KEY POINTS:
China's dairy market has soared to 25 million tonnes a year, and New Zealand is its biggest supplier of imported product, says a major agricultural banker.
Demand for dairy products has more than doubled in the past five years, and though domestic milk production is growing rapidly, China is only able to produce 24 million tonnes a year (liquid milk equivalents) of dairy products per year, Rabobank said in a report it released today on the market.
"New Zealand is the single largest import source, providing half of total import value, nearly US$460 million ($692 million) in 2005," the bank said. New Zealand, Australia, the USA and France together provided 80 per cent of the imports.
But the key factor in the Chinese market is that the 25 million tonnes consumed in 2004-2005 is still only the equivalent of less than 20kg of liquid milk equivalent per person.
Separately, Chinese statistics indicate annual consumption of dairy products there will reach 30kg a person by 2015.
"There is little doubt that the Chinese market offers a good future for New Zealand dairy products," Rabobank said.
China's tariff on dairy products had decreased dramatically. "Also, China is in free trade agreement (FTA) negotiation with New Zealand and Australia with the expectation of more favourable treatment in the near future."
Rabobank released its dairy report to coincide with the International Dairy Federation Congress, which has just finished in Shanghai.
It said the dynamics of the Chinese dairy market were changing, with production of raw milk growing at a faster rate than growth in demand recently.
"However, consumption is expanding and the market is becoming more sophisticated with consumers moving from milk powder to UHT milk; increasing consumption of higher end dairy products such as yogurt and cheese; modern retail chains improving distribution and choice; and, Chinese consumers becoming more brand conscious to ensure quality and food safety," said Lillian Lou, Rabobank's food and agribusiness senior analyst in Shanghai.
Dairy industry sales were worth US$11 billion ($16.55 billion) in 2005, reflecting a compound annual growth rate of 30 per cent since 2001.
The rapid growth had been driven by growing affluence in the middle class of more than 200 million consumer, rising nutrition awareness, fast expanding retail chains and dairy industry investment in brands and promotion.
"Affluence is a key driver," Ms Lou said.
The average per capita disposable income in urban areas was US$1312 and annual consumption of dairy products ranged from 25kg to 48kg liquid milk.
But over half of the population still lived in rural areas -- 10 per cent with an annual income of less than US$118 per head -- and rural dwellers account for less than 20 per cent of total dairy consumption.
Among urban consumers, there was a strong move to value-added milk products, with wealthier consumers now using UHT milk instead of milk powder, and western fast food chains were encouraging a growing taste for cheese.
Most of raw milk production was from small family farms with one to four cows, and big farms with over 100 cows produced less than 20 per cent of total production. The government controlled land use rights and it was very expensive to establish large farms.
Government controls to protect grassland had driven dairy production from a pasture-based system to cows being housed and fed crop straw, silage and manufactured feed, but average annual production was only 2000kg milk per cow.
With few tankers doing the rounds, local authorities run milking sheds and farmers bring their cows twice a day for milking so that the local authority can negotiate sale of the milk to a processor.
Ms Lou said foreign companies had found the fragmented milk supply a major obstacle. Some, such as Kraft, had dropped out, but 11 months ago Fonterra paid $150 million -- 864 million renminbi -- to buy 43 per cent of the Shijiazhuang Sanlu Group dairy company.
Its joint venture to initially bundle together powder businesses such as raw materials, and special ingredients, with consumer products, is expected to increasingly focus on UHT milk, and yoghurt.
Fonterra has predicted that eventually China will account for 10 per cent of its global dairy market. Sanlu is based in the northern China province of Hebei, which surrounds the capital Beijing. Headquartered in Shijiazhuang, the provincial capital, the company started out as a large-scale state enterprise, and is now China's third biggest dairy company, behind the Yili and Mengniu companies based in Inner Mongolia.
Ms Lou said Rabobank is predicting another eight to ten years of strong growth in the Chinese dairy market.
- NZPA
