Demand for higher-end products
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%.
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.