CHINA RE­TURNS

De­mand for higher-end prod­ucts

Dairy News Australia - - FRONT PAGE -

CHINA’S AP­PETITE for dairy com­mod­ity im­ports is start­ing to re­vive, but Aus­tralia should con­cen­trate on higher-end prod­ucts to cap­i­talise long-term, ac­cord­ing to a vis­it­ing Chi­nese dairy ex­pert.

China is look­ing for im­ports in com­ing months due to be­lowa­v­er­age in­ven­to­ries, which will play an im­por­tant role in keep­ing global mar­kets in bal­ance, ac­cord­ing to Rabobank Shang­hai-based se­nior dairy an­a­lyst Sandy Chen, vis­it­ing Aus­tralia for a se­ries of in­dus­try pre­sen­ta­tions.

Mr Chen said Chi­nese dairy de­mand will con­tinue to ex­pand, cre­at­ing long-term trade op­por­tu­ni­ties for Aus­tralia, but much of this will be lim­ited to higher-qual­ity and value-add dairy prod­ucts.

In the short-term, China’s de­mand for dairy commodities is 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.

“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.

“Aus­tralia’s abil­ity to cap­i­talise on this short­term sup­ply deficit will be hin­dered by its cur­rent milk sup­ply lim­i­ta­tions.”

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.

“So while Aus­tralia is in a good po­si­tion to take up these medi­umterm 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.”

De­spite the op­por­tu­ni­ties, Mr Chen said many chal­lenges would re­main and hin­der ac­cess to the Chi­nese mar­ket.

“China re­mains a mar­ket and in­dus­try in tran­si­tion 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% for the most part of last decade (2000 to 2008), to just a 2% 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% out to 2022.”

Mr Chen said China’s im­port gap is set to widen over the medium term, with Rabobank fore­cast­ing China to have a 24% gap be­tween do­mes­tic sup­ply and de­mand in 2020, up from 20% 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 as smaller pro­duc­ers have been ex­it­ing the in­dus­try and there has been the emer­gence of ‘mega’ farms.

“For ex­am­ple, in 2008 around 78% 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% 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 reg­ula- tions, which were all cur­tail­ing in­vest­ment in the sec­tor.

“The cost of pro­duc­tion on a Chi­nese cor­po­rate farm (which typ­i­cally has 8000 to 13,000 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%.

Sandy Chen

The Chi­nese dairy sec­tor has been un­der­go­ing sig­nif­i­cant struc­tural change in re­cent years as smaller pro­duc­ers have been ex­it­ing the in­dus­try and there has been the emer­gence of ‘mega’ farms.

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