China coming Great Milk Battle
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China coming Great Milk Battle

Posted by | November 6, 2014 |

In China, the great milk battle is coming. Two opposing forces are setting the trend. On one hand there is this ever-growing demand of milk, induced by westernization and 30 years of opening policy. On the other hand, plays this suspicion against milk produced by local brands, as the long lasting result of the melamine scandal in 2008 (where 18 local dairies were caught red-handed adding melamine into their fresh milk, causing damage to 300,000 babies’ kidneys): therefore the Chinese want milk but prefer the imported products.

Under this cross-fire, the Chinese milk sector undergoes a furious transformation. Virtually all family husbandries have sold their cow(s). “Small” farms of less than 100 cows still account for 60% of the production, but giant private dairy farms appear almost by the day, encouraged by State and bank credit. Each keep at least 10,000 heads of imported breed, mostly Holstein for a bigger daily milk flow (on average 12,000 pounds/year, compared to 20,000 in the US). The biggest has 140,000 – milking is robotized, performed in eight rotary, 80-bail milking parlors with cooling and self-cleaning piping systems to maintain high standards of hygiene. Those farms also typically equip themselves with automated systems for feed control, temperature control, fresh bedding and litter disposal. Mengniu and Yili, the two Chinese leaders in fresh milk, both cross the bar of 10.000 tons of fresh milk collected every day.

In 2012, China was producing 37.4 million tons of fresh milk and was the world’s third largest producer. 14.3% of the milk it consumes is imported: this percentage will grow to 34,5% next year. In 2013, China’s purchase accounted for two-third of the world milk powder market, which covered 54% of its needs, at the cost of $16.34 billion. Then in the first half of 2014, China imported 750.000 tons of milk powder from New Zealand, its main provider (dubbed the “Saudi Arabia of milk”) – the equivalent of an entire year’s import from last year.

However the average Chinese only consumes 30 kilos of milk per year, compared to 70 to 80 kilos to his Korean or Japanese neighbors. He is ready to double his intake, and he can pay for it: the prices paid for milk inside China, whether fresh milk or powder, are higher than the world average, due to the pressure of a demand that the country can’t satisfy alone.

This helps to explain the rush to which all players prepare themselves, international and local dairies alike, to get their fair share of this potential Eldorado. In February, DANONE paid $665 million and allied itself with Arla (Denmark) and Cofco (China) to control together 31.5% of Mengniu, China’s market leader. In July, Fonterra (New Zealand) bought 20% of the Chinese group Beingmate (10% of the powder market) for $514 million, and Alibaba (China’s No.1 local online sales portal) took over 60% of a unit of dairy giant Yili, in Inner Mongolia for $328 million.

Nestlé of course does not stay sitting on the side. After having for 30 years collected the milk of hundreds of small farmers from the Northeastern region, the Vevey conglomerate started to create its own milk sourcing, combining volume and reliability. Until 2018, together with Shanghai Milk, it will put $408 million into a network of big milk farms around Shuangcheng (Heilongjiang). At the core of its system, its top-end training center, at a price tag of $31 million, opened mid-October in Shuangcheng with the training input of many foreign companies and universities. It will convert its students into experts of husbandry, feeding, automation and many other skills, as a support to these new farms – its own, and many others.

A last player stays in the backstage and cannot wait to join the bandwagon: the European milk sector, which has been hampered for 30 years by a quota system that still freezes its production to 154.6 million tons per year (20% of the world production). But in March 2015, quotas will disappear, restoring production freedom, one result of the “Green Europe” overall reform. Countries like Ireland, Denmark, the Netherlands, Germany or France are busy investing into further capacities: almost all their extra production will go to China.

However Australia raises the alarm: “Within five years, those massive Aussie cow exports to China will get that country self-sufficient. Within 10-15 years, it will become one of our major competitors,” claims Darryl Cardona, COO of United Dairy Power. Indeed, according to Euro monitor, with a value of $70 billion in 2019, the Chinese dairy market will have overtaken the American one as the world’s No.1. From then on, the Chinese dairy sector which had started from nowhere 20 years earlier would be an exporting hub, endowed with an unbeatable economy of scale and pricing power…

Such a fear may be far-fetched: in the long run, China is going to stay under pressure to feed its 1.3 billion mouths, too busy to even think of exporting food. But domestic players, even those with no food experience at all, are going into foreign milk acquisition. In October, Evergrande, the Cantonese real estate developer, bought 60% of New Zealand’s milk group Cowala – it then starts advertising in stadiums, on the shirts of its own soccer team, for its new milk formula joint venture.

Now for obvious reasons, this interconnection between Chinese and international milk producers is the best chance for them to hedge against the risk of a future closure of a self-sufficient Chinese market. The other, even better way to do so, is to produce within China. From this perspective, the group with the best bet on future might be Nestlé, with one foot into each shoe, and last year already accounting for 25% of the Chinese baby formula market.

Michael Boddington from Asian Agribusiness Recruitment Training Development (AARTD) has been involved in agribusiness in Asia since 2000. AARTD has office both in Vietnam Ho Chi Minh City and China Beijing. So AARTD has a thorough understanding of the Vietnam and China agribusiness industry and produces up-to-date research reports on the market. We can offer insights on supply and demand trends and comments on the future structure of Asian agribusiness. If you would like to know more please: