KKR speculation highlighting Chinese milk potential

By Neil Merrett

- Last updated on GMT

Related tags Dairy Milk

As speculation mounts over equity group KKR’s rumoured bid for Chinese milk producer Modern Farms, a source close to the potential deal suggests that the country’s dairy sector may see a wealth of future investments.

The company, which has made only one previous non-dairy related investment in the Chinese market, refused to comment on mounting speculation that it may claim a stake in the farming group at cost estimated of around $100m (€79m).

However, a source with knowledge of the two groups told DairyReporter.com that there was strong potential in the country for investors to drive growth and expansion in milk production to meet safety and quality needs.

Chinese challenge

The Chinese dairy industry has undergone upheavel in recent years, including massive growth, and more recently, a damaging contamination scandal that led to the hospitalisation of thousands of children and worldwide product recalls.

Just this week, news reports suggested that country’s ministry of health had increased its estimates for the number of consumers that were killed or affected by the inclusion of the industrial chemical melamine in milk supplies.

The ministry believes that up to six infants may have died after consuming tainted products, with a further 294,000 suffering urinary tract ailments, according to the BBC.

Despite these concerns, the source claimed that Modern Farms had not been implicated as a source of possible contamination of the chemical linked to the illnesses.

Supply chain management

While a number of the world’s leading dairy processors are already present in the country, from New Zealand-based Fonterra to multinationals such as Arla Foods, the source said acquiring a large-scale dairy farm producer could be a major step in ensuring tighter national supply chain management.

Dairy farming in the country is mainly by small farms with a limited number of cattle, while Modern Farms offered an already operational large-scale site, they added.

Last year, the​director of China's dairy association claimed that the country had overtaken Russia and Pakistan to become the world's third largest processor of dairy products.

Dairy processing within the country increased by 15 per cent during 2006 to reach an output of 32.9m tonnes, according to a report in the China Securities Journal.

The market is not without its difficulties for manufacturers of more local brands though. In figures supplied by the research group, TNS Worldpanel, the country’s shoppers were increasingly turning to premium and international brands following the melamine concerns, besides an overall downturn in Chinese dairy sales volumes during September 2008.

Jason Yu, general manager of TNS Worldpanel in China, said that multinationals and larger local brands had a strong opportunity to meet consumer concerns following the scandal, adding that aggressive new marketing may be required to do so.

Yu suggested that there may be particular potential for local companies to act quickly and consolidate in the market for liquid milk and yoghurts, which he said were less populated by major global players.

Related topics Manufacturers Fresh Milk

Related news