China dominates global dairy imports

In New Zealand, we have yet to come to terms with the reality that the future of our dairy industry is highly dependent on China.

America does not need us. Europe does not need us. The oil producing countries can no longer afford us. Africa has never been able to afford us.

So it is all about Asia.

Our dairy products can have a place in many Asian countries – Thailand, Singapore, Malaysia, the Philippines, Sri Lanka, Vietnam, Korea, Japan, and so on. All of these countries can and will make a difference to overall demand. But without China, it won’t be enough.

Further west, Iran my well open up, particularly if oil prices recover. India is the other big one, but for the foreseeable future, India will largely meet its own needs.

In the past, our dairy industry has benefited greatly from high oil prices. This sounds counter-intuitive, but for the last ten years, apart from China, it has largely been the oil-producing countries who were out there using their oil income to buy milk powder. There has been a remarkable correlation over this period between oil prices and milk powder prices.

There were even a couple of years when oil-producing Venezuela was our largest purchaser of whole milk powder (WMP). But Venezuela is now in turmoil and any recovery will be slow.

So the key reality, is that regardless of what happens elsewhere, and even with an oil rebound, the numbers can never stack up without China in the mix.

The idea that China ever left the market is considerably misplaced. The 2015 calendar year was indeed a quiet one for China’s milk powder imports, with whole milk powder imports declining to 347,000 tonnes after purchasing 619,000 tonnes in 2013 and 671,000 tonnes in 2014. Nearly all of this WMP came from New Zealand.

Despite this step back, China was still by far the largest importer of WMP in 2015. Next came Algeria with 210,000 tonnes, much of it purchased from the adjacent EU.

Algeria tends to be a buyer that comes in and out of the market, buying mainly when prices are low. However, in the early months of 2016, and despite low dairy prices, it seems that Algeria is largely absent from the market. Algeria’s problem is the same as other oil and gas-producing countries – they no longer have the cash flow needed to purchase WMP.

In the last few days, the EU Milk Observatory has published global import and export data for the first three months of this calendar year. What is evident, is that China’s WMP and SMP (skim milk powder) imports are recovering, although there is still some way to go to reach the 2013 and 2014 figures. So far, WMP volumes are up 24 % and SMP volumes are up 29% on the same three months last year.

A key note of caution is that although China’s milk powder imports are increasing again, the increases are lower than for most other dairy products. There is emerging evidence that WMP will be a declining component of the Chinese dairy industry in future.

For example, latest statistics from industry analyst CLAL in Italy depict how liquid milk consumption per capita in China increased 9% between 2013 and 2015. However, milk powder consumption per capita dropped 17% during this same two-year period. Over a longer five-year period, liquid milk consumption per capita is up 35% but WMP consumption has essentially been static.

Over the most recent two-year period from 2013 to 2015, China’s cheese imports increased 60%, butter imports increased 36%, infant formula imports increased 57% and liquid milk imports increased 150%. It was only WMP and SMP that went down.

So far this year, China’s liquid milk imports (mainly UHT) are running at 80% up on the same months last year.

In 2015, China’s largest category of dairy imports was whey at 436,000 tonnes. This largely comes from the world’s big cheese producing regions, these being Europe and the USA.

The final destination of all this whey powder is unclear. Some will be for human consumption, and some will be ‘sweet whey’ containing a mix of whey and lactose, which probably ends up in animal feeds.

One of the interesting statistics is imports of pure lactose. The most recent statistics for the first three months of this year show that China is only number two for lactose imports.
So who beats China on lactose imports? The answer is good old New Zealand!

So why do we import so much lactose into New Zealand? The answer is that our cows produce milk in which lactose is a lower proportion than the international standard. So each year we import up to 100,000 tonne of lactose, largely from Europe and the USA, which we then mix in with our NZ-made milk powder.

Lactose is typically one of the lower value components of milk powder. So not only does its importation to New Zealand give us an internationally standardised product; it also bulks-up the milk powder and hence is a nice money-making venture.

Within the trade, the presence of imported lactose in New Zealand milk powder is no real secret. However, it is an issue to be thought about by those who argue that we could get more mileage from our so-called grass-fed products.

Turning back to China, the overall evidence is very clear that China’s demand for imported dairy products is increasing. However, the future demand for WMP is less certain. If China does want more WMP in future, then it will be following a pathway different to other countries that have travelled from a ‘developing’ to a ‘developed’ economy.

A big part of the equation is working out how much milk can China produce for itself. The answer is that China struggles to produce the feed for its growing herds. Hence, milk production over there is expensive.

