Analysis: China dairy farms swim in milk as fewer babies, slow economy cut demand

A2 Milk

20/09/2024 04:09

* 
      Small farmers shut after milk prices fall below production
costs
    

        * 
      Dairy imports in 2024 fall 14% from a year earlier 
    

        * 
      Milk powder surplus doubles from a year ago 
    

        * 
      Efforts to grow exports constrained by infant formula
scandal
    

  
    By Mei Mei Chu
       BEIJING, Sept 20 (Reuters) - China is awash in unwanted
milk as falling birth rates and cost-conscious consumers have
cut demand even as dairy farms expanded in recent years, forcing
smaller farmers out of business and squeezing shipments into the
world's top importer.
    China's milk surplus illustrates the unintended consequences
of Beijing's food security-driven efforts to boost its dairy
sector by touting consumption and encouraging expansion. High
costs and the legacy of an adulteration scandal in 2008 that
killed at least six children and hospitalized thousands,
meanwhile, limit its export opportunities.
    Weighed down by a sluggish economy that has weakened demand
for higher-priced foods like cheese, cream and butter, as well
as an aging population, Chinese milk consumption fell from 14.4
kg per capita in 2021 to 12.4 kg in 2022, the last year for
which data from China's statistics bureau is available.
        At the same time, milk output in China, the world's
third-largest producer, surged to nearly 42 million tons last
year, from 30.39 million tons in 2017, surpassing Beijing's 2025
target of 41 million tons.
        Chinese milk prices have fallen since 2022 to below the
average production cost of around 3.8 yuan ($0.5352) per kg,
causing many loss-making farms to shut and other farms to shrink
their herds by selling cattle for beef - another oversupplied
market.
    Modern Dairy  1117.HK , one of China's major producers,
reported a halving of its dairy cattle herd in the first half of
this year, posting a net loss of 207 million yuan ($29.07
million).
    "Dairy farming companies are losing money on selling milk
and selling meat," said Li Yifan, Head of Dairy (Asia) at
commodity financial services firm StoneX. 
        Chinese dairy imports, mainly from New Zealand, the
Netherlands, and Germany, dropped 13% year-on-year to 1.75
million metric tons in the first eight months of this year. Milk
powder, the top dairy import, was down 21% to 620,000 tons,
China customs data shows.
  
    
    Net dairy product import volumes in 2024 are likely to fall
by 12% from a year earlier and "the extended dairy downcycle may
continue to impact import volume in 2025," Rabobank Research
said in a note last month.
        China's dairy industry mushroomed after Beijing's 2018
call for more farms and higher output, part of the wider push
for greater food self-sufficiency, spurred a proliferation of
farms and imports of hundreds of thousands of Holstein cattle to
stock them.
    But in addition to the slowing economy, a drop in births has
meant fewer babies need milk formula. China's 2023 birth rate
was a record low 6.39 per 1,000 people, down from 12.43 in 2017,
according to government data.
    China's infant formula milk market declined by 8.6% in
volume and 10.7% in value during the 2024 fiscal year that ended
in June and may decline further in 2025, New Zealand’s A2 Milk
Company  ATM.NZ , which sells infant formula in China, said in
August. 
    China's dairy industry has also struggled to meet Beijing's
2018 call to educate consumers to move from drinking milk to
"eating milk" to increase dairy consumption.
    Liquid milk makes up 80% of China's dairy consumption, and
efforts to develop a market for cheese, cream and butter,
turning milk into higher-value products with longer shelf life,
have been stymied by belt-tightening consumers.
            
        What do older, smaller populations mean for the global
economy? Listen to 
    this week's episode of Reuters Econ World podcast
    .
  
        
    To manage the excess output, China's producers are turning
raw milk to powder, creating a surplus by the end of June of
more than 300,000 tons, the China Dairy Association said,
roughly double the previous year's level.
    China is also trying to export whole milk powder but that
potential is limited by the memories of the adulteration
scandal, said StoneX's Li, and even many Chinese consumers
prefer foreign brands despite government efforts to improve food
regulation and boost confidence. 
    China exported 55,100 tons of dairy products in the first
half of 2024, up 8.9% annually but just a small share of its
surplus.
    Chinese dairy farmers' reliance on costly animal feed means
their production costs are almost double those in top exporter
New Zealand, where cattle graze in pastures, according to StoneX
calculations. 
    The domestic oversupply has made it easier for Beijing to
target imports of European Union cheeses, milks and creams in a
trade dispute with the bloc, although those are niche products
and the measure will do little to ease the glut.
    "While limiting EU dairy imports may provide short-term
relief for Chinese farmers, it will not address the deeper
problems such as overproduction and stagnating demand," said
Tanya Bhatia, a consumer goods research analyst at the Economist
Intelligence Unit. 
        
    In the longer term
    ,
     suppliers still see opportunity in China.
  
        Charlie McElhone, general manager of sustainable dairy
at industry body Dairy Australia, said it sees significant
growth potential in China, which remains its biggest market.
  
        "We still see cheese expanding in the future," he said.
  
            
($1 = 7.1007 Chinese yuan renminbi)
    
    

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
China's milk consumption per capita (kg) is declining    https://reut.rs/3MIsUT9
China's milk prices have fallen for two years and are below
production costs for many farmers    https://reut.rs/3MGhn6H
China's milk production has risen by 36% since 2018    https://reut.rs/3XnmKwz
Reuters Econ World podcast - Baby Slump    https://www.reuters.com/podcasts/baby-slump-2024-09-11/
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Mei Mei Chu, additional reporting by Lucy Craymer
in Wellington and Peter Hobson in Canberra; Editing by Tony
Munroe and Christian Schmollinger)
 ((meifong.chu@thomsonreuters.com; Reuters Messaging: @meixchu
on Twitter;))