China’s demand for dairy imports look set to grow for at least the next two years, while its local milk production struggles under structural change in the supply chain.
Despite the fast pace of development in China’s own dairy farm system, local production has stalled. According to a new report by Rabobank, the country’s domestic producers face a number of challenges in meeting growing domestic demand.
Consequently, imported dairy products and ingredients will continue to play an increasingly important role.
Early days for farm development
“Milk production in China is struggling to grow as a result of small-scale farmers exiting the industry and large-scale farms still being under development,” explained Rabobank analyst Hayley Moynihan.
“It is likely to be at least two to three years before the pace of large-scale dairy farm expansion in China outweighs the current contraction in ‘backyard’ sources and leads to a reduction in import growth.”
China’s appetite for milk and dairy products has been rapidly accelerating in recent years, as its consumers become increasingly affluent and adopt a more Westernised diet.
However, slowed growth in milk production has already seen the country’s reliance on dairy imports grow by 20-30% per year over the past two years.
China is now expected to import almost 20% of its milk products to satisfy growing domestic demand. The surge in Chinese buying in a shrinking global dairy supply pool has squeezed out many other buyers and held dairy prices at high levels.
While just over 80% of the Chinese dairy market is still supplied by domestic milk production, this domestic supply remains under-developed with about 60% originating from small-scale dairy farmers operating with less than 100 cows per farm.
In the aftermath of the melamine crisis, however, the Chinese government has taken steps to resolve supply chain issues and strengthen raw milk quality control.
Chief among these has been the introduction of a licencing and review system for milk collection that, combined with the surging production costs of feed and labour, has forced many backyard farmers out of the market.
At the opposite end of the spectrum, the focus on milk quality in China after 2008 has favoured the rise of large-scale dairy farms, accelerating their rate of growth. The share of production of large-scale farms with more than 500 cows grew rapidly from 17% of total milk production in 2008 to 27% in 2011.
For exporters to China, the window for trade opportunity is likely to remain wide open for some time. However, demand growth is expected to prompt Chinese buyers to seek out more diverse import options, instead of continuing to rely on one or two key product origins, like New Zealand.
It is also important to recognise that the tide of local milk production will eventually rise over time to compete more strongly with imported products.