USDA Foreign Agricultural Service’s latest China Dairy & Products Semi-annual Report shows that China’s fluid milk production is expected to continue increasing as a result of the expansion of large dairy farms and improved yields. COVID-19 has had a limited impact on milk production but temporarily reduced consumption resulting in a relatively higher ratio of fluid milk being processed into whole milk powder. China’s dairy imports, including fluid milk, cheese and butter, will continue to increase given strong demand. U.S. dairy imports are likely to rebound in 2020 after the signing of the U.S. – China Economic and Trade Agreement and implementation of a tariff exclusion process.
China’s 2020 fluid milk production is forecast at 33 million metric tons (MMT), an increase of 3 percent from the previous year as a result of the expansion of large-scale dairy farms and improved yields. Major dairy companies are investing in dairy farms with over 10,000 head per farm. In addition, the Chinese government has accelerated the support to the dairy industry, including but not limited to, helping upgrade dairy farms and grow forage grass.
The outbreak of COVID-19 in January created pressure on fluid milk production when many smaller farms faced difficulties selling raw milk and/or receiving feed supplies due to transportation restrictions. Large farms, however, were better positioned to weather the effects because of their existing procurement contracts with major dairy companies. Although the outbreak has had limited impact on milk production, the closure of retail stores had interrupted milk sales in the first quarter of the year. As a result, large quantities of fresh milk have been processed into whole milk powder (WMP), which is forecast at 1 MMT in 2020, up 9 percent from 2019.
Per capita consumption of dairy products, which is currently estimated at 35 kg, will continue to increase. In addition, the outbreak of African Swine Fever (ASF) continues to drive demand for alternative protein sources. Fluid milk accounts for more than 80 percent of dairy consumption. Consumption of cheese and butter is also increasing due to the growing popularity of western foods, especially in the food service and bakery sectors.
China is the world’s largest dairy importer and imports mostly Ultra High Temperature (UHT) pre- packaged milk and WMP. UHT imports are expected to continue increasing, but WMP imports will likely decline due to increased domestic production. Cheese and butter imports will also increase, driven by strong demand from the food industry. New Zealand and the European Union (EU) remain the largest suppliers of dairy products to China. The United States may export more dairy products to China following the signing of the U.S.-China Economic and Trade Agreement (ETA) and the implementation of a new tariff exclusion process for U.S. imports.
Production: Increased adoption of modern farming practices drives productivity gains
China’s 2020 fluid milk production is forecast at 33 million metric tons (MMT), an increase of 3 percent from the revised number in 2019. The expected increase is largely due to the expansion of large-scale dairy farms and improved yields. Industry sources indicate that the share of large-scale farms (farms with more than 100 head of cattle per farm) will increase to 65 percent in 2020 from 64 percent in 2019. In China, most large-scale farms utilize modern production technology and feed management techniques to improve production efficiency and product quality. It is expected that the nation’s average annual per cow yield will increase to 8 tons in 2020, compared to 7.8 tons in 2019, according to industry reports.
The improvement in yield is also attributed to government support of the dairy industry. In 2018, the Chinese government issued guidelines aimed at revitalizing the dairy industry and improving dairy quality. In 2019, local governments in major dairy producing provinces provided a total of 2 billion RMB (approximately $300 million USD) to subsidize farmers and farmer cooperatives to build and upgrade over 1,500 family dairy farms and plant 67,000 hectares of alfalfa. According to an action plan released by the Ministry of Agriculture and Rural Affairs (MARA) in January this year, the government will continue to support farmers and farmer cooperatives; the plan aims to continue building or upgrading 1,500 dairy farms and 100 dairy processing facilities each year through 2022.
China’s major dairy companies have invested or will invest in building large-scale farms with herd numbers over 10,000 head per farm in China’s Ningxia, Gansu, and Hebei Provinces. Although the production cost of raw milk is greater than imported milk, the gap continues to narrow. Some dairy processing companies have begun extensive work to improve milk quality as they target China’s high- end fresh milk market.
