Case Study Of Infant Formula

* Background 1. Infant formula

The infant formula in the contract is restricted to the semi-manufactured infant milk powder that meet the “Codex Standard for Milk Powders and Cream Powder” (Codex Standard 72-1981), and it needs extra process to meet each brands’ design of their own infant formula compositions.

The infant formula milk powder is known for its characteristics: storage longevity and transport convenience, which is quite attractive for investors, corporation and wholesale companies.

2. Market participants

1) Wholesalers and Foreign Dairy Producers
Their interest in the product is subject to down price movement. a) They have to sell their infant formula to make profits. b) They would prefer selling at a higher price. c) If the price of infant formula goes down, they will suffer. d) When they expect there is a decrease in price, they could sell infant formula futures to hedge themselves against the down price movement risk.

2) Chinese Infant Formula Manufactures, Retailers and Wholesalers
Their interest in the product is subject to up price movement. a) They have to purchase infant formula for more processes or directly resell. b) If the price of infant formula keeps going up, they suffer higher cost and, therefore, making less profit. c) They would prefer buying infant formula at a price in which they think is relatively low or acceptable rather than being subject to uncertain future price. d) Since infant formula may not be kept for so long, they are not likely to store much infant formula in their warehouse. e) The infant formula futures may protect retailers and wholesalers against the upward price trend of infant formula and the problem of preservation. 3. Supply market analysis:
The Imported Infant Formula future contract is based on physically deliveries from six worldwide delivery ports: Auckland of New Zealand, Los Angeles of United States, Melbourne of Australia, Newark of United States, Rotterdam of Netherlands and Seattle of United States (Hu, Lu, & Li, 2009).

4. Demand market analysis:

The demand for infant formula milk powder (IFMP) in global market rises dramatically, the estimated market size worldwide is over 6.7 billion U.S dollars in 2011 (Chicago Mercantile Exchange, 2010), and Asia has been recorded with the strongest growth rate segment (Lisa infant milk know-how, 2011).

Since the demand for IFMP is driven by population growth rate, nutritional cares towards new-born babies have been improved, as well as the living standards in emerging markets. The IFMP can immune to business cycle effect (Lisa infant milk know-how, 2011), that can be expected a further growth in future.

Some specific factors that effect the market demand including: 1) Chinese Infant Formula Manufactures import most of their ingredients.

According to LI Taomin (2011), a junior engineer of Heilongjiang Province Diary Technology Center, “Chinese diary manufacturing corporations import most of their equipment and raw materials. Researches indicate that Chinese manufactures use only 25%-40% local ingredients and at least 50% imported ingredients.”

As a result, Chinese-manufactured infant formula is enslaved to foreign manufactures and distributors. To lock in a price to determine the cost of infant formula is crucial to the enterprises. 2) Chinese Population Growth and One-Child Policy:

China is the country with the largest population, with over 1.3 billion, in the world. To control its population size, Chinese government introduced the one-child policy in 1978, and initially applied in 1979, restricting married, urban couples to have only one child. Thus, China’s urban population growth rate has been slowed down since then. However, China’s total population is still growing.

Retrieved 24th April Resource: The world Bank

As China is still having a considerable amount of newborn babies, sufficient qualified infant

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