October 24, 2003
Taiwan Dairy and Products Annual 2003
EXECUTIVE SUMMARY
The Taiwan dairy industry was established more than four decades ago, during an era when Taiwan emphasized food self-sufficiency and diet diversification. To support production, authorities subsidized it and erected high barriers to imports. Taiwan commitments to liberalize the market and eventually open all dairy categories to international competition will frame market trends for the coming several years.
Dairy production peaked at 350 thousand metric tons per year during 2001 and 2002 and is now expected to shrink by an average 2 - 4 percent per year over the next 5 years. Declines are directly attributable to the loosening of bans and barriers on fluid milk product imports following Taiwan's accession to the World Trade Organization (WTO). Actual production declines promise to be influenced by two factors, namely the general public's acceptance of long-life (UHT or ultra high temperature pasteurization) milk and the impact on landed price of special safeguard (SSG) duties.
While consumption of fluid milk stumbled slightly in 2002, most other categories of dairy products saw slight or significant increases. Overall, the future continues to look positive for continued slow and steady growth in per capita dairy consumption. Dairy product consumption will continue to expand, with consumers becoming more selective, particularly with regard to liquid milk products and growth opportunities in specialty dairy items (such as whey and whey protein concentration (WPC)) that add value/differentiation to processed food products already in the market.
The U.S. remains a minor player in Taiwan's overall dairy market, with most commodity products arriving from Australia and New Zealand, while higher-end and branded products are sourced globally. The US, however, is the major supplier of whey due to competitive pricing and successful promotion efforts into hotel/restaurant/institutional (HRI) and processed food channels by U.S. exporters and the U.S. Dairy Export Council.
PRODUCTION
Taiwan fresh milk processors are expected to cut back by about 4 percent their purchases of fresh milk from Taiwan dairy farms, leaving expected production for the current year at about 335 thousand mt. The high comparative costs of production (roughly twice that of the US) make it likely that local production will drop to 300 thousand metric tons by 2005, with deeper, but likely not so drastic production cuts possible over the longer term. Taiwan's ability to impose Special Safeguard (SSG) assessments on fluid milk imports will play a significant role in determining domestic milk production levels after 2004 (see Trade section). Taiwan's Council of Agriculture promotes locally produced milk through advertisements and quality marking.
Increased productivity continues to be realized largely through industry consolidation and better production management practices. Dairy producers receive few government subsidies and are under growing pressure from milk processors to improve business practices and lower costs in the run up to an open market in 2005.
Due to the semi-tropical climate in Taiwan's dairy regions, output tends to be highest during the cooler winter months (October through March). A 20 percent variation is production between winter and summer months are normal. Unfortunately for local fresh milk producers, consumption patterns for fresh milk run in reverse, with the annual consumption cycle peaking during the hot summer months (see "Marketing & Prices" section below).
Taiwan has 751 registered dairy farms, concentrated principally in the southeast of the island.
The half-dozen or so main processors of consumer-ready fresh milk and liquid milk products (household names such as Uni-President, Kuang Chuan, and Wei Chuan) outsource nearly all of their raw milk production to independent contract farms. Dairy farms directly owned and operated by processors are justified principally by public relations and marketing objectives.
A combination of economics, policies and consumer preference channels nearly all dairy output (nearly 90%) into consumer-ready fresh milk (including flavored milks and yogurt drinks). Of the remainder, local ice cream producers consume approximately 10% of raw milk supplies and producers of milk powder use less than 1%. Dairy products manufactured with local production are consumed domestically. Taiwan produces no other dairy products (cheese, whey, etc.) in commercial quantities.
CONSUMPTION
Dairy is now firmly entrenched in the local diet. While the weak economy dented dairy consumption by just under 2 percent in 2002, total fluid milk consumption is expected to regain its normal level of 380 thousand mt in 2003 and 2004. While some (<10%) milk powder is used in the local production of "fresh" milk (principally flavored / yogurt drinks, but also in certain "enhanced" fluid milks) the market is expected to continue shifting away from reconstituted milk powder in favor of fresh fluid milk.
Associated with a healthy and comfortable life-style, dairy products have gained significant market acceptance over the past decade. While the late 1980s saw fresh milk complete its transition from niche food product to standard grocery item, the 1990s saw an unprecedented proliferation in the availability of value-added dairy items including cheeses, yogurt products, dairy spreads, whipped cream, and dairy desserts. The first decade of the 21st century should see increasing acceptance of dairy products in local foods as flavoring atop steamed vegetables, baked with seafood, added to soups, served up in sandwiches, and dolloped over iced coffee.
In 2003, liquid white milk retail sales should regain 2001 levels and continue a mild course upwards, while sales of flavored milk drinks and drinking yogurt will continue to show declines or no growth. The increasing preference for fresh milk and overall negative growth in demand for HRI ingredients cut demand for powdered milk. These trends are expected to continue into 2004. Rising whey demand continues to make this the most promising sector for near term growth. The supply shortages and higher prices, which hampered sales in 2002, are believed largely resolved and demand growth is expected to top 25 percent in both 2003 and 2004. Strong interest in whey and isolates are largely a result of successful promotion efforts for them as ingredient substitutes and additives.