African Swine Fever continues to drive demand for alternative proteins sources
African Swine Fever (ASF) continues to play a significant role in China’s fluid milk production. Due to ASF, China is experiencing a significant protein shortage. Record high pork prices have pushed Chinese consumers to seek out alternative protein sources, including dairy products. Farm gate prices for raw milk started to rapidly increase in June 2019, reaching the highest levels of RMB 3.95 per kilo at the end of 2019, according to MARA weekly price data. Although China has devoted significant resources to restoring pork production to normal levels, it is likely that the aftermath of ASF will continue to drive increased interest in dairy products, supporting Chinese milk prices and further production increases.
COVID-19 unlikely to significantly slow Chinese fluid milk production
The outbreak of COVID-19 in January initially created pressure on fluid milk production. Many smaller farms faced difficulties selling raw milk and/or receiving feed supplies due to transportation restrictions. In addition, retail store closures temporarily interrupted sales in the first quarter of the year, resulting in falling prices; milk prices dropped to as low as RMB 3.62 per kilo in mid-April (see chart below).
Despite these disruptions, large-scale farms were better positioned to weather the effects of COVID-19 because they are more likely to be vertically integrated and maintain existing procurement contracts. Since April, China has reduced many of the transportation restrictions and overall production is not expected to be affected significantly. In fact, as COVID-19 continues to disrupt global supply chains, Chinese dairy companies have reported that they see this as an opportunity to expand domestic milk production.
Post has revised the 2019 fluid milk production to 32 MMT to match China’s official numbers released by the National Bureau of Statistics.
China’s per capita consumption of dairy products was estimated at 35 kg in 2019, an increase of nearly 5 percent from a year
ago, according to the China Agriculture Outlook Report (2020-2029). That number is expected to reach 43 kg in 2025. More than 80 percent of China’s dairy production is consumed as fluid milk, including yogurt. Traditionally, Ultra High Temperature Processed (UHT) accounts for the majority of fluid milk consumption, but yogurt and pasteurized milk consumption is also increasing quickly. Yogurt is favored by Chinese consumers because it is nutritious and easy to digest.
As mentioned in the production section, because of COVID-19, milk consumption declined significantly in the first quarter of 2020. Milk consumption is expected to pick up quickly as the COVID-19 situation improves.
China is the world’s largest importer of dairy products. In 2019, China imported 900,000 tons of fluid milk, representing a 32 percent year-on-year increase. This large increase is primarily attributed to China’s pork shortage. While New Zealand realized a large increase of 22 percent in 2019, the EU saw its fluid milk exports to China jump by 48 percent. This sudden increase was likely due to the increased number of European dairy facilities approved for export to China; every single EU country (approved to export dairy to China) saw saw new facilities approved in 2018 and 2019.
In 2020, Post forecasts China’s fluid milk imports will increase to 930,000 MT, representing a more modest 5 percent annual increase. The slowed import growth is primarily due to COVID-19 related supply chain distributions in the European Union, China’s largest fluid milk supplier (market share of 55 percent in 2019). Other major suppliers of fluid milk include New Zealand (32 percent) and Australia (12 percent). China primarily imports pre-packaged UHT milk.
On February 6, 2020, the State Council Tariff Commission (SCCTC) announced that China would reduce some of the additional Section-301 tariffs for certain U.S. imported products, including several dairy products. The following outlines the current tariff schedule for U.S dairy imports.
On February 18, 2020, SCCTC announced a new tariff exclusion process for U.S. agricultural commodities. Eligible enterprises may apply for relief from the Section 301 tariffs. Unlike past tariff exclusion processes, this new process applies tariff exclusions to individual importers. The announcement included a list of about 150 agricultural-related commodities including two dairy products: concentrated milk and cream in solid forms with fat content less than 1.5 percent (HS Code 04021000) and whey and modified whey (04041000). Commodities not included on the list may also apply for a tariff exclusion with sufficient justification. For more information, please see GAIN Report CH2020-0017.
