Global thirst for milk goes up another notch in Asia

Halfway up Mt Kawi, an extinct volcano on the Indonesian island of Java, 1400 cows are supplying Starbucks' Asian outlets with 10,000 litres of milk every day. Rupert Stocker says he needs more.

"We're buying milk from local farmers because the farm can't produce enough," says Stocker, 52, general manager of PT Greenfields, owner of the Mt Kawi dairy and Indonesia's largest milk producer. He cites China's increasing appetite for milk.

Dairy farmers from Southeast Asia to California are expanding herds as the rising wealth of China's 1.3 billion consumers increases demand for milk, cheese and yoghurt.

And the boom may help dairy farmers in the US and New Zealand take market share from Western Europe.

High costs and European Union quotas are preventing the world's biggest exporter from raising output.

"The traffic lights are all green," says Mark Voorbergen, 40, a dairy analyst at the Netherlands-based Rabobank, the third-biggest Dutch lender.

"It's just a matter of whether the exporters can meet that growth."

Rabobank said global demand for dairy foods grew at double the pace of supply last year; people will eat about 628 million tons of dairy products this year, compared with 625 million tons produced.

Prices will average 8 per cent to 10 per cent higher during the next five years than in the previous five.

"There is a strong correlation between economic growth and dairy consumption," says Mark Wynne, 43, managing director of Fonterra's Asian consumer-products unit in Singapore.

China is the fastest-growing market for Auckland-based Fonterra, the world's largest dairy-foods exporter.

The UN's Food and Agriculture Organisation estimates milk production in China, India and Pakistan will rise 38 per cent in the next five years, followed by an 8 per cent increase in the US and 3.4 per cent in Eastern Europe. Production will drop 6 per cent in the 15 nations that made up the European Union before it expanded eastward last year.

China's retail dairy sales are expected to expand 55 per cent to US$7.9 billion ($11.32 billion) by 2009. The country's share of the US$283 billion world dairy market will increase to 2.5 per cent from 1.9 per cent in the same period.

European Union quotas that limit milk production, and the high cost of labour and land, will continue to stymie farmers, says Joop Kleibeuker, 57, secretary-general of the Brussels-based European Dairy Association.

In addition, EU export subsidies have enabled dairies to remain inefficient.

Even with subsidies, farmers are going out of business, says Owen Yeatman, who runs a 400-cow dairy farm in Dorset, England.

It cost US$54 on average to produce 100 kg of milk in Germany in 2003 compared with US$34 in the US, US$18 in China, US$17 in New Zealand and US$13 in Argentina.

Farmer-owned co-operatives such as Viby, Denmark-based Arla Foods Amba and Finland's Valio Finnish Co-Op Dairie already are seeking new suppliers abroad.

China is the world's largest market for dehydrated milk, consuming 987,000 tons last year, compared with 643,000 tons in the US, US Department of Agriculture figures show.

China's Government is encouraging dairy consumption to improve nutrition. It began selling fresh milk to primary schools in five cities in 1999 and took the programme nationwide a year later.

Tang Chun, a Beijing schoolteacher, says her family started drinking fresh milk three years ago. She also buys milk powder for her 4-year-old son and yoghurt drinks.

"Milk has become part of our family's daily diet," says Tang, 32.

China's milk production rose 25 per cent last year and the Chinese consumed an average of 13kg of dairy foods compared with 5kg in 1994. The UN says the world average is 100kg.

"China's domestic milk production is growing exponentially, but demand is growing even faster," says Tom Suber, 62, president of the US Dairy Export Council. The council has been working with Chinese officials to boost shipments of US dairy products

US dairy exports rose 39 per cent to a record US$1.5 billion last year. Mexico and Canada were the leading buyers, followed by China and Southeast Asia.

Farmers increased US dairy herds by 52,000 head to 8.15 million cows in the 12 months ended August 31. The US Department of Agriculture forecasts China's herds will increase 29 per cent to 11.5 million this year after a 30 per cent rise in 2004.

In the 25-country European Union, the number of dairy cows may fall 1.7 per cent to 23.6 million.

Wynne says European dairy companies are shifting their production to higher-value products such as cheese and baby formula to make up for the expected decline in output. They are also making more food in China and other growing markets.

"To them, it's probably not critical whether the milk comes from France, New Zealand or China," Wynne says.

"Europe will slowly retreat in terms of their share of the world dairy market."

Stocker says his cows on Mt Kawi produce an average of 8000 litres of milk a year, more than double New Zealand's average.

Greenfields is spending US$3 million to triple its milk-processing capacity to 15,000 litres an hour.

It's also building a factory to make whipping cream.

Production costs

* It cost US$54 on average to produce 100 kg of milk in Germany in 2003.

* That compares with US$34 in the US, US$18 in China, US$17 in New Zealand and US$13 in Argentina.

- BLOOMBERG