The past three decades have seen Chinese dairy production and consumption soar, averaging a 13% annual growth since 2000. But China’s self-sufficiency in milk production has been declining rapidly in the last number of years and today it is only 65% self sufficient.
While this has created direct and indirect opportunities to exporting countries such as Ireland, it has focused the Chinese government to address the problem.
Ireland is now the second-largest exporter of infant formula to China and accounts for a market share of 17%. Despite the overall slowdown in China, infant formula imports for the first half of the year are up 27% and are expected to increase for the full year.
China’s domestic dairy production is currently in a transition phase and last year produced 38.5m tonnes. This is a result of the government focusing on consolidating the industry at farm and production level.
According to Professor Li Shengli, chief adviser with the Chinese dairy industry, this strategy will increase the scale and improve food safety standards while breaking the consumer reliance on imported dairy products.
As a result of food safety scares (like the Melamine scare in 2008), the government implemented a plan to improve local milk supply. Between 2008 and 2014, 4.2bn Yuan (€0.5bn) of subsidies were arranged for nearly 5,000 dairy farms or co-ops. This supported dairy farms to import 685,000 cows and self breed 1.5m high genetic merit dairy cows.
Today, China is the third-largest dairy producer in the world, producing 38.5m tonnes of milk – four times the amount produced in 2000. And this was achieved by not adding significantly more cows, but by increasing their yield. In fact, average yield per cow doubled over the 15 year period to 6t/cow today.
This is mostly down to improved genetics, which they have imported – mainly from New Zealand and Australia. But there has also been a dramatic increase in the importation of Alfalfa – last year, 88,400t was imported, mainly from the US, compared to 1,000t in the past.
This has seen costs rise on farm, for a number of reasons. Firstly the cows are getting more expensive, with the average cow now costing $2,800 (€2,500), compared to $1,600 (€1,400) 10 years ago. As result of investment in infrastructure, there is more debt. In 2008, only half of the herd was milked by machine. Today that is 90%. These changes have led to an average cost of production of 3.6 RMB/litre (€0.50/litre). The current milk price is 4RMB/litre (€0.56/litre).
The Chinese government is encouraging the introduction of capital and investment overseas, according to Li. But it is not only to facilitate the introduction of dairy cows, alfalfa, milking machinery and TMR equipment, but the introduction of advanced management ideas and talents.
Due to rationalisation, driven by the government since 2008, the number of dairy companies has decreased from 815 to 631.
As a result of quality and safety concerns, the large dairy companies, such as Huishan, Modern Dairy and Danner Dairy, started to backward integrate and include forage planting, dairy farming, and milk processing.
The Chinese companies are moving up the ranks, and last year Yili ranked 10th while Mengniu ranked 15th in the global dairy industry top 20 ranking.
Challenges
One of the biggest challenges facing the industry is to ensure high quality and safety. Before 2008, there were only two dairy regulations in China. But since then, more than 12 have been introduced, with a particular focus on quality and safety in relation to milk powders. As a result, only 92 out of 133 infant formula plants are currently approved to manufacture infant formula.
But one of the biggest challenges is that the supply chain is long, with many links. There are 2m farmers, 13,000 milk collection stations and 8,000 transport vehicles and over such a large area this starts to look like a huge administrative task.
China also needs to respond to the imported milk powder issue. Imports have risen by 40% every year to 1m tonnes today. Seventy-eight per cent of that is coming from New Zealand alone, which creates its own risk for China.
Coupled to this, imports of liquid milk are beginning to increase – last year, 320,000t was imported, the equivalent of around one-third of domestic raw milk production.
The Chinese don’t traditionally drink milk, consuming less than 40kg per person per annum compared to the average EU person consuming 290kg. The consumption of dairy products in China remains polarised – urban residents consume 90% of all dairy products. The government, through policies such as the schools milk programme, is also educating younger Chinese to the nutritional value of milk.
New Zealand dominates annual import volumes of skim (50%) and whole milk (90%) powders as it benefits from a free trade agreement with China. This makes Ireland and indeed the wider EU market generally uncompetitive on price.
It is unlikely that China will become more self sufficient in the short term for a number of reasons.
Firstly, the cost of milk production in China is high. Secondly, it will want to balance the use of land (for fodder) for other protein sources such as pork, poultry and beef.
No doubt demand will continue to grow in the longer term. But it is unlikely to be linear. As the Chinese economy slows, the growth in consumption of dairy and beef will reduce simply because they don’t feel as wealthy.
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