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Market analysis: Fonterra’s dangerous chemical contamination crises

According to the announcement made by Ministry for Primary Industries, the world’s biggest exporter of dairy products and employer of 10,500 farmers, Fonterra Cooperative Group Ltd., was caught producing milk with a low level of dicyandiamide in a recent inspection. Dicyandiamide is a dangerous chemical substance which is applied to pastures by farmers to diminish greenhouse-gas emissions and is toxic to humans in high doses.

Response from Fonterra & Other Partners:

A Fonterra spokesman recently stated that the company was notified by the government that the low levels of dicyandiamide it found were not a food safety concern.
The spokesmen from Abbott Laboratories and Yashili stated that Fonterra’s contaminated milk products were not supplied to them.
Two days later, Mead Johnson made an announcement that they were not affected by Fonterra’s crises since those milk products are not the materials for baby formula. In addition, New Zealand’s government made a statement that low level of dicyandiamide would not bring any negative influence on human’s health.

Market Analysis of the Crises:

In China, large-scale breeding pastures supply only about 40 percent of the country’s milk. The rest of the country’s milk suppliers are private herdsmen. Even though Mengniu, Yili, Guangming has been investing money and technology to establish large pastures, it still cannot meet the strong demand for their milk. As Chinese customers become more sensitive about the quality of milk made by Chinese brands, they are beginning to trust foreign milk manufactures and suppliers more than domestic suppliers. Fonterra found and tried to capture this timing and the opportunity provided by such a huge demand by the market. For a long time, milk from New Zealand experienced a lot of ups and downs in China’s market. The cooperation between Fonterra and Sanlu made Fonterra suffer a heavy loss both in terms of their reputation and financial state. After three years, Fonterra began regaining the trust of China’s market and spent huge amount of money to establish large pastures in the Hebei province. As for now, three pastures have been set up, which have gradually helped Fonterra achieve its goals in China. Others believe that Fonterra’s crises could be a great opportunity for the dairy companies from the USA and Europe to enter China and gain market share in the Chinese dairy market.

Past Crises:

This is not the first time Fonterra has had public issues with their milk quality. These issues have a big impact on the China’s dairy market, since it often affects the nation’s dairy exports, valued at NZ$11.5 billion annually. In 2008, Fonterra was involved in a scandal involving a dairy supplier in China. At least six children died from the incident and 300,000 became sick from milk containing dangerous levels of melamine, an industrial chemical that mimics the properties of protein, allowing producers to water down milk without diluting its nutritional value.

Daxue China Market Analysis


Picture source: Google Image