Exporters need right formula
The first part of the Government's inquiry into August's Fonterra botulism scare exonerated the wider food-safety system. But well before the scare, Kiwi infant formula and other dairy-product exporters were worried about being on the back foot in China.
On one hand, their future looked extremely bright. Exports of "food preparations for infants" from New Zealand to China have leapt from $100m to $161m in just the past two years. The Chinese cannot make enough infant formula to meet national demand, and hold New Zealand products in high regard.
But while that opportunity still remains, a series of unfortunate events have taken the gloss off Kiwi dairy products.
Things started going wrong with the Sanlu melamine scare in 2008, in which six babies died. Although Fonterra did not make the product, it was a major shareholder in Sanlu and suffered by association.
Three years later a "grey trade" in New Zealand infant formula was revealed.
Businesses would buy up large amounts of formula from New Zealand supermarkets and slip it into China through Hong Kong to avoid duty. Chinese camera crews came to New Zealand and discovered these companies had bogus addresses.
Gregg Wycherley of goat milk formula company Fresco Nutrition says there was no question the product was safe, but the formula sold here was not tailored to Chinese specifications.
Although the Chinese have been proactive about stamping it out, he says this backdoor trade by "cowboys" casts a shadow on legitimate products.
"Traceability exists in all manufactured product in New Zealand, it's just how it gets to market.
"If that gets to market through a different route, the traceability itself doesn't get lost but the ability to recall a product gets lost because you can't get hold of that customer."
Matters escalated in February, when traces of fertiliser chemical DCD were found in two batches of Fonterra milk products. Then, in August, Fonterra announced it was asking customers of a whey product to recall certain batches because of suspected botulism contamination.
While further testing turned up negative, "the damage was already done," says Wycherley.
However, the biggest challenge for dairy exporters may still lie ahead. Months before the Fonterra incident, China had already signalled that it was tightening up on trade.
Having already tackled its own industry, it unveiled new draft regulations for dairy imports earlier this year.
The new rules were difficult for small exporters to translate and their general impression is that the Ministry of Primary Industries was caught out.
One former dairy industry player, Paul O'Brien, says it took eight months, until October, to get ministry officials to visit Auckland, where most dairy exporters are based, and explain just what the draft rules meant.
"They just weren't interested," said O'Brien, who was getting his information second-hand from distributors.
The new regulations, he says, demand a lot more testing. "They issued them roughly in early to mid April, but by then it was too late. I had containers on the water going to China."
Export New Zealand chief executive Catherine Beard, who stepped in to help arrange the meeting, agrees it was well overdue. But she adds no-one puts too much blame at the door of the ministry because of its limited resources.
"The message we got at that meeting from MPI is that they get that and they're in the process of doing that."
Beard says the new ministry needs to understand that Asian countries expect much more government intervention. Early difficulties included exporters' experiences at Chinese ports.
"When you go through some of the ports in China and you've got a free-trade agreement, we're the exceptions. So for the customs officials at that end, everyone else goes through a similar process and then we come along and we're different."
China is expected to firm up its import rules mid-next year. At the very least, exporters expect it will involve their registration and an audit of manufacturing plants.
Exporters say they've got no problems with this but are concerned that China's drive for traceability might extend to sub-contracting.
David Spurway, head of formula manufacturer New Zealand New Milk, says its understandable China wants more traceability.
"For virtually all New Zealand exporters, that's a positive move and one that would be welcomed.
"I guess the issue is how that's rolled out and what the controls are."
Spurway says that in China, traceability has been improved through vertical integration, meaning infant formula brands had to own or at least be more accountable for the manufacturing process.
In New Zealand, however, it is common for brands to contract a manufacturer to make the formula, which turns to someone else such as Fonterra or Synlait to provide the base product.
Spurway says he understands the Chinese are worried marketing companies will simply disappear if there is a quality issue. But if China wants exporters here to have control over the manufacturing process, "that's quite a problem".
"There's a lot of sub-specialisation that's happening internationally in the food industry, so people are doing what they are good at doing."
He estimates more than 100 infant-formula brands are coming out of New Zealand from only 10 manufacturers, which he suggests should lend some confidence to the Chinese.
However, Keith Woodford, a professor of agribusiness at Lincoln University (see column page 7), doubts that will be the case. He says the Chinese will probably frown on the many exporters who have no presence in their own market.
"If someone's making a go of it in New Zealand, then I would say they might have a place in China. But if you think of a brand that is just manufactured here specifically for China, then that really looks like they're trying to exploit a short-term opportunity.
"The Chinese want a trade which is regulated and ordered. And the Chinese will also be aware that a lot of the brands out of New Zealand appear to be going through Hong Kong."
The saving grace for Kiwi exporters remains that China does not have enough milk of its own.
New Zealand milk is still "best in class," says Wycherley, although it has lost some margin and market share. "Our quality's now seen as excellent rather than untouchable."
Chris Claridge, of infant formula exporter Carrickmore, says China's complexities can't be underestimated "but I think we self-flagellate a bit in New Zealand. We simply just have to play the game better.
"This country wants our products, they believe in us, they trust in us, we just simply have to deliver what they need. We just simply have to put in process the processes and mechanisms to deal with this market. Otherwise the opportunity will bypass us."
- Sunday Star Times