If it were just a case of simple economics, then China would import much or even most of its dairy products. But these things never come down to simple economics. Food security, plus the politics and welfare of rural development, also come into the equation.

In a simple world of open borders and totally free trade, then China would import most of its cheese and butter. It would also import much of its UHT (long life) milk. And with emerging technologies for extended shelf life (ESL) refrigerated milk, it would also import increasing quantities of ‘fresh milk’. In that simple world, as internal chilled facilities improve, the demand for both local and imported WMP could be expected to decline.

Estimates of the proportion of China’s dairy consumption that is currently imported depend, to a considerable extent, as to how the imported whey is allocated between human and animal uses. However, as a working number, I estimate that total dairy imports for human use are about 15% of total liquid milk equivalent (LME) consumption. My expectation is that this will increase. But in reality we don’t have quality ‘on the ground’ research to make sound estimates of what is happening to China’s overall industry.

So how should we be responding in New Zealand?

The first point on which agreement should be easy to obtain – if logic is the basis of our judgements – is that we cannot have a vibrant dairy industry without China. The second point of agreement –although I have not had time to develop this argument here – should be that wholesale conversion of New Zealand’s dairy land back to sheep and beef cattle is no solution. It is very easy to show that the economics of that do not stack up.

The challenge we face in New Zealand is that over the last 15 years we have developed an industry that is highly dependent on WMP. This is a very different industry than the butter and cheese-dominated industry that we had throughout the 20th century.

Since the turn of the century, the WMP strategy has worked very nicely for us until the last two years, built on oil-funded purchases by the oil producing countries, combined with the unique trajectory of China’s economic growth.

There was a very good reason why we went the WMP way. Quite simply, for a seasonal industry that produces most of its product in spring and early summer, and given the price signals of the time, it was an apparently obvious way to go. Seasonal production and WMP go hand in glove.

But what we have is a one-trick pony. To take an analogy from another industry, we have nearly all of our dairy eggs in the same basket.

If we want to reduce our risks from a highly volatile product, then we are going to have to restructure our industry. Unfortunately, our industry has yet to come to terms with what that means. It won’t be an easy journey.

About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
This entry was posted in Agribusiness, China, Dairy. Bookmark the permalink.

13 Responses to China dominates global dairy imports

  1. All year production and more wet product exported? Is Fonterra taking note, with the downsizing of their plans at Studholm?

    • Keith Woodford says:

      More likely is that they have re-assessed the likely supply of milk coming from the South Canterbury and North Otago region in future years.

  2. Tom Walker says:

    No mention of the ”back to the future” option if Britain votes to leave the E.U Keith?

    • Keith Woodford says:

      In that unlikely event, I don’t think a lot would change for NZ.
      I would need to check the numbers, but I think the UK is much more self-sufficient for food than back in those distant days. And almost certainly, the UK would negotiate a free trade agreement with the EU.
      Currently, we still have a preferential butter access to the UK (and the EU) but most of the quota now lies unused.

  3. Concerned insider says:

    Hi Keith
    Another good post.
    I think a few more points to reflect on;
    If we go back in 20th century history, milk powder was one of the only means of preserving milk, therefore it was one of NZ’s key products to get to the distant markets..
    And, containerisation didn’t exist at that time.
    Fast forward to say the 1990’s and other preservation methods like UHT, were absolutely mainstream and sought after, especially in the developing countries. And containerisation made shipping UHT easy. In fact, freight as a percentage of the landed cost had by then become not a big cost.
    Witness the incredible growth in the 90’s and 00’s of the China UHT milk producers, Yili, Meng Niu and others came from virtually nowhere to be Top 20 global players – all based on UHT milk!
    In the early ’90’s some progressive people inside and outside of NZ Dairy Group studied large scale UHT milk production, and the answer was clear.. but the “powder inertia” was too strong to break.
    Fast forward to today, we are still shipping powder for overseas brand owners to either re-blend or re-constitute. No matter what they do with it, they are ones making the money, not NZ!
    Consumers are buying water to mix with their powder due to poor local water quality.
    The sad irony for me, is that the often quoted, “from NZ we cannot ship water”, has been proven wrong, as we are shipping more and more water out of NZ.. how about leaving it in the milk and shipping it together!?
    I have often challenged people with “consumers don’t eat milk powder, they drink milk”, I wonder how many Asian consumers are mixing their NZ sourced powder with NZ sourced water? And guess which brand owner is making the most money?..

