• China’s strong affinity for Australian dairy and food has served as a shield against geopolitical tensions
  • Wilsons Advisory said sentiment goes back to 2008 Sanlu Group melamine infant formula scandal
  • Several ASX food stocks stand to gain from Australia’s role as a highly esteemed food source for China

Wilsons Advisory head of research James Ferrier believes that the only investment thematic more popular than China’s reopening to the world after three years of lockdown, is China’s reopening to Australia after several years of trade sanctions.

Ferrier told Stockhead the first half of calendar 2023 has been replete with bullish predictions for Australian listed companies which stand to benefit from the reopening of the world’s second-largest economy and the relaxing of trade sanctions imposed on $20 billion worth of our exports, including barley, beef, timber, cotton, wine, lobsters and coal.

But interestingly, Ferrier said that despite early concerns in mid-2020, Australia’s $1.1 billion of dairy exports remained exempt from China’s punitive trade measures, both official and unofficial.

Why? China’s long love affair with the quality and safety of Australian dairy effectively insulated local suppliers from the political fallout between the two nations.

Ferrier said this sentiment goes back to the 2008 Sanlu Group melamine infant formula scandal, a significant food safety incident in China resulting in more than 54,000 hospitalisations and the death of six babies.

Strong consumer distrust of domestic products persisted for well over a decade, making clean and green Australia and New Zealand supply critical to meet the surging demand for premium dairy.

Many Australians will recall evening news bulletins recording the outbreak of physical fights over tinned formula, and the stripping of supermarket shelves by daigou networks; Chinese tourists, relatives and for-hire personal shoppers who resold the powdered milk products for a profit back home.

En masse purchases of foreign dairy weren’t just limited to milk and milk products either; Chinese companies went shopping for farm assets and listed dairy producers too.

“‘Peak powder’ was probably the $1.5 billion takeover of Bellamy’s Organic by the China Mengniu Dairy Company in late 2019,” said Ferrier.

Mengniu had plans to roll-up the largest dairy enterprise in Australia, having bought 79% of Burra Foods in 2016 and announcing the agreed acquisition of Lion Dairy and Drinks only a fortnight after the government green-lit Bellamy’s.

However, that deal was eventually vetoed for reasons of national interest during the early stages of the Australia-China geopolitical trade dispute.

At the same time China was securing food security abroad,  Ferier said the country was focussing on food safety at home.

China rolled out its Domestic Infant Formula Milk Powder Enhancement Action Plan in May 2019, which introduced stricter manufacturing quality standards aimed at improving perceptions of local brands and lifting their market share to 60%.

“Chinese manufacturers seized this opportunity to take back market share, launching an advertising blitz to reassure distrusting consumers of their reformation and commitment to safety and quality,” Ferrier said.

For example, advertising jingles broadcast by China-based supplier Feihe claim that its home-made formula is “more suitable for Chinese babies”.

Ferrier said Australian suppliers today are acutely aware that the pre-pandemic glory days are long gone. In addition to aggressive and revitalised domestic competition, the regulatory frameworks in China have changed, with foreign approvals protracted if not elusive.

Likewise, distribution has increased in complexity, with sales channels now comprising an unwieldy mix of direct retail presence, corporate Daigou and CBEC and FTZ arrangements.

Despite these obstacles, Ferrier maintains that China’s market size ensures its ongoing appeal as key export market for Australian dairy producers, particularly those with established infant formula businesses.

“Parents everywhere want the best they can afford for their children. Ongoing urbanisation of the world’s most populous nation continues to drive higher disposable incomes and greater health awareness, underpinning long-term demand for high-quality dairy and fresh produce from Australia and elsewhere.

“Whether we’re talking about premium infant formula, beef, seafood, blueberries or almonds, Australia’s reputation and proximity ensure its status as one of China’s most-valued food bowls.”

So what are some of the ASX companies which stand to benefit from China’s appetite for Aussie food?


A2 Milk (ASX:A2M)

Ferrier said A2M delivered a strong first-half result in February, gaining share across multiple channels into China.

“Share price volatility since then has been driven by market announcements of key contract supplier Synlait Milk, which insinuated reduced demand for A2M product when downgrading its own profit outlook, forcing A2M to allay market concerns,” he said.

“June’s positive news about Chinese regulatory approval was well received, but investors retain some caution on the implications for product transition and inventory management.”


Costa Group Holdings (ASX:CGC)

Costa reported “generally improved growing conditions” in its May AGM Trading Update.

Known as  Australia’s biggest fresh produce company, Costa also operates blueberry farms in China which Ferrier said yield margins three times greater than their Australian counterparts.

“A return by pre-IPO US private equity co-owner Paine Schwarz to Costa’s register in October last year ignited talk of potential re-acquisition.”


Select Harvests (ASX:SHV)

Select is a vertically-integrated grower, processor, packager, marketer and distributor of edible nuts, dried fruits and seeds. Australia’s second-largest almond grower, Select also exports to China.

“In March, its new CEO warned of a smaller 2023 almond crop, and in May, confirmed a disappointing first-half result,” Ferrier said.

“However, there are early signs of progress with respect to management initiatives around earnings and cashflow performance.”


Bubs Australia (ASX:BUB)

We can’t write a story on ASX listed companies selling dairy and food products without mentioning troubled baby formula maker BUB, the subject of a bitter board split, for which China is a major market.

However, last week BUS said a JV which previous management entered in 2022, won’t proceed after its Chinese partner has so far failed to get registration under the country’s new national standards.

BUB now plans to have its Melbourne factory registered under China’s new national standards so it can sell China label infant formula products.

Furthermore, BUB said its China net revenue for FY23 is expected to be at the lower end of the previous forecast range of between $13.5-$13.8 million, versus $53.6 million in FY22.

The company blamed an exclusive China distribution deal with AZ Global which is also a “has failed to deliver against expectations”.

Inked under former management of CEO Kristy Carr and chairman Dennis Lin, BUB said the distribution deal had “failed to move stock and continue to disappoint”.

“Bubs Australia understands there is more than five years of Bubs Supreme finished goods inventory held in multiple warehouses, based on the current rate of sale.”

AZ Global and its subsidiaries also owe the company $5.65 million, which BUB said it was pursuing. AZ Global has aligned itself with Carr and Lin to spill the board.

Just how the BUB saga unfolds remains to be seen.


RooLife Group (ASX:RLG)

The cross-border platform matches Chinese consumer demand with international brands and products including Aussie produce.

RLG identifies trends in Chinese consumer demand, secures distribution rights for international products that fit consumers’ needs, then provides the tech and sales infrastructure necessary for brands to sell at scale in China.

MD Bryan Carr told Stockhead Aussies products are recognised for their high quality and the high standards of production.

“Similar to everywhere in the world there is an increased awareness of personal health and well-being with Chinese consumers and Australian products at the top of the list in that regard,” he said.

“China is a net importer of food and food products – and will be for a very long time, so we see China as a high growth consumption market with plenty of headroom for growth.”


The A2M, CGC, SHV, BUB, & RLG share price today:



At Stockhead, we tell it like it is. While Roolife Group is a Stockhead advertiser, it did not sponsor this article.