white powder, grey market

Since melamine was discovered in locally produced baby formula in China during 2008, a semi-licit global trade in expensive white powder has developed, notably in Holland, to the point where it has led the government to impose purchasing restrictions.

A Dutch supermarket manager in a large urban supermarket, who gave his last name as Bakker, knows all about Chinese food scandals. “Yes, of course we closely follow these developments,” he said. So far he decided against any signs. “That would be too discriminating. But we do want to protect our local customers. This is not about profit—our milk powder is subsidized by the Dutch government. It is about societal responsibility.” He understands the motivations of Chinese traders, but says Dutch sellers have been forced to these measures by “professional networks of Chinese extended families that systematically buy up supplies within a 10 km range.” While his store has noticed increased milk powder sales for years, the situation has become very noticeable in the second half of 2012, “possibly because the traders are becoming more organizationally sophisticated.”

via. I dread to think what would happen if this hit the UK in a big way: it's pure Daily Mail bait, except that it's difficult to blame on the EU.

Obviously, if markets worked as they were supposed to, manufacturers would ramp up production, thereby also relieving the problems of oversupply in the dairy farming industry. On the other hand, the article notes that parents have become accustomed to paying huge amounts for baby formula, and perhaps that’s the way the manufacturers like it. So do the baby milk arbitrageurs.

If you’re wondering about breast feeding in China, check this out. Rates are low because of a combination of hyper aggressive marketing by companies and a persistent belief that mothers can’t produce enough milk unaided to feed their babies properly. This may be a holdover from when most people in China had a bare sufficiency of food, or even a memory of the outright famine associated with the Great Leap Forward, something that may be at the back of a doting granny's mind as she shells out her life savings on half a ton of Dutch wailing powder. Of course, It also might be something to do with the aforesaid hyper aggressive baby formula marketing.

Comments

[Alex]

OK, that's completely weird. It's an article of commerce like any other; why wouldn't you just buy it wholesale?

[ajay]

This is grey-market exporting. Maybe there are legal restrictions on importing containers full of baby food to China? Or tariffs? Or prohibitive permit and health rules?
Just guessing here.

[dsquared]

if you buy it wholesale, you presumably don't get the Dutch government subsidy. would guess that the real story here is that Dutch milk producers are subsidised to the tune of more than the difference between container freight and DHL.

[ajay]

Not just more than the difference between container freight and DHL; more than the difference between container freight plus wholesale, and DHL plus retail. Which is quite a jump!

[ajay]

dsquared: also, here's another point, from the article...

Hong Kong’s wide range of foreign milk powder brands is considered more trustworthy than even the foreign imports available in Chinese supermarkets.

So, if you buy Dutch milk wholesale, ship it to China and sell it in the supermarkets there, people still won't trust it (rightly so, because it might just be Chinese milk in a fake Dutch box). The point about the informal networks is that you're paying a premium for a trusted shipping chain.

[duaneg]

As you might imagine, this is a big story in NZ, too.

No subsidy here, but a lot of small operators buying small-scale wholesale, or even bulk retail, shipping over and reselling direct to the consumer. If you go through the proper channels then there is a lot of bureaucracy to navigate, and you need a lot more capital, but of course it is much more efficient.

It is a bit of an open question why Fonterra don't ramp up production and flood the market. One issue is the unfortunate fact that they owned a large stake in Sanlu and got badly burnt. This has opened the way for smaller local producers, sometimes with laxer standards, to get into the game. There was a recent scandal with one producing nutritionally deficient powder.

[duaneg]

On breast-feeding, there is also the fact that if you are a woman breast-feeding her baby then your parents, and your in-laws, are probably going to have very strongly held views on what it is and is not appropriate for you to be eating.

Furthermore, if the baby gets sick then perhaps you, with your weird ideas and your deficient milk, are directly to blame. Especially after you were warned about it, by everyone, repeatedly.

[Shackleford Hurtmore]

We have a similar problem here in New Zealand... when breast-feeding didn't work out (if you want to tell us we didn't try hard enough, just FUCK OFF now and save us both time, thanks), we started using baby milk powder. The supermarkets limit how many tins a customer can buy, because again, Asian families were just buying every single tin and shipping it home. I think ajay's comment on "trusted supply networks" is a big part of it, as the shipping costs involved must offset any "saving" made by purchasing it here (where it is not subsidised). I think exported milk powder is bulk shipped in foil sacks and repackaged at destination, allowing ample opportunity for tampering / dilution / substitution)

[Chris Williams]

I live in a place with a lot of different expat communities in it. Handwritten signs in shop windows would suggest that there are flourishing and competitive cottage industries in the 'send stuff home in our container really cheap' line. I imagine that these undercut DHL by a hefty margin - if expat Chinese communities have access to similar services (and, dur) then their transport mark-up might not be as high as all that.

[ajay]

CW: I was wondering if that sort of thing happened - makes a lot of sense. Thanks.

So the business model here would be to set up an incredibly foreign-looking shop, in China, selling baby milk - all-gwailo staff, all-foreign products, that kind of thing - and sell baby milk. You want to give that impression of trustworthy gwailo dairy produce, while still taking advantage of buying wholesale and shipping into the country in bulk.

If only you could still set up foreign trade concessions...

[Chris Williams]

Also, just realised: Europe to China is a buyer's market for transport, given that there are an immense number of empty containers heading east all the time, the owners of which are going to be casting around for something to stick in them and offset some of the cost. Not for nothing did I spend all those hours playing Railroad Tycoon.

[dsquared]

indeed, the UK's number one export is fresh Suffolk air. Container-loads of the stuff.

[Alex]

Well, Kenyan air used to be in such demand that they airfreighted it...until someone realised that you could compress the air into a slightly smaller volume and fill the remaining space with fresh vegetables.

[ajay]

I just noticed the pattern that the first few comments on this thread follow, unfairly caricatured below:

Engineer: "This is illogical! Why are these people not being maximally efficient? I AM CONFUSED."
Banker: "Clearly what is happening here is that the government subsidy is distorting the free market."
Regulation specialist: "I bet it's all about peculiar bureaucratic requirements that you have to bribe your way round."

[Alex]

Plus "person with actual knowledge", who explained the whole thing.

[Chris Waugh]

duaneg: Fonterra isn't ramping up production because of the drought. Fact is, NZ has a huge, as in 70 - 80% share of the imported dairy market in China, particularly in infant formula, and Chinese dairy companies have plans to build milk powder plants in NZ. If the weather were better, many companies in NZ would be ramping up production.

[duaneg]

Ah, good point about the drought, although hasn't the formula frenzy been a thing for several years now?

Fonterra dominates the wholesale market, but if there is so much profit to be had at the retail end then I would hope and expect them to be trying to move up the chain and capture some of that.

[Chris E]

Interesting. Lately i've experienced the same thing locally for a leading brand of baby milk - the wife went out and started buying milk in bulk (and wasn't amused when I pointed out that if everyone did what she did then the situation self perpetuates), ringing around the local supermarkets confirmed a shortage in most places.

I couldn't think of an obvious local chinese community - until I realised that the university has tons of chinese students - and as Chris W says above, the local chinese supermarket have loads of these 'ship Xkg to Beijing for $lownum' adverts.

[Chris E]

.. and it appears to have hit mainstream. Sign in local Waitrose says "Due to milk formula shortages, maximum purchase is 6 units per customer, for more details talk to a partner".

On talking to a partner; the explanation was "We are having difficulty getting milk in because they are buying it all up in China"