4 January 2008

16 minute read

Report Highlights:

China’s total 2008 milk production is expected to increase by nine percent to 39.1 MMT with cow milk accounting for 97 percent of output. Non-fat dry milk (NFDM) production is expected to increase by two percent to 65,000 MT in 2008. Whole-fat milk powder (WFMP) production in 2008 is expected to increase by nine percent to 1.3 MMT due to strong domestic demand. Despite increasing costs of production, higher international prices have pushed domestic production upwards and reduced imports. China’s NFDM and WFMP imports in 2008 are expected to fall by seven and 11 percent to 39,000 MT and 51,000 MT respectively. China’s whey imports in 2007 are also expected to fall by 12 percent, but import value is expected to increase considerably as a result of higher international prices. The United States is the second largest whey supplier to China. AQSIQ has accepted USDA/AMS export health certificates for U.S. dairy exports to China.

Executive Summary

The Chinese dairy industry is expected to grow in 2008 but at a slower rate than previous years. Post expects China’s beginning-year dairy cow stocks in 2008 to fall below 10 percent for the first time in the last four years. Considerable increases in production costs and low raw milk procurement prices have negatively affected 40 percent of backyard and small scale dairy farmers. As a result of this and high beef prices, some farmers slaughtered their dairy cows for beef while large commercial dairy farms were not significantly impacted. Post believes this situation is temporary because it has already received attention from top Chinese leaders. The Chinese Government has decided to provide subsidies for raw milk production beginning in October 2007. China’s total milk and cow milk production in 2008 is expected to increase by nine and eight percent to 39.1 MMT and 38 MMT respectively. Cow milk is expected to account for nearly 97 percent of China’s total milk production. Non-fat dry milk (NFDM) and whole-fat milk powder (WFMP) production in 2008 is expected to increase by two percent and nine percent to 57,000 MT and 1.2 MMT respectively. Increased domestic production and higher international dairy product prices will constrain imports in 2008.

China’s NFDM and WFMP imports in 2008 are expected to decrease by seven and eleven percent to 39,000 MT and 51,000 MT respectively. The United States does not export WFMP to China. However, U.S. NFDM exports will be impacted because the United States is the 3rd largest supplier to China. U.S. whey exports to China in 2008 will be strongly challenged by French whey products partly due to a smaller increased price margin and less strict French whey standards which will lead to a wider usage in China. China’s non-traditional imports, such as cheese, are expected to increase by 30 percent in 2007 and 2008 due to strong demand and little domestic production. U.S. cheese exports to China are expected to reach record 1,000 MT in 2007 despite New Zealand and Australia accounting for 75 percent of China’s cheese imports.

AQSIQ (the General Administration of Quality Supervision, Inspection, and Quarantine) accepted the USDA/AMS export health certificate for U.S. dairy products to China. The unified certificate will assist AQSIQ in identifying eligible goods and should facilitate the exportation process.

China mainly exports liquid milk and WFMP. Its exports of the two products in 2008 are expected to increase by 14 and 15 percent to 50,000 MT and 75,000 MT respectively due to competitive prices. China’s increased exports will not impact U.S. exports because each focuses on different export markets. Note: No data included in this report is official. All official USDA data is available at http://www.fas.usda.gov/psdonline.

Production

Post forecasts China’s beginning year 2008 dairy cow stocks to increase by nine percent to 14.9 million head. Consequently, post forecasts China’s total 2008 milk production to increase by eight percent to 39.1 MMT with cow milk production set to increase by nine percent to 38 MMT. Cow milk production is expected to account for 97 percent of the total milk production. In general, milk production continues to move in the same direction discussed in the last Dairy Annual (CH6100). Despite rising demand, the pace of domestic dairy production growth is constrained by rising production costs.

The slower growth will be visible in 2008 when the rate of increase in the number of milk producing cows is expected to fall below ten percent. This sharp slowdown from the average 22 percent increase every year from 2003-2006 is a result of increasing input prices, especially feed costs. The average corn price was up 18 percent to RMB 1,570 ($209.3) MT from January to August 2007. The average price for alfalfa in the first half of 2007 increased over 20 percent to about RMB 1,140 ($152) MT in 2007. In addition, increasing labor costs, water, electricity, and transportation have cut into the profits of dairy farmers. Dairy farmers’ profit decreased from RMB 3,000-4,000 ($400-533) per head a couple of years ago to currently RMB 1,000 ($133) or less according to the dairy industry. Credit has also tightened. The government mandated bank loan interest rates to rise 5 times in 2007 from 6.1 percent at the end of 2006 to 7.29 percent in September 2007. This has made it more difficult for dairy farmers to pay back their loans for buying cows. Furthermore, prices for raw milk offered by processing plants have changed very little. Fierce competition between processing plants for sales of dairy products has driven sales prices down. As a result, they have tried to keep raw milk procurement prices at low levels.

