The Secret to China’s $7 Billion Milk Market

You might think milk is about the least exciting business you could possibly to be in. You couldn’t be more wrong.

The famous bootlegger Al Capone was once asked why he’d entered the milk industry. He replied, ‘We’ve been in the wrong racket right along!’ Al Capone was referring to the profits to be made. But it turns out milk can be as controversial and dangerous as bootlegging too.

The New York Times reports Chinese tourists across the world are reportedly clearing shelves and smuggling milk powder by the suitcase into the Chinese mainland. They can bank 400% returns by selling the stuff on the black market. Some enterprising businessmen travel back and forth to Hong Kong with boxes full of the stuff…

That’s the nicer side of the boom. Behind the scenes, milk is a matter of life and death in China. In 2006, melamine tainted milk killed six Chinese infants and made up to 300,000 severely sick. In 2012, the whistleblower who exposed the levels of contamination was stabbed to death and the local officials tried to frame his wife. But there were too many witnesses.

Quite frankly, milk in China is about as controversial and messy as Al Capone’s ‘other goods’ were back in the day.

You’ll understand just why when you realise what’s at stake.

The Chinese don’t see milk as we do in the west. To them, it’s a luxury premium product reserved for babies, the elderly and the wealthy. Chinese consumption per person is tiny compared to its Asian neighbours, and an even smaller fraction compared to the west. The average Australian consumes 23 times more dairy products than the average Chinese.

But the market is growing, and fast. When Chinese Premier Wen Jiabao visited a dairy farm in 2006, in typical Chinese fashion, he made what’s now called the 500 Gram Dairy Declaration: ‘I have a dream that every Chinese, especially children, could have 0.5 kilogram of dairy products every day.’ Consumption has boomed since.

At stake is hundreds of billions of dollars in potential revenue based on unimaginable volumes of demand at prices up to seven times what you’ll find in an Aussie supermarket. It’s a businessman’s dream.

And since contamination scandals have been plaguing the local industry, foreign milk, especially from New Zealand’s provider Fonterra, has been immensely popular.

In the February issue of The Money for Life Letter, we wrote about how Fonterra had made two disastrous strategic mistakes. And one small Aussie company which was about to fill the void and stake its claim on the Chinese milk boom.

The first mistake Fonterra made was to produce raw milk inside China. That completely negates the value of buying a foreign brand in the Chinese consumer’s eyes. It’s no longer as safe or prestigious.

Far more importantly, at the time we wrote the report, Fonterra’s milk powder tested positive to dangerous dicyandiamide levels. They’d blown their reputation for having safe, clean powdered milk as well. With both advantages gone, that created the opportunity of a lifetime for one small Aussie company. We recommended the stock and it has done well ever since.

But recently, things in the milk world have got out of control and the stock has reached all time highs.

Fonterra is embroiled in another scandal.

For the past week, story after story has come out about the crisis, and it just keeps getting worse. First, China stopped the import of some of Fonterra’s products after tests discovered contaminants which can cause a serious illness called Botulism.

Now the crisis is engulfing Fonterra’s other products. Mothers across the world are running scared from Fonterra…and many of them straight into the arms of the company we recommended.

Nick Hubble
Editor, The Money for Life Letter

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Nick Hubble is a feature Editor of The Daily Reckoning Australia . Nick has spent the last three years discovering lots of new, exciting and surprisingly simple ways to generate money for retirement. He’s put all these ideas into his investment publication The Money for Life Letter.

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