China’s cheese production is forecast at 42,000 MT in 2020, an increase of 5 percent from 2019. Most of the cheese produced in China is believed to be reprocessed cheese using imported natural cheeses as an ingredient. It is estimated that reprocessed cheese accounts more than 80 percent of the market share in China, according to an industry leader. The production of natural cheese is quite small as the raw material cost (fluid milk) is much higher in China than in traditional cheese producing nations.
Cheese consumption is still low in China. The per capita consumption of cheese was reported at 0.1 kg in 2017, compared with 2.4 kg in Japan. However, cheese consumption is increasing quickly, especially among younger generations. Cheese bars or cheese sticks have become a very popular food among Chinese children and cheese flavored yogurt and tea are very popular among younger consumers.
Food service and bakery are the main channels for cheese consumption, accounting for about 70 percent of total consumption. Western-style restaurants, fast food restaurants, and chain bakery stores continue to increase in number and will be the main drivers for increased cheese consumption.
Natural cheese is not preferred by most Chinese consumers, who prefer reprocessed cheese that has been flavored and/or sweetened.
China’s cheese imports are expected to continue increasing to 138,000 MT in 2020, up 20 percent from the previous year driven by strong demand. China is already the seventh largest cheese importer in the world and is expected to become the world’s largest cheese importer within the next 10 years, according to industry sources. New Zealand remains the largest supplier, accounting for nearly 60 percent of market share. Market share of U.S. products has fallen over the past two years as a result of the additional tariffs imposed on many U.S. dairy imports. With the signing of the U.S.-China Economic and Trade Agreement and the new tariff exclusion process, many U.S. cheese products have returned to being price competitive, especially cheddar cheese.
China’s butter production is estimated at around 10,000 MT in 2020, unchanged from the previous year. China’s minimal butter production takes place near the large dairy processing facilities in Inner Mongolia and Heilongjiang Provinces, according to industry reports.
Butter is not a traditional dairy product consumed in China. The per capita consumption of butter is still low. However, as more western foods and bakery products become available and acceptable, butter consumption is increasing quickly. The butter market is dominated by imported products and more international brands are exploring this growing market.
Butter imports are expected to increase by nearly 40 percent year-on-year to reach 120,000 MT in 2020, supported by strong demand from the fast-growing food service and bakery sectors. New Zealand is the largest supplier to China, accounting for over 80 percent. The EU is China’s second largest butter supplier, followed by Australia.
WHOLE MILK POWDER
Post anticipates China’s whole milk powder (WMP) production to increase approximately 9 percent in 2020, to 1 MMT. China’s growing fluid milk production, combined with consumption declines due to COVID-19, will result in a large amount of fluid milk being processed into WMP.
WMP is used as an ingredient in a wide variety of dairy products including yogurt, beverages, pre- packaged formula powder, bakery products, and even reconstituted fluid milk. Strong demand for WMP as a raw material in the food processing industry will likely lead to increased WMP consumption this year.
China is anticipated to import 600,000 MT of WMP in 2020, a drop of more than 10 percent from the previous year. Increased domestic WMP production will add to the existing high stocks remaining from last year. New Zealand remains the single largest supplier of WMP to China, accounting for more than 90 percent of the market.
NONFAT DRY MILK (SKIM MILK POWDER)
China’s production of skim milk powder (SMP) is forecast at 15,000 MT in 2020, unchanged from the previous year. China produces a very limited amount of SMP, as SMP is a by-product of cheese and butter production.
SMP is used interchangeably with WMP in many types of processed products that use dairy as a raw ingredient, including infant formula, yogurt, and bakery goods. As described above in the WMP section, demand for dairy ingredients will continue to grow, driving future growth.
Like WMP, China’s imports of SMP are also likely to decline in 2020 due to the large increase in domestic WMP production. New Zealand is the largest supplier of SMP to China, followed by Australia and the EU. Despite the additional tariffs, SMP imports from the United States have been quite stable. With the U.S.-China ETA and tariff exclusion policy, U.S.-origin SMP products are expected to gain more market share in 2020.