New Zealand and Australian infant formula makers face a number of challenges. Photo / Getty Images
Covid-19 has changed the commercial landscape for many industries, and infant formula is no exception.
As the pandemic's impact starts to recede, New Zealand and Australian infant formula makers still face headwinds, so will they ever return to those pre-Covid, "white gold" days?
In Australia, the domestic infant nutrition market is worth A$900 million ($996m) a year while its export market is worth A$750m.
In New Zealand, the industry is worth $1.1 billion, mostly built around exports.
"I think it faces headwinds on a number of fronts," says Jan Carey, chief executive of the Infant Nutrition Council (INC), which represents most of Australasia's infant formula makers.
While there were still grounds for optimism, she says the product is not the high premium opportunity that it once was.
"Infant formula sits in a global environment so what is happening globally affects them [producers]," Carey told the Herald at this week's INC conference in Wellington.
The conference heard that production of sunflower oil - a key ingredient for infant formula - had been hit hard by the war in Ukraine, which is the world's biggest producer.
Then there were the supply chain issues that have affected most industries throughout the pandemic.
Carey said the sunflower oil shortage and supply chain problems were key issues, but there were structural challenges as well.
Foreign infant formula manufacturers enjoyed strong sales growth in China - the world's biggest market - after a 2008 scandal in which local formula was contaminated with the chemical melamine, rocking confidence in the Chinese-made product.
The incident resulted in Chinese consumers turning to foreign-made product in their droves, giving New Zealand and Australian producers a major boost.
But Carey said that in the isolation of Covid lockdowns, China had built up its own infant formula manufacturing capacity, and that faith in locally made product was returning.
China is running a campaign focusing on "China Pride" - Chinese formula for Chinese babies, and sales of locally made formula are increasing despite a declining birth rate, she says.
The People's Republic is aiming to be 60 per cent self-sufficient in formula, and sources at the conference said it had probably already achieved, or exceeded, that target.
Carey said the ever-tightening regulatory environment in China was another headwind.
"The birth rate is going down and the regulations are very, very strict, so it's hard to get your product into China now which is fair enough - it should be highly regulated and the Chinese Government is allowed to set their regulations as they see fit. But it is making it harder for our companies to get product into China and to maintain the sales that they used to have," she said.
Another drawback for many Australasian producers was the severe curtailment of the informal, or "daigou", trade in infant formula from Australia to China due to Covid lockdowns and border closures.
Early this year, the US suffered an acute shortage of formula after the recall of several products manufactured by Abbott Nutrition, the largest US manufacturer of infant formula, because of bacterial contamination and the shutdown of its Michigan plant.
Only a limited number of foreign suppliers have been allowed to sell product to the US to fill the void.
In August, the dual-listed a2 Milk said the US Food and Drug Administration (FDA) had deferred further consideration of the company's request for discretion to import infant milk formula products into the US.
The company has since been advised by the International Dairy Foods Association (IDFA) that equivalent letters have been sent to all applicants awaiting that enforcement discretion, indicating that the FDA is deferring any further review of all pending applications.
Carey said it was disappointing that so many local producers had not been able to get product into the United States to help with its product shortages.
"New Zealand has a good relationship with the US Government and we are seen as allies of the US, yet they have a cartel on infant formula, frankly.
"It's almost impossible - they make it so difficult for anybody else to get in, yet the USFDA recognises New Zealand as having a very good food safety system.
"A2 Milk is a success story in our region and yet they have granted approval to companies that cannot supply in the way that a2 can supply, and you have to wonder why."
Carrie Assar, team leader infant formula and medical foods staff at the FDA, told the conference via a video presentation that the FDA had issued 16 letters to eight infant formula companies in nine countries.
"This exercise has eased the shortage and has helped replenish our shelves," she said.
The programme was to have ceased on November 14 but will now run to January 6, 2023, and possibly beyond, she said.
Daniel Ong, commercial director for Cargill Global Edibile Oil Solutions Malaysia and Australia, said industries continued to adapt two years after the Covid peak.
"Current geopolitical issues have also posed challenges," he told the conference.
The Ukraine-Russia war had caused supply disruption of sunflower oil and the Indonesian government had limited the export of palm products.
"Supply disruptions of key components of important commodities and the added pressure of constraints to the global logistics and transportation network," he said.
Carey said the sector faces issues and "life is not the same, post-Covid".
So are the "white gold" days for New Zealand and Australian producers really gone for good?
"Yes, but the Chinese still want our products," she says.
"They do a lot of research and they know the value of what we are producing, so they are still very keen to take our products."
INC's trade and market access manager Simon Woolmer said the structural changes that the infant nutrition industry faces are not going to go away.
He said the melamine scandal was not a distant memory, but it was now in the past.
"The Chinese Government has made no secret of the fact that they want to grow the industry, with China Pride.
"That said, China is going to remain the dominant market for Australia and New Zealand infant formula exports - there is no doubt about that.
"But if it drops off by 5, 10, 15 or 20 per cent going forward, where do New Zealand exporters go to pick that up?
"A number of our members are seeing that writing on the wall and are looking at other emerging markets in the region - like Vietnam and Indonesia.
"India is obviously a very big market that can't be ignored but at the same time it has some [market access] issues as well," he said.
"Certainly, the ASEAN markets are all very accessible in the cross-border e-commerce channel which a lot of our members are very well versed in."
The US, notwithstanding the current difficulties, also had potential.
Even so, Woolmer expects only four or five of the current INC members to be allowed to ship product there under today's fast-tracking process.
"I still think there is a lot of upside globally but the key for local producers would be diversification into new export markets.
"In terms of risk mitigation, it's not a bad strategy to have anyway."
The key would be targeting markets where there is an expanding middle class, Woolmer says.
"I still think that there is a lot of positive momentum but as exporters, they are probably going to have to diversify and get their product into a broader range of markets and get their sales channels up and running."
• Jamie Gray attended the Feeding The Future conference in Wellington courtesy of the Infant Nutrition Council.
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