    • Keith Woodford says:

      Concerned insider
      There are indeed ironies there; we take the water out of our milk but then ship bottled water.
      Actually I see bottled water as a great opportunity, but i have no faith we will get that one right either.
      My intellectual challenge is to work out the elements of how and why we get some of the big strategies wrong.

  4. michael kitchin says:

    It seems a great pity that you were not on the Board of Fontera with a casting vote.

    • Keith Woodford says:

      There is no chance of that.
      I am actually passionate about Fonterra, and its importance to NZ.
      That is why I write about it.
      But I am critical of status quo thinking and establishment power blocks.
      Everything at Fonterra was all too comfortable for far too long.
      And in the process they keep missing the opportunities.
      There is nothing unusual in that; it happens to many big companies.
      Fonterra has some great staff and also some great directors.But the overall culture is all wrong.
      And this is why diverse thinking and new ideas do not flourish.
      Within today’s Fonterra, challenging the existing power relationships with new ideas is not a good career move.
      Also, the company seems to believe its own PR.
      Therein (culture, diversity of thinking, genuine leadership) lies the tragedy.

  5. Pingback: Rural round-up | Homepaddock

  6. trlahh says:

    Hi Keith, I’m a little late coming to this discussion… and I’m really looking for your comments on a different subject… steering a much stronger organic / sustainable agriculture path for dairy and NZ agriculture in general. I was inspired to forward this:
    The economic and environmental gains in becoming the world poster-child in sustainable agriculture seem obvious and numerous. Any thoughts on this?

    • Keith Woodford says:

      By chance, I have today been gently ruminating on the thought of writing something about organics, stimulated by some EU analyses I have been reading. But my thoughts are not structured at this point.
      I note the the link you provide to Bob Crowder’s thoughts. I have known Bob for some 50 years. The early years of Bob’s time at Lincoln were a period where diversity of thinking was at least accepted, even if not always cherished, and Bob’s contribution was very significant. If anyone writes a modern history of Lincoln, then Bob’s contribution, operating outside the mainstream, needs to be fully acknowledged.
      My own alignment is with sustainability rather than organics per se.
      As a side issue, I was working in Vietnam a few weeks back, and my Vietnamese colleague told me that he likes to buy his green vegetables with signs of being nibbled by bugs of one sort or another. That gives him some modest confidence that the plants were not totally doused in chemicals.
      Perhaps more directly relevant, I was talking recently to a dairy farmer who has been organic for many years but has moved away from it. His key reason was that once clover root weevil struck, he could not survive economically without artificial N.
      Another little anecdote: I am part of a project on the Qinghai-Tibet plateau where we are trying to develop knowledge related to sustainable pastoral systems. The Chinese government says that all pastoral practices must be organic. We need P fertiliser, but rock phosphate does not work because of high pH. Currently, we lack an organic option for provision of P.
      Keith W

  7. Tom Walker says:

    Hello Keith,
    Since you have been ruminating about organics I thought you might be interested in our experience,we stopped being certified organic due to getting caught up in Fonterra`s ”slash and burn” treatment of the program a few years ago..but with a 9.20$ payout would go back at the speed of light,trouble being that you can not reconvert your herd under organic rules.(this would be the same for all of the others who exited the program due to Fonterra`s short sightedness)

    To be frank though the $1.05 premium at the time barely covered the extra costs and hassles involved in being organic but with the premium on offer now it is a whole new ball is amazing what a little competition for a product does as without the advent of the milkhub I very much doubt there would be a Fonterra organic payout anywhere near where it is at the moment.

    As for organic farming in NZ being ”sustainable”? our experience it was,the biggest problem was hard to control weeds like Californian thistles but I think you just had to live with the idea your farm would not be pristine and weed free (and you would have to spend time on a brush cutter)Also you have to except you will not set the world on fire with your production figures even though ours were not to shabby @ 415gk/cow / 1083kh/ha in our last season.. but the caveat is that we had irrigation so did not have to worry so much about not having the ability to buy in feed in the time of droughts etc which nobbles a lot of organic dairying in NZ.

    Interestingly the organic farmer you were talking to pulled out due not being able to use artificial N when he had the option of using a certified chicken manure for N (and you get P and K as well) experience was that some things just bugged organic farmers (newly converted ones) and they did not last long.For some it was not be able to treat mastitis with anti-biotics,others might be not being able to ring the urea hotline if the round was getting tight but none of it proved that organic dairying was not doable.

    Talking about chicken manure, it always supplied all of the P our farm required,not sure how available it would be though on the Qinghai-Tibet Plateau!

  8. Great article, thanks Keith

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