The Chinese dairy sector is very conventional. Over 70 percent of the cows are raised by backyard or small scale farmers. Each herd is made up of less than twenty cows. As a result, average milk production per cow is about 30 percent lower than the world average. The lack of cold storage has also depressed producer prices. Since raw milk cannot be kept long, dairy farmers have to accept the low prices offered by the closest processing plants. As a result, 40 percent of small “backyard dairies” are losing money in 2007. A Porcine Reproductive and Respiratory Syndrome (PRRS) pork disease breakout has occurred at the same time which has cut pork and total meat supplies. Therefore, low profitability and current high beef prices have encouraged dairy farmers to slaughter dairy cows for beef. The slaughter has lowered the number of milk producing cows. These factors have cut milk production growth despite rapidly increasing demand. Post adjusted its forecast for China’s 2007 total milk and cow milk productions down to 36.1 MMT and 35 MMT respectively based on this situation.

Post believes that low milk prices cannot be sustained for long, especially since this issue has attracted considerable attention among the Chinese leadership. To avoid a situation similar to the pork supply shortage and high prices, China decided to provide subsidies to dairy farmers. Other favorable policies are also expected, such as loan forgiveness for dairy farmers who have loans from January 1, 2006 to June 30, 2008. These policies should assist the dairy industry after 2008 when these incentives will have an impact.

Subsidies in Raw Milk Production

On September 27, 2007, the State Council issued the “Opinion on Promoting Sustainable and Healthy Development of the Dairy Industry [2007] Memo #31.” On September 30, 2007, MOA announced the implementation measures to carry out Memo #31. Starting in 2007, the Chinese Government will subsidize dairy farmers with RMB 500 ($66.7) for each high quality heifer with bloodlines tested and registered by official breeding centers mostly under MOA. It will also subsidize standardized large commercial dairy farms to improve water, electricity, waste treatment, disease control, and milking facilities. Farms culling cows for disease control reasons are eligible for a subsidy.

Local government subsidies vary. For example, some local governments provide 20-30 percent subsidies for farmers to buy high quality cows. Heilongjiang Province, one of the largest dairy producing provinces, takes RMB 0.1 ($1.3 cents) per kilogram of raw milk as a dairy cow risk fund to help dairy farmers when necessary. Starting in September 2007, the province will allocate RMB 10 million ($1.3 million) to subsidize dairy cow insurance. It requires the provincial government, county government, and a dairy farmer to pay RMB 100 ($13) each to buy insurance for a cow that produces at least 5 MT of milk a year. Some provinces will provide RMB 1,500 ($200) to farmers to buy Holstein or other high-quality cows. The old program that the Central Government began in early 2006 to subsidize RMB 30 ($4) for two straws of frozen Holstein bull semen used for artificial insemination will be extended into the next couple of years. Improving genetics in this manner will likely help Chinese dairy production to develop steadily.

Recovering Non-Fat Dry Milk (NFDM) Production

Post forecasts China’s non-fat dry milk (NFDM) production in 2008 to recover by three percent to 65,000 MT. Domestic NFDM production dropped considerably from peak year 83,000 MT in 2003 to 60,000 MT in 2005 when domestic poor-quality milk powder caused food safety problems during 2004-2005. Those problems did not necessarily occur with NFDM products; however, NFDM sales were impacted most because Chinese people do not traditionally drink NFDM. When consumers had trouble distinguishing which products had problems, they chose not to buy non-traditional products, such as NFDM. China started stepping up quality control for milk powder in 2006, and Chinese consumers’ confidence in domestic milk powder has gradually recovered. Older citizens’ demand for NFDM, for health reasons, has been increasing since 2006. Increased domestic demand and lower imports in 2007, because of higher international prices, has driven domestic production upward. However, increasing production cannot offset decreased imports. This trend is expected to continue into 2008, since China’s main suppliers, New Zealand and Australia, have suffered serious droughts causing milk prices to rise considerably.

