EL: How have Chinese imports of dairy powders been over the past 18 months?
SC: China’s imports of dairy powders halved in the first half of 2015, compared with the same period in 2014. The second half of 2015 was less challenging, due to a lower comparison base. However, they were still 15% back compared with the second half of 2014. In January this year, powder imports were up 50% compared with 2015, but February declined 18% year-on-year.
EL: Why are imports back so much –is it really down to reduced demand?
SC: Between 2009 and 2012, demand for dairy products in China was growing at 4% to 5% per annum. However, over the last 18 months, this reduced significantly to 0% to 2.5%. So demand is slowing in China and it has been down to a number of factors. Firstly, high pricing for nearly all of 2014 choked some demand. Secondly, we are now seeing certain categories mature. For example, overall growth of raw milk has been very slow, along with milk beverages declining. Finally, there is definitely some impact from the economic slowdown.
EL: Is there a stock buildup of dairy in China now?
SC: It is estimated that China worked through half of the stock during the course of 2015. This was mainly in the second half of the year when production declined and consumption was in low single digits. This would suggest that the big rise of imports in January may simply be down to buyers rushing to fill the low tariff rate quota from New Zealand. The first 140,000t of powder into China from New Zealand carries a 2.5% tariff rate, compared with the normal 10% rate. However, what is also likely is that the destocking progress during 2015 meant that imported stock was low, and the reduced prices were now becoming attractive to buyers.
EL: Were the import levels in 2013 and the first half of 2014 an outlier or a surge? Are they likely to be seen again?
SC: It does look like it was a surge during this period, and was due to a miscalculation by Chinese buyers. They seemed to be of the view that firstly, global prices were to remain high and supply tight; secondly, domestic production recovery was to be slow; and thirdly, demand in China was to remain reasonable at the then-prevailing high pricing. But now, with over-import a thing of the past and destocking in progress, it would seem that the import of dairy products should grow in the region of 5% to 10% in 2016.
EL: With the current economic slowdown in China, do people feel less confident and hence are they reigning in their spending?
SC: Consumption has its own resilience. There may be a slowdown to some extent, but this is a complicated issue. Within food and beverage, premium products are growing very well, reflecting consumers trading up. But products targeting the mass market are slowing or declining, for varying reasons. For example, instant noodle sales declined in 2015, impacted by a few factors: 1) a significant player raised prices which led to falling volume and sales; 2) a lower amount of migrant workers in the cities due to the slower economy (fewer target consumers); and 3) the online meal delivery service has been growing rapidly and gained popularity in the cities (substitution).
In soft drinks, there is a decline in sales, but more due to the aging of products as there has been a lack of innovation over the last few years. Beer sales declined overall. However, premium and imported beers continue to grow.
EL: Will the relaxation of the one-child policy increase demand for dairy in general?
SC: Such demographic themes may unfold in the long run, with limited near-term boost. The more direct positive impact could be on infant formula, which will see some demand improvement as a result of the two-children policy. But it remains to be seen whether young couples in China are embracing this new policy enthusiastically. Surveys in the recent past suggest that the interest in a second child is at the best lukewarm, largely due to the perceived cost of raising children in China.
EL: Where next for China and dairy imports in the near term?
SC: It is expected that overall dairy imports (including all products in liquid milk equivalent terms) will be down slightly in the first half of 2016. The second half of the year looks better, with imports increasing by 25% to 30%. This would mean that overall dairy imports would increase by 5% to 10% overall in 2016. This is driven by destocking, a need to source cheaper ingredients (domestic milk is expensive) in the international market as processors focus on cost management.
EL: We hear reports of fake powders under big brand names in the market in China. How is the government tackling this?
SC: This may slightly impact the reputation of big brands in the short term. However, more importantly, it highlights the need to improve the regulation of the supply chain, despite so much having been done by the regulators, and that the fines may need to be raised significantly.
EL: Is China still investing in its own milk supply?
SC: Due to the downturn in milk price in China over the past two years, investments have slowed significantly and were even suspended in some cases. Dairy farming continues to go through structural changes, with large-size farms getting larger and small farms exiting. As a result, local supply growth is expected to be just 0.8% in 2015. The biggest challenges will be to large-scale dairy farming, where environmental regulations and enforcement could be heightened.
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