Chinese trade fails to live up to expectations

The first stop on last week’s Bord Bia trade mission to Asia was China – the behemoth of global trade.

The last time the Irish Farmers Journal was in China was in 2019 and the feeling was one of optimism bordering on euphoria. Irish beef had just been approved for export to China and dairy exports were flying it.

The Chinese pig population was getting infected with African swine fever. I remember sitting in a seminar and being told that China was at risk of running out of protein if the pig herd continued to get infected.

Hopes were high that Irish beef and pork could fill some of that gap, which it subsequently did. Irish pork exports to China in 2018 were valued at €59m and this increased to €176m in 2019.

Beef exports to China more than doubled in 2019 as it was the first full year of market access.

By the end of 2019, there was €40m worth of Irish beef exported to China.

Irish dairy exports were booming. From almost nothing a decade or so earlier, dairy exports were worth €540m in 2018.

As the Chinese economy was booming, with a growing middle class, the prediction was that the popularity of cheese and other western-style dairy products would increase. It was a proven market as China’s dairy imports had already increased by 75% between 2012 and 2018.

In 2019, Carbery was building its mozzarella plant in Ballineen and it had representatives at the trade mission.

So too had Glanbia, both hoping to forge links with Chinese buyers of pizza cheese.

Cheddar was also put forward as a growth area, for use in snacks for children and fast food.

If infant formula was the growth area of the previous decade, the perception from that trade mission was that cheese would be the next big thing in China and that Ireland was well placed to capitalise on that.

Trade issues

That was then and this is now. Last week’s trade mission to China was a much more sombre affair, for a number of reasons. The rising trade tensions between China and the EU were on everyone’s mind. The timing of the restrictions on over €50m worth of Irish dairy exports, pending a Chinese investigation into subsidies, couldn’t have been worse.

Minister for Agriculture Charlie McConalogue told the Irish Farmers Journal that he raised the issue with his Chinese counterparts in Beijing.

“I would be very hopeful that as we move forward, given the confidence levels we have of being able to answer the questions [posed by the Chinese authorities] positively, that working with the European Commission we can reach a positive outcome. The key point here is compliance with World Trade Organisation rules and we are very clear in relation to that,” he said.

BSE

The Chinese market for Irish beef closed in 2020 as soon as an atypical case of BSE was discovered in Ireland.

The market remained closed until January 2023 and it closed again in November 2023, this time for a 10-week period. Beef exports to China in 2023 amounted to €32m in value, down 20% on the 2019 figure. Exports for the first half of 2024 are up by 23% but low beef prices in China means that the value of beef exports are back 3% compared to the first six months of 2023, despite the higher volumes.

The birth rate in China has crashed from 16m babies born in 2015 to just over 9m in 2023. It’s a trend that’s spreading right across Asia and one which is worrying economists because it’s leading to an aging population.

For the dairy industry, it means much less infant formula is being purchased in China. Infant formula imports peaked in 2019 at 356,000t.

By 2023, this had fallen by one-third to 238,000t and it’s down a further 26% for the first six months of 2024.

While the Chinese economy continues to grow, the rate of growth has slowed considerably. Speaking at the trade mission in Shanghai last week, China-based consultant Song Liang said that young, middle-class Chinese people are worst affected by the downturn, especially those with families.

He said this cohort is more health-conscious than previous generations and while dairy fits into their lifestyle, they are limited by what they can spend on dairy. This is clearly having a negative impact on demand in China. Allied to this, internal production of milk is ramping up at an enormous rate.

For this year, China is expected to produce 43.3m tonnes of milk, up 5.6% on 2023 and up a staggering 44% compared to 2018.

Based on these facts, the outlook for Irish dairy exports to China is looking bleak. Last year, dairy exports to China were worth €452m, down 23% on the 2019 level.

The industry has diversified somewhat from infant formula. Back in 2018 it accounted for 95% of all dairy exports to China, but this was down to 62% of the value in 2023. However, a sizeable chunk of the diversified product was milk and cream, and these are now caught up in the trade dispute.

Despite the optimism at previous trade missions, cheese exports have failed to live up to their potential.

Bord Bia’s China boss Conor O’Sullivan told the Irish Farmers Journal that the big growth area for cheese in recent years was in kids’ cheese lollipops, which use cheddar as a base ingredient. He said it was easy to make by Chinese manufacturers and the market became oversupplied.

He shares the view that the short-term opportunity for cheese is weak, but says that the medium-term opportunity is strong.

“Analysts are still expectant of an improvement in cheese, perhaps less so for mozzarella because of the focus of the Chinese production on mozzarella, but there isn’t a big focus on cheddar production here and cheddar is one of the products that’s needed for a lot of the products that are produced here,” he said.

The big push, however, was on protein powder, specifically whey, which is in growing demand in China and a product that is widely manufactured in Ireland. The increased Chinese demand is driven by the desire for older people, who have more disposable income, to invest in a healthy, high protein diet as they get older.

Irish dairy companies Kerry, Ornua, Carbery, Dairygold and Tirlán were all present at the trade mission, with a big push on higher-spec whey and casein offerings. CEO of Bord Bia Jim O’Toole is confident that this is the right market for these companies to target.

Demand for ingredients

“We know from meeting customers this week that there is a demand for ingredients that we know we can supply that they are not able to produce themselves, so this is reason to be confident [in the Chinese dairy market],” he said.

On beef, both Minister for Agriculture Charlie McConalogue and Minister of State Martin Heydon were keen to stress the efforts being made to get approval to supply offal to the Chinese market.

“For offal, China is a very strong market compared to markets internationally. It’s not something that’s popular in Ireland, but it is popular here [in China] and it would make the economies of scale and the cost of doing trade with China much better,” Minister McConalogue said.

With a Chinese delegation visiting Ireland next month, an announcement on offal could be expected. Minister Heydon said that the attraction of offal is that it will help to fill containers of beef leaving Ireland for China.

So the next big thing in China are functional proteins for the increasingly health-conscious and aging middle class.

Not only will the Irish co-ops be competing among themselves for market share, they’ll also be competing with international suppliers.

Just last week, Fonterra announced it is investing €42m in a new functional protein facility in New Zealand.

Growth opportunities

Fonterra says it sees significant growth opportunities in this area, with annualised growth at 7% per annum and the market worth €9.06bn in four years’ time.

Recent history has taught us that China is a fickle trading partner due to factors both within and outside of the direct control of the ruling Communist Party.

Pandemic

It’s fair to say that trade didn’t live up to the expectations of 2018-19 era, but who foresaw the pandemic and subsequent economic downturn?

It is a huge market and Ireland should be part of it, but as a small country with small players, we need a better strategy and joined-up thinking to tackle it.