Rising Whole-Fat Milk Powder (WFMP) Production

Post forecasts China’s WFMP production to increase by 10 percent to 1.3 MMT because of strong domestic demand. Decreased imports of WFMP, as a result of higher international prices paired with strong domestic demand, will drive domestic WFMP production to continue to rise in 2007 and 2008. Some Chinese processing plants made a significant change over the past year by shifting from using imported WFMP to domestic WFMP for making reconstituted drinking milk or other dairy products, such as yogurt, ice cream, and baked goods. These changes were made to save production costs resulting from higher international prices. Increased domestic production is expected to offset lower imports. Low Chinese prices that are ten percent below international levels are expected to increase WFMP exports and drive domestic production further in 2008.

Decreasing NFDM Consumption

Post forecasts China’s NFDM consumption in 2008 will fall by two percent to 99,000 MT because of fewer imports. Although NFDM is not traditional Chinese milk, it is getting popular among older citizens in large cities for health reasons. Since domestic production is small, imports have played an important role in supplying milk for consumers. The Chinese consumption of domestic and imported NFDM in 2006 was almost half imported and half domestic. However, NFDM is mainly consumed by older citizens who are price-sensitive consumers. Domestic consumption varies inversely with changes in international prices. International prices are expected to constrain China’s imports in both 2007 and 2008, and China’s NFDM consumption in 2007 and 2008 is expected to decrease by 17 percent and 2 percent respectively. However, a small increase in domestic production cannot offset decreasing imports. The pace of decrease in 2008 is expected to be even lower because NFDM prices in some countries are expected to become lower in the second half of 2008. Decreasing Chinese imports are expected to impact 62 percent of U.S. exports to China in 2007 and 20 percent in 2008.

Consumption

Post forecasts China’s WFMP consumption in 2008 to increase by eight percent to 1.2 MMT. Domestic demand for WFMP is strong yet varies. Higher-priced functional domestic WFMP, such as for blood sugar control, is popular in urban areas while lower priced ordinary WFMP is popular in rural areas. Brand name products are becoming more popular because of food safety concerns. Imported finished and pre-packaged brand name products mainly focus on infant or children’s milk powder at various ages in large-medium cities. Imported and domestic WFMP in large-sized packages are mainly used by processing plants to make reconstituted drinking milk, yogurt, and ice cream. A significant change in 2007, and most likely in 2008, is that higher international WFMP prices will drive some processing plants to shift from using imported WFMP to domestic WFMP. This shift does not impact U.S. exports because U.S. WFMP exports to China are very small.

Decreasing Traditional Imports While Increasing Non-Traditional Imports

Post forecasts China’s non-fat dry milk imports in 2007 and 2008 to decrease by 32 and 7 percent to 42,000 MT and 39,000 MT respectively. The United States is the third largest supplier to China after New Zealand and Australia. Because China is price-sensitive in DFDM imports, decreasing Chinese imports are expected to impact U.S. exports most. U.S. exports to China in 2007 and 2008 are expected to fall by 62 and 20 percent to 5,000 MT and 4,000 MT respectively. This is a sharp contrast with 13,107 MT exports from the United States to China in 2006. U.S. average export prices from January to August 2007 increased by 69 percent from $1, 990 to $3,360 per ton from the same period in 2006. It was 27 percent higher than the world average level. That explains why U.S. exports have declined faster. Conversely, Post believes this is not a long-term trend. With more stable international prices, China’s imports will recover quickly because domestic demand remains strong, and domestic production cannot keep pace with demand.

Post forecasts China’s 2007 and 2008 WFMP imports to decrease by 23 and 11 percent to 57,000 MT and 51,000 MT respectively partly due to higher international prices and partly due to increased domestic production. The average import price from January to August 2007 increased by 14 percent from $2130 to $2430 per MT compared with the same period in 2006. Chinese processing plants normally import large quantities to produce reconstituted drinking milk or yogurt and ice cream. Higher international prices have pushed some Chinese processing plants to switch from using imported WFMP to domestic WFMP. This trend is expected to continue into 2008 because China’s main suppliers, New Zealand and Australia, have suffered serious droughts causing dairy product prices to rise considerably. China’s decreasing WFMP imports will not impact the United States because U.S. exports are small.

