September 19, 2016

In the year 2025: World dairy market trends and transformations

An eFeedLink Hot Topic
  • Decelerating developing country dairy demand is only partly counterbalanced by higher rich country consumption growth
  • The dairy products and countries leading the industry's expansion are changing
  • India, Southeast Asia are taking over from China as the main driver of world dairy demand
  • Due to the immaturity of booming South Asian markets, growth in fresh dairy goods now exceeds that of dairy powders
  • China will see far slower growth in dairy powder imports alongside booming imports of UHT milk and cheese
  • From under 5% of milk powder volumes in 2010, Chinese fluid milk imports now exceed combined SMP and WMP imports

While dairy farmers are still patiently waiting for the market to recover from the previous boom's excesses, the industry's supply, demand and geographic fundamentals are gradually changing. Powered by annual increases of 3.5% in South Asia, developing country consumption of dairy products is rising by an FAO estimated 2.9% annually, which is at least 0.5% faster than the more mature Chinese market's fresh dairy CAGR. Moreover, with growth shifting to immature, less sophisticated markets, the growth rate of industrial dairy goods like WMP and will grow 31% and 69% more slowly respectively, decelerating to annual rates 2.2% and 2.1% respectively.
Our decade's deceleration in demand growth for internationally traded dairy goods is also impacting the world's top dairy exporters: With their own domestic markets flat and world demand growth falling off, the combined dairy output of New Zealand, Australia, America and EU is rising by only 1.2%. In particular, by 2025, Australian and New Zealand combined milk output will have risen by only 4.8 million tonnes –less than the amount that India's output will increase by every year over the next decade.
Superficially, the UN FAO projects that for the decade from 2016 through 2025 inclusive, fluid world milk production and demand to decelerate slightly, from the 2006-15 decade's 2.0% annual rate to 1.8% in the ten years up to 2025. From approximately 770 million tonnes in 2015, world fluid milk production is projected to rise 19.5% and total 920 million tonnes in 2025. However, unlike the 2005-15 era when aggressive supply growth occurred in East Asia and the southern hemisphere, in our current decade, South Asia will account for the lion's share of higher milk world milk output.

Out of the 150 million tonne increase in world milk output in the ten years up to 2025, approximately 77 million tonnes. In the 2015 to 2025 decade, India's milk production will rise by an FAO estimated 3.6% annually, while that of Pakistan will increase by 3.3% annually. India in fact, will single handedly account for 40% of the rise in world milk production, or 61 million tonnes.
While its large population, economic growth and cultural familiarity with dairy products make South Asia the leading market frontier, it is part of a larger trend where developing countries increasingly dominate the industry's supply and demand. Led by China, India, Pakistan, Indonesia, Egypt and Iran, developing country per capita dairy consumption is expected to rise by 2.2% annually, with large differences across the various commodity products.
Developing country per capita consumption is projected to increase 0.8% annually for cheese, 1.0% for butter, 1.1% for WMP, 1.5% for SMP and 1.7% for fresh goods such as fluid milk, with the average being around 2.2%.
Within the roster of developing countries, China which once led market growth, will see its per capita expansion of dairy goods increase at the lower end of this range. By comparison, ASEAN and South Asian consumers will boost their consumption at least twice as quickly.
On the other side of the income divide, led by an expanding US population, developing country per capita dairy consumption is projected to increase by 0.5% annually. With North American and Australian population growth counterbalancing flat European, Korean and Japanese demographics, developing country dairy consumption will be approximately 10% higher in 2025 than it is today. Moreover, rising processed food sales will push rich world per capita SMP consumption up by 1% annually in the years up to 2025.
On the other side of the income divide, wealthy countries are seeing a slight recovery in their market fundamentals.  Compared to the 2005-15 decade, rich countries will see higher growth in their per capita consumption of butter (from 0.2% to 0.8%), cheese (0.7% to 0.9%), WMP (-0.3% to 0.9%) and fresh dairy products (-0.4% to 0.5%).
With North American and Australian population growth counterbalancing flat European, Korean and Japanese demographics, developing country dairy consumption will be approximately 10% higher in 2025 than it is today. As the accompanying growth shows, emerging economies are seeing substantially less growth in per capita consumption of across all dairy lines. Due to the immaturity of South Asian markets, only fresh dairy goods consumption is growing anywhere close to its former rate in emerging markets. With developing country demand growth slowing down slowing down by more than it increased in developed countries, the world dairy market is growing a tenth more slowly now than it was in the previous decade.
Going forward however, the story is not in the quantity of dairy market growth but in how product profiles and country characteristics are changing. On one hand, a once-powerful secular expansion in East Asian commodity dairy powders is tapering off. On the other hand, this is being counterbalanced by rising growth in ASEAN and South Asia, which increasingly define the industry's development.
With this change in geographic focus comes a change in the product mix. India and Pakistan are not merely growing more quickly than China or Southeast Asia: They are positioned at a significantly lower level of mass market development, with lower incomes and less dairy processing capacity.
Supply-wise, due to a lack of country-wide cold storage chain facilities, the distribution of processed goods that require refrigeration is limited to urbanized, developed regions. Consequently, fluid milk and fresh goods such as yogurt will continue to make up a far larger proportion of Indian and Pakistani consumption than they do in in the Far East.
Coinciding with maturing, slower processed dairy goods expansion in China and ASEAN, these South Asian market limitations are one of two factors responsible for making fresh dairy goods consumption grow faster than commodity powders for the first time in decades. Interestingly, despite the relative sophistication of China's dairy production and consumption, it stands as the second factor boosting global growth in fresh dairy goods.
On one hand, China's fluid milk output is growing at near normal rates for the first time since the 2008 melamine contamination crisis. Within China itself, food processors are happy to use cheaper, locally produced dairy commodities whenever possible. On the other hand, Chinese consumers continue to prefer to buy imported milk (which they consider safer) for their personal consumption and for their infant formulas.
Consequently, even as rising Chinese milk production and slowing economic growth diminished its appetite for imported WMP and SMP, imports of fresh milk skyrocketed. Led by UHT milk, Chinese fluid milk imports skyrocketed 3,963% over six years, from a mere 16,000 tonnes in 2010 to a USDA estimated 650,000 tonnes this year. By 2018, Chinese fluid milk imports will exceed a million tonnes.
This trend has transformed China's behavior on the world dairy market. Five years ago, Chinese fluid milk imports equaled less than a tenth of WMP or SMP imports. This year, for the first time, Chinese fluid milk imports will exceed the combined import volume of its WMP and SMP purchases. It can be seen in the fact that while Australian and New Zealand milk production and dairy powder exports have flattened out, investment in UHT milk processing facilities-for-export is proceeding full speed ahead –and will continue to do so.

