| China Dairy Market 2007 First Half Review |
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Dairy production analysis
China’s dairy production industry situation looks benign at a general level, with cows in stock and dairy output on a rapid increase. But amid the inflation environment, profit margin in the dairy market has been in a straight-line decline. Some dairy farmers are even overburdened, impacting on the national dairy market development. According to National Animal Husbandry Service and company financial reports, cows in stock and dairy outputs have been on the increase nationally. However, declining dairy output and milk output have been witnessed in traditional dairy provinces like Heilongjiang, Inner Mongolia, Shanxi and Qinghai.
Analysis of milk consumption
According to statistics, overall consumer prices went up 3.9% on pcp between January and August this year. Compared to August last year, consumer prices were up 6.5%, with urban prices up 6.2%, rural prices up 7.2%; food prices up 18.2%, non-food prices up 0.9%; consumer goods prices up 8.0% and service items prices up 1.8%. Another statistics showed that dairy consumption has been increasing in over 20 provinces, some of which even experienced 33% annual growth. But there are also dairy consumption reductions in about 10 provinces, averaging 13% decline annually.
Compared to the same period last year, more provinces are experiencing growth in fresh dairy consumption, up from 19 to 23. Such growth mainly concentrated in regions with a previously low consumption base. On the other hand, fresh dairy consumption has reduced in Beijing on a monthly per capita basis, so have markets such as Gansu, Qinhai, Shanghai and Tianjin. This is mainly due to fresh dairy price increases brought about by milk powder price increases.
Milk powder consumption level in Tibet ranked the highest with an average of 0.32 kg per capita per month, followed by provinces of Hunan, Anhui, Hubei, Guangdong and Sichuan (0.1 kg). Compared to last year, more provinces are experiencing declining milk powder consumption and significant decline rates, with 10% or more in 16 provinces. |
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Yogurt consumption are rising faster due to heavy marketing campaigns from dairy companies, with 22 provinces experiencing 10% plus growth rates. On a monthly per capita basis, yogurt consumption in Beijing ranked highest with 0.89 kg, followed by Hebei (0.62 kg) and Anhui (0.59 kg). Another seven provinces (Shanxi, Shanghai, Henan, etc) are also experiencing higher-than-average yogurt consumption levels.
Analysis of market prices and profitability
According to a recent survey, overall prices in fresh dairy retail market increased marginally in fist half of 2007. Average fresh dairy product price is US $0.62/kg, up 0.7% from $0.6/kg last year. Although the nominal price remained stable, considering the significant inflation this year, profit margin of fresh dairy products have apparently slipped, so has the profitability of producers. Outlook for Chinese dairy market
China’s dairy industry growth has slowed down compared to previous years, and the growth rate is still decelerating. But the central government and agricultural department policies are continuing to support animal husbandry, especially the dairy industry. Improvement in cow varieties has produced better yields, easing the pressure from rising farming costs. Due to the tightening situation in supply sources, dairy ingredient prices are expected to increase. And as consumer living standards improving and demand growing, dairy sector is still the focus of developing China’s animal husbandry industry.
Therefore in the medium term, China’s dairy industry is expected to keep a high growth rate. But as a whole, the dairy industry will become more rational, and half of the existing dairy companies in China will probably be eliminated due to market competition.
China is currently the second largest dairy market in Asia, only behind Japan. Chinese consumers are increasingly behaving like their peers in neighbourhood countries, with strong demand fro high-valued-added products such as milk beverages, cheese and yogurt. High-valued-added products have a 25% dairy consumption market share in China, while it is 60% in Japan. Therefore experts are forecasting a continuing growth in high-valued-added dairy products in China, with estimated annual growth rates of 22%, 38% and 31% for milk beverages, cheese and yogurt categories respectively. This is no doubt good news for dairy companies, as profit margins on these products are 2 to 3 times of generic liquid milk products.
While urban market is maturing, rural residents are expected to form the habit of frequent dairy consumption, due to factors like higher income levels, spread of nutritional knowledge and health awareness. While overall dairy consumption is growing incrementally in the short term, rapid growth in yogurt products will make it a new area for dairy competition. Several provinces coming off a low dairy consumption base is expected to have substantial growth in the next 2-3 years.
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