MARKET PROFILE
Despite increasing product diversity, dairy consumption in Taiwan still lags behind other high income Asian economies -- where dairy products already enjoy broad acceptance in local diets. Using benchmark research conducted in 1998, it is estimated that Taiwanese (in 2002) spent US$240 (NT$8,200) per capita on dairy items - representing some 11 kg per person. Japan, a market to which Taiwan frequently looks for consumer and food trends, still consumes more than 3 times this amount per capita of dairy products. This highlights both the relatively shallow level of dairy product penetration in Taiwan and the substantial potential for growth.
TRADE
Highly competitive prices and long-running coordinated promotion by dairy suppliers from major exporting nations such as New Zealand and Australia in commodity categories and comparatively good prices and terms offered by many suppliers of higher end dairy products from Europe have generally made the going tough for U.S. suppliers who are often able to get better prices (particularly for commodity dairy products) in their home market. U.S. suppliers are not expected to gain significant ground in the general dairy market given current supply conditions. However, given recent reported instability in supply from Europe, rising overall prices, and changing conditions in the U.S. with respect to dairy prices, U.S. suppliers should experience growing opportunities in particular product areas, such as cheese and whey.
The current structure of trade for major commodity categories, such as fluid and powdered milk, are expected to be little affected by the recent fall in dollar-denominated prices due to the weaker U.S. dollar. Importers are, however, giving greater attention to U.S. cheese suppliers (and, likely, other important niche categories, such as ice cream, whey, and dairy ingredients) due to increasingly attractive U.S. supplier prices.
Tariff Rate Quota (TRQ) Administration: Under Taiwan's World Trade Organization (WTO) accession agreement, the 2003 TRQ for the liquid milk is 15,974 mt. This will increase to 21,298 mt in 2004, with liberalization set for 2005. Taiwan administers TRQs under "System 2" rules, under which import rights are auctioned once a year. All importers and exporters registered with Taiwan's Board of Foreign Trade (BOFT) are eligible to bid on quota rights. There are no performance bonds and quota rights go to the highest bidder. For liquid milk, the minimum lot size is 250 mt. The liquid milk quota is expected nearly fill this year, with similarly optimistic sentiments for next year as well.
Special Safeguard (SSG) Protection: WTO rules also allow Taiwan to impose an additional SSG assessment, above and beyond any tariff bindings on imports of most fluid dairy products. This can occur either when either the CIF price of an item falls below a benchmark floor price (based on a 1990-1992 historical domestic "farm gate" price) or when total import volumes exceed a certain trigger level (based on recent import volumes). Taiwan has already notified the WTO of its intention to impose SSG's although it has not said when it may act. The SSG would add 33 percent to tariff bindings (e.g., a 10 percent duty would rise to 13 percent). Imports under TRQ are not subject to special safeguards.
The U.S. is a major producer and exporter of whey and whey protein concentrate and other extracts and so enjoys a competitive advantage in these niches. The success of initial promotion efforts targeting food processors indicates strong potential for whey as an ingredient in Taiwan's large food processing industry. Strong demand growth is projected through the foreseeable future.
At present, Taiwan permits most value-added milk products onto the island subject to payment of tariffs and compliance with sanitary requirements. Infant milk formulas, however must be approved by the Department of Health.
Projecting forward, Taiwan's fluid milk import volumes are unlikely to rise significantly until 2005, when TRQ controls on fluid milk imports are lifted completely.
DAIRY & WTO
Taiwan acceded to the World Trade Organization (WTO) on January 1, 2002. In addition to reduction in tariffs for most dairy products, Taiwan now operates a process to allocate import quotas for products entering under TRQs. All TRQ restrictions will be eliminated as of 1 January 2005.
In general, the bulk of gains from tariff reductions and greater market access for imports should be passed directly to consumers through lower prices and increased product selection.
COMPETITION
At present, U.S. products and brands are relatively well represented only in the ice cream and infant formula segments. Key European, Australasian, and Japanese brands that have sold into the market for many years have much higher brand recognition. To gain market share, U.S. suppliers will need to increase consumer awareness.
The potential of China to supply competitive milk and dairy products into the market is small through the foreseeable future. WTO terms anticipate that member states permit all WTO members equal access, subject to phytosanitary, safety, and other requirements. The political freeze across the Taiwan Strait poses formidable problems for traders seeking to resolve technical issues, which will seriously impede trade. While unlikely to pose a threat to higher value-added product segments, continuing investment flows into China from Taiwan may eventually help develop the former as an effective exporter to Taiwan.
In May 2003, Taiwan announced the lifting of import restrictions for one value-added dairy product from China, sweetened condensed milk (HS Code 0402-9940-008). The overall impact will be small (Taiwan is expected to import about 380mt of sweetened condensed milk total in 2003), but the opening of this category to importation is expected to provide Taiwanese suppliers an initial opportunity to evaluate Mainland Chinese value-added dairy products, with the potential for the opening of further value-added categories in the coming several years.
Source: USDA
