April 22, 2004

China's Dairy Industry Struggling To Meet Rising Demand 
  
China's small and fragmented dairy farms are struggling to keep up with the sharp rise in demand for milk as the country's dietary habits rapidly change, industry experts say.
 
Milk consumption has risen in Beijing and Shanghai by an annual 20 percent over the past few years, as an increasingly affluent population becomes more health conscious.
 
With consumption of dairy products rising across the country, production of fresh and ultra high temperature (UHT) milk, for example, jumped to 17 million tons from 12.3 million in 2002 and 10 million in 2001.
 
The crux of this supply problem is that China's inefficient upstream sector lags downstream capacity, analysts said.
 
"There are just not enough dairy farms now to feed the growing capacity of dairy producers," said Zheng Qi, a sector analyst at China Securities.
 
According to statistics, out of 1.37 million producers, less than 3,000 dairy farms have a herd of 100 head or more cattle. On the other hand, milking cows total about eight million head, well short of the 18 million needed.
 
For the time being, major state-run dairy producers such as Inner Mongolia Yili Industrial Group, Bright Dairy Food and Mengniu Dairy can secure enough raw milk supply from their exclusively dedicated suppliers.
 
Yili, for example, receives 700,000 to 800,000 tons of China's overall annual output of 10 million tons of raw milk. Shanghai Bright Dairy and Mengniu each get 400,000 to 500,000 tons, according to Qu Yongxing, an analyst with Guotai Junan Securities.
 
By comparison, 1,600 smaller dairy companies have to fight to ensure they win a portion of the remaining 8.2 to 8.5 million tons of raw milk.
 
This, in turn, has pushed up prices for milk cows to at least RMB20,000 (2,400 dollars) per head, up from RMB3,500 to RMB6,500 four years ago, analysts said.
 
China's annual per capita milk consumption averages 8.6 kilograms (19 pounds), a tiny amount compared with 100 kilograms (220 pounds) in other Asian countries and 300 kilos (660 pounds) in the West.
 
Intent on closing this gap, China's major dairy producers have recently announced plans to expand capacity.
 
Yili is reportedly planning to spend RMB1 billion to build Asia's largest dairy production base in China's Inner Mongolia Autonomous Region.
 
Mengniu Dairy, in which overseas firms including Morgan Stanley hold a combined stake of 33 percent, followed suit eight months ago with a scheme to build a RMB400 million ice cream and milk production plant in central Henan province.
 
In the meantime, Shanghai Bright Dairy decided to pump in RMB16 million in mid-2004 to expand operations by a dairy joint venture with local partners.
 
Anxious not to be left out, Beijing Sanyuan Foods went public with a RMB150 million A-share initial public offering last August to fund its expansion.
 
If dairy firms' expansion were to continue unchecked, the country could soon face a substantial shortfall of raw milk, industry analysts warned.
 
Even if upstream operations were to build economies of scale, a shortfall of milk would still be imminent as cow breeding is a slow process, said Zheng.
 
It takes at least three to five years to bring a typical dairy farm online while major companies like Yili, Bright Dairy and Mengniu can easily double their capacity within months through sufficient capital injection, he said.
 
"Competition for raw milk will no doubt heat up, as it is the lifeblood of dairy producers," he added.