Dairy demand spills overseas
China has become an avaricious consumer of commodities from soy beans to steel, milking global supplies and driving up prices. The humble cow could be next on the list as Chinese dairy demand spills over into the global bovine market.
Domestic milk consumption is rising more than 20 per cent annually, but the country is chronically short of fresh milk. The supply shortfall - China has eight million milk cows but needs 18 million - is equivalent to the entire United States herd.
Milk production in China last year reached 17 million tonnes, almost double the 9.19 million in 2000, but the country's processing capacity is 30 per cent to 40 per cent higher. The milk shortage is spurring imports and has driven up the price of milkers to 20,000 yuan, more than three times the price in 2000. A new-born calf costs at least 5,000 yuan, about the same as the average farmer's annual salary.
Nonetheless, dairy watchers say Chinese demand, hefty as it may be, is not ready to spark a stampede of cow imports.
'Dairy firms will not repeat what Chinese companies have done in minerals and steel,' said an economist at Ming Tai Dairy Products Consultancy, who declined to be named. 'They do not have the technology and management skills to buy foreign dairy producers. Instead, they will co-operate with foreign firms to increase the supply of milk.'
He cited the example of Fonterra, New Zealand's biggest exporter of dairy products with output of two million tonnes a year, 95 per cent of it for export.
Fonterra has just signed a joint venture with San Lu (Three Deer) Dairy, one of the top six producers in China, of which it will hold 49 per cent and the Chinese side 51 per cent. The new company will raise cows on the plains of Hebei, one of the seven areas chosen by the Ministry of Agriculture as advanced milk production bases.
San Lu's headquarters is in Shijiazhuang, capital of Hebei province.
China is already Fonterra's fourth-largest export market, with sales last year of NZ$300 million (HK$1.51 billion). It opened an office in Shanghai on March 29 and is pushing its government to conclude a free-trade agreement with China.
Consumption of dairy products is rising rapidly because of increased urbanisation, rising incomes and official support. But per capita consumption of dairy products, at 7.2kg a year, is low compared with a world average of 93kg.
New Zealand and Australia accounted for 90 per cent of China's imports last year, which reached a record 44,000 head. New Zealand accounts for 40 per cent of China's imports of milk powder.
China has 1,600 dairy companies but most do not have their own herds, nor the capital or technical expertise to import on a large scale. Even in Inner Mongolia, one of the major cow-raising areas, there is a serious shortage of milk, with the result that the average annual equipment utilisation rate of its 56 dairy producers hovers around 50 per cent.
'There are three kinds of dairy firms in China,' said the Ming Tai economist. 'The first are the big traditional producers, like Guangming and Yili, which have large herds of their own.
'The second are the small companies which badly need to import but cannot afford it, at 20,000 yuan a head. The third are new companies which have recently invested in the dairy business, like New Hope and De Long.
'Their ability to import is limited. The future will be more tie-ups like that between San Lu and Fonterra,' he said.
Wang Huaibao, chairman of the China Dairy Association, notes that the major domestic brands are now established. 'The smart thing for foreign companies is to invest and take shares in these brands and avoid the initial chaos when they invested on their own,' he said.
Last year, French giant Danone raised its holding in Shanghai-based Guangming from 3.85 per cent to 7.7 per cent, making it the third-biggest shareholder.
