In the last instalment, we shared an introduction to the Chinese dairy farming industry.
This time, we look at the consumer habits, products, the pricing structure for Chinese dairy farmers and the outlook for 2022.
Compared with western countries, Chinese dairy consumption per person is comparatively low - about 15 per cent when compared to Australia and New Zealand.
Dairy was very uncommon in the older generations.
A preference for warm drinks and a poor cold supply chain meant consumption habits were not formed.
Over the last 15 to 20 years, dairy is now seen as a healthy and nutritious food, almost essential. It is very common for grandparents to buy their grandchildren 200-250ml milk drinks - often UHT but also fresh chilled.
For people 25-45, milk is often consumed in coffee or bubble tea.
It is uncommon for cold fresh milk to be used on cereal. Breakfast often involves millet congee or soy-based drinks that are warm.
Milk and dairy products are very common for the 15 to 25-year-old demographic in tier one and two cities.
Habits formed when they were young are continuing, and include liquid milk - both fresh and UHT, drinking yoghurts, probiotic drinks and ice cream.
Generally, cheese consumption remains low, with the exception of its use on Pizza, which is very popular in tier one and two cities.
Pizza Hut has been positioned as a premium brand in China, and western-style Pizza restaurants are common in Beijing and Shanghai.
There are two main drivers of infant formula consumption in China: the number of babies and the split between domestic and imported products.
Between 2010 and 2016, the number of babies born each year increased, to a peak of 17.86 million babies in 2016.
However, the birth rate has decreased since then, with only 11 million babies born in 2021.
This is despite the one child policy being abolished in 2015, and proactive campaigns for Chinese couples to have two and now three children.
In rural areas, birth rates are generally higher, but in tier one and tier two cities, cost and lack of support from family (provided by grandparents so that both parents can keep working) are commonly sighted reasons for not having more than one child.
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Chinese policy has had major effects on the infant formula market.
In 2018, companies were limited to three brands each. In mid-2019, the Chinese government issued an action plan to uplift the domestic infant milk formula sector, targeting 60pc market share by domestic companies.
These policies have been successful - consolidation with the top five brands having over 50pc market share and imports accounting for around 40pc.
Overall, the best days of the Chinese infant formula market are behind us.
In 2021, we saw many new "premium" products launched by Mengniu, Yili, Junlabao, Shanghai Bright and Sanyuan.
Some of these were in specific sectors, such as A2, organic, quick pasteurization and milk from Jersey cows (high fat).
Domestic A2 milk and most of the premium milk sell for around 30 RMB per litre (over $6), compared with 1L in a carton for between 12 RMB and 20 RMB ($2.50 and $4.25).
The other new products were newly positioned brands - with new packaging (PET bottles) and saturation advertising.
The shelf life of products remains relatively low in China for fresh milk.
Although imported fresh milk from Australia, New Zealand and Korea has 21 days shelf life from the time of manufacture.
Chinese consumers generally think a shorter shelf life is better, as it's "fresher", and it won't sit on the shelf for as long.
Small packages between 350ml-500ml, up to 780ml are common.
It is very uncommon to see bottles greater than 1.5L for fresh milk.
The Chinese farmgate price generally moves in sync with the global milk price.
Most farms have annual contracts, January to December, for set volumes of milk at set prices.
Some contracts have seasonality in terms of price and volumes, but many are at a fixed price and at a fixed volume for the year.
Most farms sell their surplus, uncontracted milk at the "spot price".
The spot price is lowest in the period from the Chinese New Year holiday (late January to mid-February) when some factories are closed.
In the summer, consumer fresh milk consumption increases, and production drops in many regions due to heat stress, and the spot price increases.
China reported the highest raw milk prices ever in November 2021 at 4.38 RMB/kg following a 20pc increase since May 2020.
Corn prices increased by up to 30pc in 2021, due to increased demand from the pig sector as they recover from African swine fever and due to an extremely wet harvest, making corn silage harvest extremely difficult. So, overall, despite record milk prices, margins are very thin.- Paul Niven
Provincial government reports for Anhui, Jiangsu and Shandong have average prices in the range of 4.25-4.5 RMB for 2021, representing a farmgate price of $1L.
Although this sounds great, feed costs are also at record highs.
Corn prices increased by up to 30pc in 2021, due to increased demand from the pig sector as they recover from African swine fever and due to an extremely wet harvest, making corn silage harvest extremely difficult.
So, overall, despite record milk prices, margins are very thin.
In 2022, the usual spring drop in price has been very small, driven by the rapid increase in global milk price.
In the first four GDT results, whole milk powder increased from US$3800 to US$4800/t, before easing to US$4500/t.
It is continually reported that Chinese stocks are very high, and analysts predict an easing of prices.
I don't agree, as I understand that China has increased its inventory volumes and feed prices remain high.
The invasion of Ukraine by Russia and the subsequent war will continue to keep prices high.
Ukraine is the largest producer of non-GM corn outside the EU, and exports 10 million tonnes or 42pc of the EU's imports.
China imports 18pc or 4.4 million tonnes of corn from Ukraine.
At this stage, there will be minimal effects on China and the EU from disruption to Ukrainian wheat production.
However, it's important to realise that all Ukrainian ports are closed, captured, or destroyed.
China imports 90pc of its soy (mostly from the Americas), 88pc of barley and 10pc of its corn.
In February 2022, China signed a new trade deal with Russia to allow for the purchase of wheat and barley, both of which China had bought very minimal volumes in the past.
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The conditions in Ukraine in April, May and June are critical for the world's wheat and corn markets.
Overall, Ukraine produces about 28 billion tonnes of wheat, exporting half.
The FAO estimate that 20-30pc of winter wheat, summer corn and sunflower areas are under threat of not being harvested or planted.
Overall, predictions are an 8-22pc increase in feed prices globally.
Russia produces 77 billion tonnes, exporting one-third.
Western sanctions on Russia are having an impact, however, the impact on their wheat trade remains uncertain.
Many countries are dependent on Russian (and Ukrainian) wheat, including Egypt, Indonesia, Turkey, Nigeria, Morocco and Algeria.
*Paul Niven leads Cows First (China), an independent dairy advisory business. He works across all parts of the dairy supply chain, from raw milk production to retail. Mr Niven has worked in the dairy industry in China for six-and-a-half years, and was the founding general manager of Pure Source Dairy Farms, a joint venture between Fonterra and Abbott (USA). He managed the establishment and operation of two large scale (4000 adult cows each) dairy farms and 2000 hectares of double-cropped irrigated land near Jinan, the capital of Shandong province. Before working in China, Mr Niven the business manager-dairy at Van Diemen's Land Company, when it was owned by the New Plymouth Council from New Zealand, with 25 farms and 20,000 milking cows.
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