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China – 25m tonne dairy market and growing

China – 25m tonne dairy market and growing

China is Asia’s second biggest dairy market, consuming an estimated 25 million tonnes (liquid milk equivalents) of dairy products per annum. Domestic milk production is growing and reached 24 million tonnes in 2004/05 with most of this supplying the liquid milk market. Demand for dairy products has more than doubled in the past five years. However to put these figures in perspective, this is still less than 20 kilograms of liquid milk equivalent per person per annum. There is little doubt that the Chinese market offers a good future for New Zealand dairy products.

Rabobank has released a report on the Chinese dairy market in conjunction with its sponsorship of the International Dairy Federation Congress, held in Shanghai, 18-23 October 2006.

“The dynamics of the Chinese dairy market are changing, with production of raw milk growing at a faster rate than growth in demand recently. However, consumption is expanding and the market is becoming more sophisticated with consumers moving from milk powder to UHT milk; increasing consumption of higher end dairy products such as yogurt and cheese; modern retail chains improving distribution and choice; and, Chinese consumers becoming more brand conscious to ensure quality and food safety,” says Lillian Lou, Rabobank Food and Agribusiness Senior Analyst, Shanghai.

Dairy industry sales were worth USD11 billion (NZD16.5 billion) in 2005, reflecting a compound annual growth rate (CAGR) of 30% since 2001. This growth is driven by growing affluence, rising nutrition awareness, fast expanding retail chains and dairy industry investment in brands and promotion. Affluence is a key driver. The average per capita disposable income in urban areas is USD1,312 and consumption of dairy products ranges from 25 to 48 kg liquid milk equivalent per annum. Over 50% of the population still lives in rural areas, and 10% have annual income of less than USD118. Rural dwellers account for less than 20% of total dairy consumption.

There is a strong move to value-added milk products. Wealthier consumers now use UHT milk instead of milk powder. Western fast food chains are encouraging a growing taste for cheese. Recent food scares such as the deaths of 13 babies after consuming ‘fake’ infant formula are driving consumers to recognised brands.

On the production side of the equation, favourable government policy is encouraging farmers to move into dairying but regulations do not support the development of large scale operations. The bulk of raw milk production comes from small family farms with one to four cows. Large farms, those with over 100 cows, produce less than 20% of total production. The government controls land use rights and it is very expensive to establish large farms.

Dairy production has moved from a pasture-based system to cows being housed and fed crop straw, silage and manufactured feed. Average production is around 2,000 kg milk per cow per annum. Again, government policy on protecting grassland has lead to this change.

A fresh milk industry is one of the most difficult systems to operate as the milk has to be collected and processed every day. It needs to be harvested and stored to ensure quality and food safety. There are few tankers doing the rounds in China, instead the solution to this logistical problem is to transport it in the cows. Local authorities operate milk collection stations in small towns in the dairying areas and farmers bring their cows twice a day for milking. These stations collect anything from a few hundred kilograms to several tonnes of milk a day. The local authority is responsible for negotiating the sale of the milk to a processor.

There are around 1,600 milk processors operating in China. Many are small scale, with only around 500 processing more than 50 tonnes of milk per day. Industry rationalisation is seeing the emergence of larger companies and this is encouraging multinationals to re-enter the Chinese market.

“Foreign companies first started exploring the Chinese market in the mid 1990’s but found the fragmented milk supply a major obstacle. There were casualties, for example Kraft sold its operations to a local company in 2001. The large foreign dairy companies are being attracted back by the growing market but are now looking at joint ventures with larger national or regional players. This includes Fonterra which owns 43% of Sanlu Dairy,” says Ms Lou.

Dairy imports have been growing since 2002 when China entered the World Trade Organisation (WTO) and embarked on the required tariff reduction programme. This has seen tariffs fall from 25-50% to 10-15% in 2006. New Zealand is the single largest source of imported dairy products, providing half of total import value, amounting to USD460 million (NZD700m) in 2005.

“Rabobank is predicting another eight to ten years of strong growth in the Chinese dairy market. Improvements in the domestic supply of raw milk, particularly focused on food safety and quality, will only enhance the market. Modern retail channels are growing at about 40% p.a. and the ongoing development of super/hypermarkets will further enhance consumer access to a wide range of products,” finishes Ms Lou.

Rabobank New Zealand is a part of the international Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 100 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank has a AAA credit rating and has been awarded the title of the world’s safest private bank by Global Finance magazine. Rabobank operates in 35 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1500 offices and branches. Rabobank New Zealand is one of the leading rural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 29 branches throughout New Zealand.

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