Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



China Spoils Global Infant Formula Trade

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

The Chinese dairy market was rocked by scandal in 2008 when it was discovered that producers were adding melamine, an industrial compound used to make plastic, to infant formula to boost apparent protein levels, but ended up causing six deaths and left thousands hospitalized with kidney problems. Producers like Synutra International (NASDAQ: SYUT  ) have never recovered, their stocks trading at a fraction of their former heights.

This coming as it did a few years after producers were charged in a fake milk scandal leading to malnutrition and leaving 13 infants dead, Chinese mothers largely abandoned domestic formula suppliers in favor of foreign ones, like Nestle (NASDAQOTH: NSRGY  )  and Danone (NASDAQOTH: DANOY  ) .

Demand was so great that prices soared by as much as 30%, with foreign-made formula costing twice as much on the mainland as the same brands in Western countries. That led relatives as far away as the U.K. to buy up cases of formula locally and ship it back to China, causing supermarket chains like Tesco to impose a rationing system to limit the practice.

With runaway demand, analysts estimate the market there could hit $25 billion by 2017, but China has launched an investigation into whether foreign producers conspired to exploit the crisis to inflate prices.

In addition to Nestle and Danone, Abbott Labs  (NYSE: ABT  ) , Mead Johnson Nutrition  (NYSE: MJN  ) , New Zealand-based cooperative Fonterra, and Chinese producer Biostime have also confirmed they've been targeted for possible price-fixing and anti-competitive practices.

While it would seem to be simply supply and demand driving up the cost of infant formula prices, Nestle and Danone have already agreed to cut its prices, with Nestle saying it will lower them by 11% through 2014, with some products' prices getting slashed by as much as 20%. While that could be a gesture of goodwill, it could also suggest these companies previously colluded to raise prices.

Yet even if the foreign producers are found guilty of anticompetitive practices, don't expect domestic suppliers like Synutra to benefit. Chinese parents remain leery of locally produced product, and last year another formula maker, Yili, had to initiate a recall because of high levels of mercury. 

Tainted food products out of China are nothing new, with antifreeze, lead paint, and other toxic substances having found their way into the food chain. And parents, it seems, would rather pay inflated prices than trust locally sourced products. Particularly when it comes to infant formula, "Made in China" is not a label that instills confidence.

Such crises should represent opportunity for American companies to help level the trade imbalance with China. Profiting from our increasingly global economy can be as easy as investing in your own backyard. The Motley Fool's free report "3 American Companies Set to Dominate the World" shows you how. Click here to get your free copy before it's gone.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2524454, ~/Articles/ArticleHandler.aspx, 9/30/2016 4:29:46 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 7 hours ago Sponsored by:
DOW 18,143.45 -195.79 -1.07%
S&P 500 2,151.13 -20.24 -0.93%
NASD 5,269.15 -49.39 -0.93%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/29/2016 4:01 PM
ABT $41.44 Down -0.85 -2.01%
Abbott Laboratorie… CAPS Rating: *****
DANOY $14.63 Down -0.15 -1.01%
Groupe Danone (ADR… CAPS Rating: **
MJN $78.24 Down -0.07 -0.09%
Mead Johnson Nutri… CAPS Rating: ***
NSRGY $79.60 Up +0.10 +0.13%
Nestle CAPS Rating: *****
SYUT $4.15 Down -0.01 -0.24%
Synutra Internatio… CAPS Rating: *