the superiority of their own milk, the market could
shrink even faster.
But Rinehart's connections with state-owned Sinomach may help
her crack a market now dominated by Nestle (NESN.VX), Mead Johnson
(MJN) and local producers like Beingmate Baby & Child Food
(002570.SZ) and Biostime International Holdings (1112.HK).
Her deal also comes on the eve of a free trade agreement that
China and Australia could sign as early as today. New Zealand's
trade pact with China resulted in a 17-fold increase in its milk
powder exports to China.
China is meanwhile cracking down on local milk producers,
refusing to renew licenses of those that aren't up to snuff, thus
winnowing domestic competition. Regulatory changes could also open
new opportunities for offshore baby formula. Earlier this year,
China's Food and Drug Administration began allowing local formula
plants to use imported milk powder.
Two more new rules argue in favor of building a Chinese-run
plant abroad: China's formula plants are no longer allowed to
import large bags of formula powder and re-package them into
smaller bags. And imported formula must be labeled in Chinese. By
some estimates, baby formula imports will double in the next few
years.
These days more of China's seniors are using milk powder to
supplement their diets and their population won't peak until 2049.
Nestle earlier this year identified its nutritional milk powder for
seniors, Yiyang Protein Powder, as one of its top performers in
China.
Milk is also a key ingredient in a range of increasingly popular
products in China, from yogurt to chocolate to mocha frappuccinos.
The U.S. Dept. of Agriculture estimates China's milk imports will
grow from 30% of its total consumption to 42% this year.
And China isn't the only country likely to need more imported
milk. The world's biggest milk producer is also the world's second
most populous nation, India. Rising incomes and growing demand
there have created the potential for a milk shortage.
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Comments? E-mail us at wayne.arnold@barrons.com
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