A row between New Zealand dairy companies Synlait and A2 Milk Co. over the ripping up of a supply contract has gone to arbitration.

Synlait disputes that A2 Milk has the right to cancel an exclusivity of supply arrangement but the latter disagrees and the companies have been unable to resolve the dispute between themselves during a period of “good faith” negotiations.

In a stock-exchange announcement this morning (17 October), Synlait, which supplies A2 Milk with dairy and infant-formula products and ingredients, said the companies will now enter into a “confidential binding arbitration process”.

A2 Milk also confirmed the arbitration move in a stock-exchange announcement.

Last month, A2 Milk, which is Synlait’s second-largest shareholder with a 19.8% stake, announced via a statement on the New Zealand stock exchange (NZX) that it had provided Synlait with written notice cancelling exclusive manufacturing and supply rights enjoyed by the company.

The rights covered stages 1 to 3 of A2’s infant-formula products - including A2 Platinum - for sale in China, Australia and New Zealand.

It said it cancelled the exclusivity deal “due to Synlait’s delivery in full and on time performance during FY-23 falling below the level required for Synlait to maintain such exclusive rights”.

Responding in a stock-exchange filing of its own, Synlait said: “Synlait disputes that The A2 Milk Company has the right to cancel the exclusivity arrangements” under the Nutritional Powders Manufacturing and Supply Agreement (NPMSA).

Synlait also pointed out it holds the Chinese State Administration for Market Regulation (SAMR) licence. The licence, attached to its Dunsandel manufacturing facility, covers A2 Milk products. Synlait said it expects to keep manufacturing those products for the China market until the licence expires in September 2027.

It reiterated that point in its stock-exchange statement issued today.

Local media outlets have suggested that by scrapping Synlait’s exclusivity deal, A2 Milk can instead utilise the purpose-built dairy nutritionals facility, Mataura Valley Milk, which it co-owns with China Animal Husbandry, and which runs at a loss.

The cancellation relates only to the exclusivity arrangements. The NPMSA between A2 Milk and Synlait will remain in place on a rolling term as it can only be terminated by either party on three years’ notice.

In April, A2 Milk said it was “surprised” at a profit warning issued by Synlait, which had warned investors it could book a net loss of NZ$5m ($2.9m), compared to its previous forecast of an annual net profit after tax of NZ$15m-25m.