The a2 Milk Company has decided to cancel its exclusive manufacturing and supply agreement with Synlait Milk, allowing for increased production at its own factory. While Synlait currently holds the exclusive manufacturing and supply rights over A2 Milk’s Stage 1 to 3 infant milk formula products sold in China, Australia, and New Zealand, the cancellation of this agreement will enable a2 Milk to have more control over its production.
The a2 Milk Company has given written notice to Synlait, and the latter is currently considering its options and will respond formally at a later stage. Synlait’s shares and bonds have been halted from trading while the company assesses the impact of this development.
A2 Milk cites Synlait’s failure to meet delivery requirements during the 2023 financial year, particularly in relation to English label infant formula, as the reason for the cancellation. However, it emphasizes that the manufacturing and supply agreement with Synlait will remain in place, as Synlait remains an important supplier.
If Synlait disputes the cancellation notice, A2 Milk states that the matter will be resolved through negotiations and confidential binding arbitration as outlined in the dispute resolution provisions of the supply agreement. In the meantime, A2 Milk has agreed to maintain Synlait’s exclusivity until the resolution of any disputes, assuming it happens by the end of 2024.
While the cancellation of the exclusive agreement gives a2 Milk the option to produce its a2 Platinum English label product at its own Mataura Valley Milk factory in Southland, it is not expected to have a significant impact on the company’s earnings in the next two years. However, A2 Milk remains committed to accelerating the profitability of the Mataura Valley Milk factory by the 2026 financial year.
Overall, this decision by the a2 Milk Company marks a shift in the production and supply dynamics of its infant milk formula products, giving the company greater control and flexibility in meeting market demand.
Sources: Article by John Hawkins/Stuff, RNZ