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Why Sell Heroin or Cocaine When You Can Sell Milk Powder?

If the riches of the drug trade tempt you, leave them behind and do this: find a way to get quality milk powder to Chinese mothers. You’ll find a hungry market of worried parents with cash in hand — wads of the stuff. 

That’s the impression we get, anyway, following the food safety story in China. Sales of non-Chinese brands of baby formula are booming. In April, a Bloomberg article put sales growth at 29% in 2012 to a total of 95.2 billion yuan (US$15.4 billion). That’s more than four times the size of the US market. 

It’s not because the good people of the Middle Kingdom are suddenly having more babies. There’s still the one child policy, after all. It’s that Chinese parents don’t want to go near the local industry. And no wonder. Its track record of regulation and safety is awful. You might remember the melamine scandal of 2008 that caused six deaths. Not much has improved since.

As a result, Chinese consumers are willing to pay big money to get their hands on the good stuff. But getting their hands on the best is harder than you might think. Entrepreneurs ship what they can into China to meet the demand. But it’s so great it’s causing shortages in the UK, Europe and New Zealand. 

Enter governments at one end trying to stop the outflow and the Chinese government at the other trying to stop the inflow. As always when you retard the market, the distortions multiply. But so do the investment ideas.

The ‘problem’ is so bad in Hong Kong there’s a new class of criminal: milk powder smuggler. They catch more of these than they do for the type that deal in heroin and cocaine. There’s a two can restriction on outbound travellers.

Take this from an article in last weekend’s Australian Financial Review:

‘In April, the customs police held a news conference to announce that a two-day “anti-smuggling operation” had resulted in the breaking up of three “syndicates,” the arrest of 10 people and the seizure of formula worth $US3500.

‘On the mainland, Chinese parents’ obsession with foreign milk powder, which stems from distrust of domestic brands, is stirring a nationalistic “buy China” movement among some officials. This month, a government agency began an investigation into price-fixing in the baby milk powder industry; targets of the inquiry included some of the biggest foreign companies.’

Those companies include big multinationals Mead Johnson Nutrition, Danone and Nestle. According to the Wall Street Journal¸ imported milk powder prices in mainland China are up 60% since 2008. They can cost twice as much for the same thing in Hong Kong or overseas.

But here’s the key takeaway for investors: ‘Despite the high prices, demand for foreign milk powder keeps surging…the vast majority of mothers of infants and toddlers are willing to pay a high premium to buy imported milk powder – or actually buy it overseas, to minimize the risk of getting counterfeit – to ensure it won’t harm their babies.’

Every analyst that thinks about China seemingly must take a position on whether the economy is shifting to a consumption-based one or not. But who can say who will be right and when in the long run? The point is we think this is the kind of trend that puts the GDP figure and macro growth rates out of the picture. You can put the talk of ghost cities, iron ore bubbles and panics aside — for one Saturday, at least. Before everything else, people need to eat.

Maybe Nestle agrees with us. In June, Bloomberg reported the world’s biggest food maker was opening two new factories in China and targeting the country to increase sales. It shrugged off concerns about the slowing economy. No wonder; its Greater China sales doubled last year. If they can cement a dominant market position now, you’d think they could lock in a lot of sales in the coming decades. It’s a long term strategy as the Chinese get richer. 

That probably also explains Chinese company Shanghai Pengxin buying 16 dairy farms in New Zealand’s North Island, where 16,000 dairy cows graze, munch and blow off no doubt an amazing amount of methane over 8,000 hectares. If Chinese consumers will pay top dollar for powdered milk, what might they pay for a trusted source of the real thing?      

Time will tell. The good news is there is an investment angle to all this that you can take advantage of. Nick Hubble, editor of The Money for Life Letter, backed an Aussie company he says can cash in on the dairy trade selling into China. If you want a company with bright prospects, it’s hard to find something brighter than giving the Chinese consumer what they want more than anything — clean food. You can see what he says here.

Enjoy your weekend!

Regards,

Callum Newman+
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

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Callum Newman

Callum Newman

Callum is the feature editor for The Daily Reckoning — Weekend Edition. He covers areas of interest arising from world markets and the global economy that could mean new investment opportunities for Aussie investors. To follow Callum's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. More on Callum Newman...

4 Comments

  1. Ross says:

    not good timing. Want some justification for vertical integration led by sovereign wealth equity? See Fonterra botulism reports. The so-called good stuff hasn’t been so good. Sewerage leak mid 2012 hits wey, affects hundreds of tonnes of powder, mostly China and S.E. Asia bound, and it only hits the recalls and headlines mid 2013. Great QC in the superior western world eh? (in kiwi bro talk). What BHP-RIO are to Australia, Fonterra is to NZ, and even moreso in GNP terms. It is a disaster that should see heads roll. They could start with the vwolf in sheep’s clothing PM Key.

  2. slewie the pi-rat says:

    very topical!
    timing is everything.
    1) China to change baby policy; announced today?
    2) the ‘botulism’ from the Fonterra products has apparently caused China and Russia to halt NZ milk imports. today?

    buying 16 dairy farms = a LOT of cows and tractors. makes me laugh just to think about it.
    a pediatrician once told me: milk is a complete food.

    the US produces +dairy+. they could buy some of ours, but it might be too radioactive…

  3. Ross says:

    Man, like drugs there’s now price fixing to add to this misery.

    http://www.businessspectator.com.au/news/2013/8/7/food-and-beverages/fonterra-fined-price-fixing

    next thing we know the CIA will be buying in, or perhaps that’s the hot tip Callum got?

  4. Ross says:

    Oh, I forgot the reckoners likely won’t turn pink – DR doesn’t sign onto anti trust law … against the faith based religion. Won’t do much for NZ valuations either way.

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