The US Department of Agriculture (USDA) released details about the dairy production industry in China and the challenges that US producers face with that industry on Thursday [November 1] in a Foreign Agricultural Service’s agricultural attaché's report.
Overall, the prediction is that dairy consumption in China will expand in 2019, based on continuing changes in consumer diets, said the agricultural attaché.
However, domestic production is expected to fall, based in part on higher feed costs – leaving a space for an increase in imported products, he said. “As China continues its push towards urbanization, this growing urban population will drive the increased demand for dairy products,” he added.
“Decreasing domestic production (34.7m metric tons, a 1% decrease from 2018) will result in increased demand for imported dairy products, leading to increased imports of fluid milk (up 13% year-on-year), whole milk powder (up 15%), and non-fat dry milk powder (or skim milk powder) (up 11%),” he said. “However, in July of this year, China placed additional tariffs of 25% on the majority of US-origin dairy products, complicating US dairy exports to this growing market.”
Tariff influence on feed price
Several elements are supporting the forecast that domestic milk production in China will drop in 2019, the attaché said.
“The primary cause of this production decrease lies with China’s shrinking dairy herd,” he said. “China’s dairy herd is shrinking because small dairy operations are exiting the market faster than the mid- to large-scale dairies are adding inventory.”
The smaller farms have seen challenges from rising feed costs and changes to environmental regulations, along with low milk prices, he said. “Input costs are rising in part due to China’s recent imposition of additional tariffs on key feed ingredients from the United States,” he added.
US alfalfa accounted for more than 90% of China’s alfalfa imports, and alfalfa was about 13% of the total feed cost per cow, the attaché said. Soybean meal was about 20% of the total feed costs and a large percentage was derived from imported US soybeans.
“On July 6, 2018, China implemented additional tariffs of 25% on both US-origin alfalfa hay and soybeans,” he said. “The Chinese dairy industry estimates that these additional tariffs alone will result in a 6% increase in the total production cost of fluid milk.”
Overall import forecast
Chinese imports of fluid milk are expected to increase by about 13% from 2018 to about 850,000 tons, said the attaché. The change is primarily related to an increase in interest for yogurt.
“On June 16, 2018, the People’s Republic of China’s Ministry of Finance (MOF), State Council Tariff Commission (SCTC) announced a list of US products subject to an additional 25% import tariff in response to the United States imposing tariffs related to the US Section 301 Investigation,” he said. “The dairy products included in this list are milk, cream, whole milk powder, skim milk powder, yogurt, whey and modified whey, butter, and cheese.”
Chinese domestic production of whole milk powder (WMP) is set to drop by about 3% in 2019, he said. However, imports are expected to grow by about 15% in 2019.
The US had been increasing import market share for the products, but the tariffs are anticipated to slow that process, the attaché said.
Similarly, production of non-fat skim milk powder (SMP) is expected to decline by about 25% in 2019, he said. In addition to use in dairy beverages, bakery and infant formula, the feed industry has been increasing its use of SMP in swine feed.
“China has little SMP production and thus relies on imports to meet demand in the food processing and infant formula sectors, which are the traditional channels for SMP,” he said. “With the new development of feed usage for SMP, China’s imports of SMP will continue to grow.”
The US was the third largest exporter of SMP to China, he said. The new tariffs applied to SMP from the US are expected to “significantly depress” exports.
US companies also face challenges in registration, and several dairy companies have not been able to register or update facility information to send products to China, he added.
Sector consolidation and environmental considerations
The dairy processing industry remains “fragmented” and the majority of producers are not vertically aligned with processors, the attaché said.
“China’s top eight dairy processing companies (many of which are state-owned enterprises) collect over 70% of the milk in China, allowing them to essentially set domestic prices,” he said. “The milk price in 2019 is forecast to increase moderately, but not enough to keep pace with rising costs. Hence, overall profitability for dairy farmers will decrease.”
In addition to internal market price pressure, Chinese producers also faced challenges from international prices for WMP and SMP, because production costs for fluid milk are higher than those in other dairy-producing areas, he said. “The availability of cheap WMP and SMP on the international market puts downward pressure on Chinese milk prices as WMP and SMP can be reconstituted and substitute for Chinese-produced fresh milk,” he added.
The implementation of new environmental laws also has put pressure on dairy producers, especially smaller operations, he said. There has been an increased focus for provincial governments to move farming facilities further from densely populated areas or waterways.
Farms have predominately moved north or west, however, smaller producers may not have the capital to move and close instead, he said.
“The Ministry of Agriculture and Rural Affairs (MARA) reported that larger dairy farms (inventory of 100 head or more) occupied only 50% of the market in 2016,” he said. “That number jumped to 58.3% in 2018.”