Chart Update, page-67

Given the dominance of Fonterra in New Zealand, together with Fonterra’s new alliance with A2Millk, plus the existing and increasing demand by Synlait for A2 milk, it is apparent that most of the New Zealand supply of A2 milk is ‘spoken for’.  Nestlé’s statement that they searched unsuccessfully for a New Zealand supply of A2 milk provides confirmation.

In China, all of the major dairy companies control a major part of their milk supply through their own herds. Accordingly, they are in a strong position to organise herds of A2 cows from within their existing herds.

This appears to be exactly what Mengniu has done, initially putting together a pure A2 herd of some 2000 high-producing cows.  They and other companies can quickly replicate this.

The challenge for Chinese companies is that milk produced in China is not what Chinese mums and dads prefer to give to their babies, toddlers, and even older children. They want a product that is sold on international markets.

For Chinese mums and dads, choosing a brand of infant formula has been likened to a major decision that sits alongside buying a house or buying a car. Only the best will do for their little prince or princess. So, the Chinese companies will have to work hard to compete against international brands such as a2 Platinum coming from A2M.

With most of New Zealand’s A2 milk already spoken for, together with consumer caution towards product from China, it is inevitable there will now be a focus on the USA for a global supply of A2 milk.

A key point is that in the USA there are many farmers who own multiple herds and there are some with up to 60,000 cows in total. Whoever can get access to the milk from the re-organised and concentrated pure A2 cows from within these herds has potential to create a leading global position.

A2M has a major global advantage at the outset, in that it does not have to protect any existing brands of A1 milk. This is a major issue for all of the other major companies, with the possible exception of medium-sized Freedom Foods in Australia. A2M also has valuable trademarks and first mover status, together with proprietary systems.

A2M also has some 15 families of patents, some lasting through to 2035, which it can defend. However, as someone with relevant expertise relating to the A2 issue said to me many years ago, it is best to use patents as shields and bang loudly on them, but also best not to test them in battle.

Two key patents, both now extinguished by time, were very effective until recently in keeping competitors at bay.  By definition, anything those patents protected is now not protected. However, existing patents may still allow A2M to do certain things more efficiently than other companies can do, and also make some protected claims that others cannot do.

There is a range of scenarios as to how events will play out from here. A key issue will be how fast the A2 category grows, and the extent to which each company focuses on growing the category as well as their own brand.

It is clear that The a2 Milk Company has the most to gain by growing the overall category. Other companies may choose to simply tag along with the category growth, and put all their focus on developing market share for their own brands.

The rate at which the A2 category grows will also determine the future farm-gate premiums for A2 milk. Until now, the A2M has had minimal competition for the existing milk pools. This has led to market premiums being captured and largely retained by A2M rather than by their supplying farmers, or even A2M’s processors.

Whatever happens, things have recently become a lot more interesting in relation to the health attributes and industry politics of dairy products that are free of A1 beta-casein. It looks like things will remain interesting, with many twists and turns.

Disclosure of Interest: Keith consults internationally for a range of dairy companies that hold a range of stances in relation to A2 Milk.

*Keith Woodford is an independent consultant who holds honorary positions as Professor of Agri-Food Systems at Lincoln University and Senior Research Fellow at the Contemporary China Research Centre at Victoria University.  His articles are archived at http://keithwoodford.wordpress.com. You can contact him directly here.