Post forecasts China’s whey import volume in 2007 to decrease by 12 percent to nearly 166,900 MT, but import value is expected to increase by 60 percent due to higher international prices. U.S. exports to China had the same situation as it was the largest supplier in 2006 and second largest supplier in 2007. China’s import price from the world during January-August 2007 increased by 83 percent from $1,000 to $1,830 per MT, while from the United States increased by 120 percent from $730 to $1610 per ton compared with the same period in 2006. As a result, U.S. whey exports to China in 2007 are expected to decrease by 44 percent to about 27,910 MT, but its export value is expected to increase by 23 percent. This trend is expected to continue into 2008 because global whey supplies in 2008 are expected to be tight, and China does not produce whey. French whey exports to China during January-August 2007 increased by 2 percent in volume despite higher prices compared to the United States. France mainly exports dematerialized whey powder used to make infant and children’s formula milk powder. There is almost no substitute in China. The United States exports mainly sweet whey powder used to make reconstituted UHT milk, dairy drinks, yogurt, ice cream, chocolates, and baked goods (with 12-34 percent protein), or to make feed (with 4 percent protein). Increased domestic WFMP production can substitute part of U.S. exports when prices are too high. Post feels that this may not be a long-term trend because whey is a byproduct of cheese and it is more economical than WFMP. China’s import tariff for whey is the lowest among all imported dairy products.

Post forecasts China’s 2008 cheese imports to increase by 30 percent to about 17,000 MT due to strong domestic demand and little domestic production. U.S. exports during January- August 2007 increased by 34 percent to 756 MT, and total exports to China are expected to be at a record of 1,000 MT even though New Zealand and Australia dominate 76 percent of China’s cheese imports. In China, 80 percent of cheese is sold to Western fast food chain restaurants, Pizza Huts, high-end hotels, and bakery shops. The other 20 percent are sold through supermarkets for home consumption. Although cheese is not a traditional dairy food item for the Chinese, it is getting popular because of the influence of the ever growing Western food restaurants, bars, and hotels in China, especially among the younger generation. Increased incomes in China have allowed many consumers to be able to afford to eat out or buy cheese for home consumption in large cities. The increasing cheese consumption trend in China will continue over the next few years.

Trade

On February 7, 2007, AQSIQ sent a letter to FAS Beijing to confirm its acceptance of using USDA/AMS certificate for U.S. dairy exports to China. During the transition period (it is not known how long), U.S. exporters can use both new and old export health certificates. The unified AMS export health certificate will allow AQSIQ to export U.S. products more efficiently (Please contact USDA/AMS for additional information about dairy exports).

Quarantine on E. Sakzakii Strengthened

On April 30, 2007, AQSIQ issued the “Notice of Strengthening Inspection and Quarantine on Imported Dairy Products” ([2007] No. 298) to various Entry-Exit Inspection and Quarantine Offices (CIQs) to strengthen tests for Enterobacter Sakazakii. The Notice stresses that imported dairy products cannot be sold or used before CIQ tests them and issues the import health certificate (IHC) for qualification. If E. Sakazakii is detected on pre-packaged dairy products, the goods will be returned or destroyed. If it is detected on dairy materials for further processing, the goods are allowed to enter China to be heat treated at the entry ports or at the final destination under the supervision of CIQ. This policy does not significantly impact the United States because it mainly exports dairy products, such as whey, to China.

Increasing Exports

China’s drinking milk exports in 2008 are expected to increase by another 14 percent to 50,000 MT based on a 19 percent increase in 2007 as a result of competitive prices. The export market will not change in 2008. Hong Kong is expected to continue accounting for 88-90 percent of China’s total exports. Although the average export unit price in January- August 2007 increased 1.7 percent, it remains competitive because of higher international dairy prices. In addition, the rising RMB exchange rate against the Hong Kong Dollar benefits exporters.

Post forecasts China’s WFMP exports to increase by at least 15 percent to 75,000 MT. If international prices continue to be high in 2008, China’s exports may increase further. A significant change over the past year since Post’s previous forecast in the last dairy annual report (CH6100) is that China’s WFMP exports are almost doubled from 22,689 MT in 2006 to 43,604 MT during January-August 2007. This resulted from competitive prices and availability of the product to increase domestic production and market promotion in nontraditional export markets, such as Thailand, United Arab Emirates, and Bangladesh.

Although the average Chinese export unit price increased by 13 percent to $2.2 per kilogram during this period, it was still 10 percent cheaper than the international price $2.44 per kilogram. However, it is difficult to say how long the lower prices will last because of increases in production costs. Major processing plants jointly announced in the Nanjing Declaration on June 21, 2007 for self-discipline to stop distorted price competition which became effective on July 23, 2007. Increased China’s WFMP exports will not impact U.S. exports because of different export markets.

Further Reading

- You can view the full report, including tables, by clicking here.

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