New Zealand exporters in general, and Fonterra in particular, often come under fire for being too reliant on the Chinese market.

Part of that reliance, of course, is due to the fact we’ve been able to negotiate a free trade agreement with China but struggled with other large protected markets like the United States, India and Canada.

The Government may have recently negotiated deals with the EU and the UK, but our agreement with China has been in place for 15 years.

Despite the warnings of impending doom often sent Fonterra’s way, it is one of the Cooperative’s competitors who is once again feeling the effects of putting all its milk bottles into one crate.

When I first wrote about Synlait in late 2020, their share price and profitability had plummeted due to one of their customers’ heavy reliance on the Chinese grey market to get their product into China.

The A2 Milk Company (A2MC), who are owners and customers of Synlait, played a dangerous high-stakes game, relying heavily on an informal network of Chinese students and personal shoppers to distribute much of its product into China.

It’s a game that has cost other companies dearly in the past.

Daigou, buying on behalf, is a network of Chinese nationals living in or visiting Australia who buy local products and ship them back home to groups of friends, and to customers cultivated via the social media app WeChat.

It is not uncommon for Chinese tour groups to visit stores like the Chemist Warehouse and buy products in bulk, much to the ire of locals trying to buy product for themselves.

Covid-19 stopped daigou in its tracks with Chinese students and tourists unable to visit Australia and even now, over three years later, the channel has still not fully recovered.

According to the Australian Financial Review, in just a six-month period, sales of a2 Platinum English infant nutrition fell by 35.5 percent.

Unsurprisingly, in response to A2MC’s inability to get product into China, competitors rushed to fill the vacuum.

The Chinese government also took steps to close the price gap between domestically produced and imported infant formula.

With restored consumer trust in Chinese manufactured product and the daigou channel still faltering, A2MC has cancelled orders from Synlait totaling 1,650 metric tonnes, or 5% of Synlait’s Advanced Nutrition sales.

Synlait now must find a market for this milk that was previously earmarked as high value.

I suspect the people who lecture companies to pivot from making whole milk powder to higher value products are probably the same people who believe in the adage “if you build it, they will come”.

Most businesses make a product to meet consumer demand, not make a product and then blindly hope someone will buy it.

Synlait’s earning guidance has once again been slashed and their share price has fallen off a cliff, and once again it would appear to be due to its major clients’ dependence on the Chinese market.

So how has Fonterra fared in the face of a Chinese market that has cooled considerably in the current financial year?

The cooling is evidenced by the steadily declining milk price and decreasing returns from the fortnightly Global Dairy Trade.

The dairy cooperative did what it does best, and shifted product to where the money was.

They have reduced their exports to China from over 40% in 2022 to only 26% this year, and in doing so they have doubled their profit.

Rather than making a product and hoping there is a market for it, Fonterra have looked at consumer taste in China and created and refined products to meet these needs.

Cheese lollipops, which taste exactly how they sound, and a cream cheese tea drink called Tea Macchiato are just some of the foods that now include custom made New Zealand dairy products.

Observers and pundits are right when they say a company should be careful of being too reliant on one market, but maybe they should also dig a little deeper and see that a smart company can pivot quickly and turn their raw material into the product that will give them the best return possible and send it the place that’s willing to pay.

It just so happens that most of the time, that place is China.

by Craig Hickman.