UPDATE 1-NZ's Fonterra cuts milk product prices in China amid probe

Wed Jul 17, 2013 7:53pm EDT

WELLINGTON, July 18 (Reuters) - New Zealand's Fonterra - the world's largest dairy producer - will cut the price of one of it milk formula products in China, joining a growing list of firms responding to Beijing's investigation into the sector.

Auckland-based Fonterra said it will reduce prices by up to 9 percent for its Anmum brand of maternal milk products from Aug. 1. The move comes as the company prepares to enter China's booming branded infant milk formula market later this year.

A number of international milk powder producers have cut prices in China after the country's top economic planning agency said earlier this month it was investigating possible price-fixing and anti-competitive behaviour.

Fonterra's managing director for China and India, Kelvin Wickham, said in a statement the move was aimed "to better meet consumer needs in light of recent industry-wide price revisions".

Abbott Laboratories, French food giant Danone SA , Nestle SA, Mead Johnson Nutrition Co and Hong Kong-listed Biostime International Holdings Ltd have already announced reductions of up to 20 percent on milk formula prices in China.

Drug pricing in China has also come under severe scrutiny, with China's top regulators targeting British drugmaker GlaxoSmithKline PLC, and announcing a crackdown on pricing in the wider pharmaceutical market.

China is a major export market for Fonterra. As well as its Anmum products, which are aimed at expectant mothers, it supplies the vast majority of milk powder imported by local producers for use in products ranging from Chinese branded milk formula to confectionary.

Fonterra said earlier this month that Beijing's review of foreign milk formula brands had not affected its plan to launch its own branded infant milk formula in the country this year. The New Zealand firm is playing catch-up with other global dairy groups already operating in the high-margin Chinese market.

Dairy economists said the price cuts would shrink the fat margins seen on foreign-branded formula products in China, where tins costing less than $10 to produce can be sold for upwards of $50.

But the reduction was unlikely to push down global milk powder prices much, given growing demand for dairy products, particularly from emerging Asian countries.

"Formula producers have seen very healthy margins over the past few years and some of that is going to come out," said Con Williams, rural economist at ANZ in Wellington.

"How much that flows into weaker demand for wholesale products such as skim milk or whole milk powder, I don't think it will be substantial."

The announced price cuts have done little to slow a rise in international prices for whole and skim milk powder, the dominant ingredients in infant milk formula.

At the latest global dairy auction held earlier this week by Fonterra, prices for whole milk powder rose 7.7 percent, while skim milk powder prices rose 3.3 percent.

Whole milk powder prices have surged 65 percent so far this year, reflecting growing demand for processed dairy products, while skim milk powder prices are up 38 percent.

Demand for international milk powder spiked in China after parents turned away from local products in 2008 when infant formula tainted with the industrial compound melamine killed at least six babies and made thousands sick with kidney stones.

Fonterra had held a stake in Chinese dairy company Sanlu, which collapsed after it was discovered to have used the compound in its products.