NEW ZEALAND – Tensions are running high in New Zealand’s dairy industry as a dispute unfolds between A2 Milk Company and Synlait, one of the nation’s leading suppliers of dairy and infant formula products.

The conflict arose after A2 Milk abruptly terminated a long-standing exclusive supply contract with Synlait, sparking a legal battle and concerns over the future of their partnership.

A2 Milk, a significant player in the infant formula market, has enjoyed a close business relationship with Synlait for years.

However, recently, A2 Milk dropped a bombshell by announcing the cancellation of Synlait’s exclusive manufacturing and supply rights for stages 1 to 3 of A2’s infant-formula products in key markets such as China, Australia, and New Zealand.

A2 Milk holds a substantial 19.8% stake in Synlait, making this decision all the more impactful.

The cancellation was attributed to what A2 Milk described as Synlait’s subpar performance in meeting its delivery obligations during the fiscal year 2023.

A2 Milk asserted that Synlait’s failure to meet these requirements had forced their hand in canceling the exclusivity agreement. Nonetheless, A2 Milk emphasized that Synlait remained an important supplier.

Synlait, however, promptly responded to A2 Milk’s announcement, disputing the validity of the cancellation.

In an official stock exchange filing, Synlait stated that it contested A2 Milk’s right to terminate the exclusivity arrangements.

Synlait further indicated that A2 Milk had agreed to maintain exclusivity until the dispute was resolved, and the contract contained a 20-day dispute resolution process, which would be followed by arbitration if necessary.

One crucial aspect of the dispute is the Chinese regulatory State Administration for Market Regulation (SAMR) license, held by Synlait and covering A2 Milk products manufactured at its Dunsandel facility.

Synlait expressed its intent to continue producing A2 Milk products for the Chinese market under this license until its expiration in September 2027.

“While the Nutritional Powders Manufacturing and Supply Agreement (NPMSA) between A2 Milk and Synlait remains in place on a rolling term, it can only be terminated by either party with three years’ notice.”

Synlait also disclosed in its NZX statement that it had completed bank refinancing, adding new banking syndicate members ANZ, Bank of China, China Construction Bank, HSBC, and Rabobank.

The company now boasts a working capital facility of NZ$240 million (US$142.5 million) and revolving credit facilities of NZ$230 million.

The dispute between A2 Milk and Synlait has captured the attention of the dairy industry, with both companies likely to provide further clarity on the matter when they release their respective full-year 2023 results later this month.

In April, A2 Milk expressed surprise at Synlait’s profit warning, which suggested a potential net loss of NZ$5 million, contrasting with the previous forecast of an annual net profit after tax of NZ$15 million to NZ$25 million.

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