February 1, 2015


Foreign brands cashing in on China's booming milk market



The market for high-end liquid milk in China is expected to expand at a double-digit rate, with retail sales expected to reach US$11.36 billion by 2017, spurred by the Chinese' growing appetite for foreign brands. The uptrend started in 2013 when high-end liquid milk grew by 25.4%.


High-end liquid milk is only part of the dairy product industry which, as a whole, grew at a compound annual growth rate (CAGR) of 12.3% between 2004 and 2013. Liquid milk constitutes 86.6% of China's dairy product industry, and it is expected that the liquid milk output will reach 35.46 million tonnes in 2017 from 23.36 million tonnes in 2013, while retail sales are expected to reach $35.42 billion in 2017 from $24.20 billion in 2013.


Despite this bright scenario, somewhere in Changde, Hunan province, at least 173 cows have been slaughtered at a cattle farm over the past four months due to a supposed downturn in the domestic dairy industry.


Tencent News reported that Pi Hui, farming chief at the Xiangmin Husbandry Co., reluctantly sent another cow to be slaughtered on Tuesday. In his 30 years in the industry, he said he had never seen the dairy market in a "standstill" like this.


Pi said he had lost almost 1.4 million yuan ($224,000) in the past four months, and had to slaughter his cows to help cover costs.


Late last year small dairy farmers in several provinces were reportedly forced to throw away milk and sell their herds due to a drop in demand.


While the normal price for raw milk is 3.94 yuan (63 US cents) per kilogram, Pi said he could manage to sell it for only 3.7 yuan (59 cents). This means a loss of nearly 240 yuan ($38.40) for every tonne of milk he sells.

Cheap imported products blamed


Why is this so when liquid milk sales are on the uptrend? Pi blames the cheaply priced imported dairy products flooding the Chinese market. The Chinese news service Xinhua attributes the Chinese' preference for foreign dairy brands to past production-related scandals in China.


Some of the world's top dairy producers have made inroads into the Chinese market including Italy's biggest dairy producer, Sterilgarda Alimenti, which entered into a strategic partnership with Yili Group in 2013; Pactum Australia, which signed a processing agreement with Bright Dairy & Food in April 2014; New Zealand's Fonterra, which released in August 2013 Anchor UHT milk in the local market; Japan's Meiji Dairies, which unveiled yogurt products and pasteurized milk in November 2013; and Italy's Centrale Latte Torino, which launched soy-based beverage and UHT milk products in February 2014.


Apparently China's smaller milk producers are not cashing in on the boom as China's oligopolistic liquid milk industry is dominated by local giants Mengniu Dairy and Yili Group, which both account for half of the local liquid milk at 25.2% and 24.7%, respectively, as of 2013. Bright Dairy & Food is a distant third, accounting for 7.7% of the market.


Other major players in the domestic dairy industry are Royal Dairy, Yantang Dairy, China Shengmu and Modern Farming, each accounting for less than 1% of the total liquid milk industry of China.


And yet these local dairy products enterprises are partnering with foreign milk suppliers, according to reports.

Cows imported from Chile


In an apparent bid to help the smaller dairy farmers, China has allowed the shipment of some 7,100 dairy cows from Chile to Tianjin in northern China. The cows, which arrived on Wednesday (January 28), is the first batch of 30,000 cows from the South American country, which is the fifth to export dairy cows to China after Australia, New Zealand, Uruguay and Romania, according to Xinhua.


Dou Shulong, an official of the General Administration of Quality Supervision, Inspection and Quarantine, said the imported cows would be distributed to seven import companies in six Chinese provinces and municipalities after a quarantine period in Tianjin.


Officials maintain that domestic dairy products supply cannot meet demand. Chinese dairy farmers and dairy companies said they were enthusiastic about investing in well-bred dairy cows.


According to data, China's per capita milk product consumption is less than one-third of the world average. Affluent Chinese have a high demand for quality dairy products, and many opt for foreign brands.


The importation of well-bred dairy cows may yet help the local dairy industry--which has yet to fully recover from the 2008 scandal over melamine-tainted baby formula--in winning back consumers' trust. -- Rick Alberto

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