Even so, whereas China's growth dominated the dairy trade, its rising self-sufficiency does not bode well for commodity dairy powder exporters. Whereas the previous decade saw Chinese dairy commodity imports rise by over 20% annually, the next ten years will see overall volumes rise by less than 5% annually.
Only Chinese imports of UHT milk will grow by over 20% annually. SMP, which formerly lead import growth, will only rise by 2.5% annually. But there is one other exception to China's dairy import deceleration: Driven by rising fast food consumption and lifestyle changes, China's cheese imports will rise at a faster-than-average of 7.5% annually. In fact, at a time when per capita cheese consumption is growing more quickly in developed countries (1.0%) than in the developing nations (0.8%), China's rising demand for it is becoming an important source of market support.
In retrospect, the 2008 melamine scandal's disruption of Chinese milk production gave an artificial, five-year boost to its import demand for WMP and SMP. Chinese demand growth for SMP and WMP has not fallen as much as it has returned to normal levels. This is a big part of the reason why developing country per capita demand growth for fresh milk products is staying nearly constant, while that for SMP has plummeted from 4.8% in 2005-15 to 1.5% in the years up to 2025.
Moreover, China's weight in world markets was never due to its milk production: It produces half as much milk as America, even though it has 4 times the latter's population. India, which has almost the same population as China, produces 3.5 times more milk. China's world market weight was always defined by its imports, which (with the exception of UHT milk) are levelling out.
Thus, while the past decade was defined by Chinese buying and rising exports from America and Oceana, the 2015 to 2025 decade will see India and Pakistan's self-contained markets lead an anticipated 20% rise in world milk production. 73% of the growth is occurring in developing countries and South Asia, with its long dairy consuming tradition, will lead the way.
But the rise of South Asia will hardly save the day for world dairy market suppliers. They may have a similar sized population but unlike China, India and Pakistan are stand alone, self-contained dairy markets that are largely detached from the world economy.
Consequently, taking advantage of the next decade's dairy opportunities entails establishing in-country production facilities or providing capital and inputs to suppliers, rather than the commodity exporting that was taken for granted in the years leading up to 2015. Commodity exporters may see better returns on fresh milk and cheeses than on the dairy powders commonly used in food processing.

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