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China changes end Murray Goulburn plans

AAP logoAAP 4/12/2016 Lilly Vitorovich

Dairy processor Murray Goulburn has dropped plans for a new infant formula supply partnership after changes to Chinese import regulations rendered the strategy unviable.

Australia's biggest dairy processor announced on Monday that it and US-based infant formula maker Mead Johnson Nutrition had "mutually agreed" to abandon their supply agreement, which was unveiled nearly nine months ago.

"The framework agreement we envisaged back in March is no long relevant as a result of the change in Chinese regulations," Murray Goulburn interim chief executive David Mallinson told AAP.

The regulatory changes include restrictions on the number of baby products companies are allowed to sell in China.

Murray Goulburn's update came as investors continued to sell down Tasmanian-based infant formula maker Bellamy's after it warned on Friday of a fall in revenue and tighter profitability because of worse-than-expected sales in China.

Bellamy's said the Chinese regulatory changes had triggered discounting by rivals that had temporarily hurt its sales.

Investors wiped more than $500 million from the market value of Bellamy's on Friday and the shares were down another two per cent on Monday afternoon.

As a result of the Mead supply agreement being scrapped, Murray Goulburn's previously announced plans to build a new plant in Koroit, western Victoria, will be delayed "slightly", Mr Mallinson said.

Murray Goulburn will seek a new partner before signing off on the Koroit plant, which is expected to initially cost between $260 million and $300 million.

"Once we get board approval, its about a two-year build," Mr Mallinson said.

About 90 per cent of the company's existing nutritional sales are destined for markets outside of China, including Indonesia, Thailand, Phillipines and New Zealand, he said.

Murray Goulburn said on Monday that its supply deal with Indonesia's Kalbe Nutritionals, which was announced at the same time as the Mead supply deal, remains in place.

Murray Goulburn and Mead Johnson will "explore new ways to work together", Mr Mallinson said.

At 1422 AEDT, Murray Goulburn shares were up 0.75 cents to 95.75 cents, while Bellamy's shares were down 14 cents to $6.71 as analysts cut their earnings forecasts on the group.

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