This article is part of the proceedings of the NMC 2014 meeting in Fort Worth, TX
For centuries China stood as a leading civilization, outpacing the rest of the world in the arts and sciences, but in the 19th and early 20th centuries, the country was beset by civil unrest, major famines, military defeats, and foreign occupation. After World War II, the communists under MAO Zedong established an autocratic socialist system that, while ensuring China's sovereignty, imposed strict controls over everyday life and cost the lives of tens of millions of people. After 1978, MAO's successor DENG Xiaoping and other leaders focused on market-oriented economic development and by 2000 output had quadrupled. For much of the population, living standards have improved dramatically and the room for personal choice has expanded, yet political controls remain tight. Since the early 1990s, China has increased its global outreach and participation in international organizations.
There are about 1.3 billion registered people in China, half of the population are living in the countryside and half in the cities. The life standard is increasing year by year, trying to reach that of the western world. There are about 14 million total cows, and nearly 7 million milking cows. The Chinese government considers milk to be an important part of the young person’s diet, and this, combined with the increasing western influence, is bringing an 8% - 10% yearly increase in dairy production (see – albeit from a relatively low base. Dairy production in China is changing rapidly and it will continue to do so in the near future. Milk production continues to grow rapidly in response to domestic demand, mainly in the urban sector. The below figure describes the trends :
Figure 1: Key Dairy Sector Trends in China, 2007-2012
Source: Dairy Association of China
Environment - Current Issues:
Air pollution (greenhouse gases, sulphur dioxide particulates) from reliance on coal produces acid rain; China is the world's largest single emitter of carbon dioxide from the burning of fossil fuels; water shortages, particularly in the north; water pollution from untreated wastes; deforestation; an estimated loss of one-fifth of agricultural land since 1949 to soil erosion and economic development; desertification; trade in endangered species; climatic conditions, water availability and soil types means land is often unsuitable for dairying; large-scale dairy farms often compete for arable forage land with grain and rice plantations; and the environmental challenge of getting rid of dairy effluent; all of these environmental issues are seen to be a huge risk factor for future development, for the economy in general and agriculture in particular, so any future plans or prediction must take them into consideration.
Since 2008, in the wake of the melamine crisis, large scale dairy farms are growing fast, at the same time ‘backyard’ dairy farming has declined, primarily due to inconsistent milk quality and regulatory pressures. However, development constraints, social considerations, disease outbreaks and high production costs have also provided a considerable challenge to production growth. An estimated 80% of the milk production is in the north and north east of China while most of the population is concentrated at the east and the south east, this creates a huge issue around logistics - milk production and shipment of milk. This demographic can partly explain UHT milk as the most popular product in the market (no need for cool chain). The dairy market in China is mostly defined by local production where 60% is still coming from small farms with less than 100 cows, and the rest is from large scale dairy farming (10 years prior it was 90/10 ratio, respectively). Large scale dairy farms are directly owned by processors or corporate groups where quality controls and measures are in place to gain consistency and surety over the milk supply. The below figure illustrates the consolidation occurring in the industry over the last five years:
Figure 2: Share of milk supply by farm size, dairy farm count by farm size in China 2008-2011
Source: China Dairy Statistical Summary, Rabobank, 2013
Figure number 3. Global milk price (farm gate) November 2013
Figure number 4. China milk price - (CNY/100kg)
Annually the farmer share of the consumer milk price is decreasing whilst the retailer/processor share is increasing, -1.2% and 14.5% respectfully (2006-2011) (IFCN Report 2012). This combined with large scale farms being paid a premium over small scale farms will further drive industry consolidation in the coming years. However it must be noted that the growth in milk prices is higher than that of the growth in feed prices, so dairy farming continues to be profitable.
Challenges for Growth:
Together with farm structures changing there are many other factors influencing the milk supply challenge. The milk supply from newly established, large scale dairy farms is still at an early ramp-up stage and has been unable to fully offset the reduction in supply from the exit of backyard farms. This situation is resulting in an expanding gap between annual supply and demand, from below 5 percent in pre-crisis years to an estimated 15 percent of the market as of 2012—which is being filled by imported product (Rabobank, 2013).
Quality and productivity demands are increasing, which drives the demand for competence, knowledge, technology and finance. In order to take advantage of the upscaling farms, industry consolidation, and high milk prices, capability in these areas needs to be developed. As with many dairy industries internationally, there are co-contributing challenges which unless acknowledged and acted upon could continue to drive the gap between supply and demand. These factors include: management challenges: a need for management expertise with a strategic and systematic approach to both the development and ongoing operation of large-scale dairy farms; a general need for people management skills; competence challenges: poorly qualified labour; a general need for practical understanding and implementation of farm management, dairy production systems, animal management; and disease control, especially FMD, Tuberculosis, Brucellosis, and mastitis; industry and environmental challenges: heifer and cow import supply due to increasing international demands for quality heifers; suitable land, feed and water; environmental waste management; financial challenges: liquidity, the need of cash for investments to keep up with growth opportunities; supporting legal and banking financing systems for the growing sector of smaller independent dairy farms; and also of concern is the absence of any animal welfare standards.
