A pick-up in China’s appetite for dairy imports will create trade growth opportunities for Australia, albeit largely in higher-end products, according to a visiting Chinese dairy expert.
In Australia for a series of industry presentations, Rabobank Shanghai-based senior dairy analyst Sandy Chen said after a two-year hiatus from the global dairy market, China’s appetite for dairy commodity imports is starting to revive, at a time when global supply across the export engine is returning to growth.
Longer-term, Chinese dairy demand will continue to expand, he said, creating trade opportunities for Australia, however much of this will be limited to higher-quality and value-added dairy products.
Mr Chen said while Australia was in a good position to take up some of the medium-term trade growth opportunities into China (with China’s import gap set to widen), many challenges would remain and hinder access to the Chinese market.
“China remains a market and industry in transition,” he said, “with the country’s dairy consumption fluctuating significantly over the past 15 years, while local production is also still undergoing considerable structural change.
“In terms of dairy consumption growth, we have seen this plummet from an annual growth rate of close to 19 per cent for the most part of last decade (2000 to 2008), to just a two per cent growth rate since 2012. And looking out to the medium-term, we are expecting dairy consumption growth to remain in low single digits of around two to 2.5 per cent out to 2022.”
Mr Chen said while China’s per capita dairy consumption remained well below that of some of its east Asian neighbours, “such as Japan, Korea and China’s Taiwan”, there were some dairy product categories exhibiting strong growth opportunities.
“For example, annual cheese consumption in Japan is two to four kilograms per person, while it is close to two kilograms per person in Korea and Taiwan,” he said.
“However in China, it is currently less than 100 grams per person.
“While this sees China only import around 100,000 tonnes of cheese each year – largely for its food-service sector such as burger chains – Australia supplies nearly a quarter of all China’s cheese import requirements, having seen good trade growth in recent years.
“Butter consumption is also growing faster than other dairy categories, but it also represents a very small component of overall dairy consumption, so, like cheese, there is considerable opportunity for growth.”
Other sectors exhibiting strong growth opportunities include yoghurt and ‘premium’ white milk (which has a higher protein content of 3.3 to 3.4 per cent) compared with ‘mainstream or standard’ milk (with a protein content of 2.9 to 3 per cent).
Mr Chen said while Australia has been importing fresh pasteurised milk into China, representing five per cent of China’s liquid milk imports, it was facing intense competition from domestically-produced milk.
“I see the export of fresh liquid milk into China being a very niche market,” he said, “given the high air freight costs and increasing local competition. To remain sustainable exporters supplying that market will have to invest in a strong brand presence to warrant a premium retail price.”
China’s import gap to widen
Mr Chen said China’s import gap is set to widen over the medium term, with Rabobank forecasting China to have a 24 per cent gap between domestic supply and demand in 2020, up from 20 per cent in 2016.
Given China’s relatively slow consumption growth prospects, Mr Chen said, much of the gap would be due to the constraints hindering expansion in local production.
“The Chinese dairy sector has been undergoing significant structural change in recent years,” he said, “as smaller producers have been exiting the industry and there has been the emergence of ‘mega’ farms.
“For example, in 2008 around 78 per cent of China’s dairy farms had less than 100 cows – with the majority of these farming operations having one to 10 cows. Nowadays, dairy farms with less than 100 cows make up 50 per cent of total dairy farms, with the majority of these operations having 50 to 100 cows.”
Mr Chen said constraints to China’s dairy production included land and water availability, high costs of production (particularly for feed) and environmental regulations, which were all curtailing investment in the sector.
“The cost of production on a Chinese corporate farm (which typically has 8000 to 13000 cows) is just over US50c/litre, whereas in Australia it is around US30c/litre,” he said.
Equally as important, the Chinese Government was becoming more tolerant to dairy imports, Mr Chen said. However, China still had ambitions to maintain self-sufficiency levels of 70 per cent.
Opportunities for Australia
In the short-term, Mr Chen said, China’s demand for dairy commodities was set to increase in the second half of 2017.
“China started 2017 with below-average inventories, and even with slow consumption growth, it will be looking for imports in coming months,” he said.
“However, with China buying commodities again in the short term, this will play an important role in keeping global markets in balance and support sustained higher commodity prices, which will help deliver a higher farmgate milk price in Australia in 2017/18.”
In the medium-term, Mr Chen said, opportunities for Australia’s trade growth into China would lie in higher quality and value-add foods.
“Given this outlook, much will hinge on the ability of Australian dairy processors to execute value-add strategies that demonstrate Australia’s food safety, product innovation and category expansion as well as staying on top of new retail formats for improving distribution,” he said.
“While this will create opportunities for overseas exporters, including Australia, Australia’s ability to capitalise on this short-term supply deficit will be hindered by its current milk supply limitations. So while Australia is in a good position to take up these medium-term growth opportunities, they should not be at the expense of investment in other south-east Asian markets that exhibit stronger growth opportunities, such as Vietnam and Indonesia.”
Responsible for analysing the dairy market for Rabobank in Asia since 2013, Mr Chen’s visit (to Victoria and Tasmania) marked his third opportunity to meet with local dairy farmers. Prior to joining Rabobank, Mr Chen worked as an Equity Analyst at Citigroup Global Markets Shanghai.
Featured Image: Sandy Chen
Image credit: Rabobank