Opportunities for growth
Whilst there are many challenges for growth, there are also significant and real opportunities. As the trends of urbanisation, and the inclination towards western diets continues, dairy consumption in China will continue to strongly increase, and the volumes are significant, at nearly 45 billion litres milk equivalent in 2012. The very recent Government relaxation of the one child policy has the potential to significantly increase demands in the infant milk formula (IMF) market. Supply chain rationalisation is the biggest driver of large scale dairy farm growth. With the increasing useage of technology, raw milk prices and profitability remaining high; the trend of dairy demand outpacing local supply; consumer demands for food safety and integrity; and the Government continuing to promote and subsidise safe and secure local food production, as well as defining ambitious production growth targets, there are many opportunities for companies to capitalise on this gap.
The ability for processors to secure good quality raw milk supplies locally is challenging without direct investment in the supply chain. However following the crisis, with government policies and directives designed to regain quality control and assurity, and farm consolidation, milk quality has been improving. As detailed in the Rabobank report (2013) the government has strengthened the regulation of raw milk collection and transport licensing. Beginning in late 2010, production licences would only be renewed for those IMF and milk processors that had equipment for self-inspection across a wide range of food additives, strengthening the traceability management of IMF products and ingredients. In addition, the government lowered the minimum protein content standard from 2.95 percent to 2.80 percent per gram and increased the upper limit of bacterium colony-forming units from 0.5 million/ml to 2 million/ml. The counter-intuitive downward adjustment in the minimum standards was intended to protect small scale dairy farmers whose milk may otherwise have been rejected by processors for quality reasons, and to reduce the incentive or need to adulterate raw milk to meet requirements (especially for protein content).
Table 1: Farm performance measures in China by farm size, 2008 and 2012
||Average Milk Yield (kg/head)
||Protein and fat content (percent)
||Somatic Cell Count (thousand/ml)
Source: China Dairy Statistical Summary, Rabobank, 2013
Positively, milk quality improvements are associated with animal welfare improvements, milk production yields, and therefore profitability. Milk quality will continue to be the focus of the industry, alongside production for the coming years.
Urbanisation, changing demographics, increases in incomes, increasing westernisation of diets, and the prevalent use of infant milk formula (IMF) rather than breast milk are at the core of increasing dairy demands. Per capita milk consumption has grown 50% from 16L in 2007 to 24L in 2012. Consumers are increasingly aware of food safety and are more discerning regarding quality. Liquid milk is mostly UHT, fresh pasteurised refrigerated milk is not a mainstream product offering. Consumers tend to regard premium dairy products as a safer and more nutritious option rather than purely a price driven purchasing decision. The premium segment is now estimated to account for nearly one quarter of the liquid milk market. Premium local brands have been able to capitalise on this change in consumer preference in the liquid milk and chilled dairy product segments (yoghurt, butter, flavoured milk). Flavoured milk consumption is high, China is the world’s biggest flavoured milk market and is expected to grow to a volume of 4.9 billion litres by 2015. Superbrands China recently published the preferred local brands for dairy products and liquid milk: Mengniu, Yili and Bright. These companies all have integrated supply chains with their own large scale farming operations. Generally these integrated farms have lower somatic cell counts SCC, lower bacteria counts, and better systems regarding the use and recording of antibiotic treatments, which places them well to provide the raw milk for premium products, compared to backyard farms. Growing consumer demand for high quality dairy products stimulates the need for local production of high quality raw milk.
Figure 5: China Liquid Milk Output Trend by Month 2005-2013
Source: National Bureau of Statistics of China, BOABC, China Dairy Monthly Report Oct 2013
Imported IMF remains a consumer preference as cautious consumers trust the safety and quality of milk from overseas for their babies over local supply, and they are willing to pay a premium. Cheese will also continue to be imported as local production is not prioritised or subsidized.
Figure 6: China Dairy Products Importation Trend, by Month, 2004 - 2013
Source: China Customs Statistics, BOABC, China Dairy Monthly Report Oct 2013
There are solid foundations in the China dairy industry: with a growing consumer demand for high quality dairy products, the highest milk prices in the world, and low labour costs, it is almost the perfect market for investors. However the dairy industry’s long term successful development will depend on the ability to improve the quality of products and raise consumer confidence in domestic processors and their products.
In order to develop production and grow in both quantity and quality there is a need to focus on management capability; disease control; cow comfort and welfare; practical capability of labour; and to align the industry’s economic incentives with the required results.
If these conditions can be realised then China will continue developing and moving forward as a profitable dairy industry.
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Tetrapak Dairy Index Issue 6, June 2013 An annual news and information source about the dairy industry