November 2, 2017

China: The Queen of Dairy Trade

 |  By: Alan Levitt

In 2016, the world’s leading dairy importing nations increased aggregate purchases of milk powder, cheese, butterfat and whey by nearly 500 million pounds. China was responsible for 337 million pounds of those “new” imports—more than two-thirds.

The way things are tracking this year, China’s share of growth will be even greater. While we would like to see all major markets consuming and importing more dairy, the health of the global dairy market relies on a strong China—which is why this year’s purchase patterns have been such a welcome development.

Vibrant Chinese demand has import volume of the major commodities on a record pace of nearly 3.3 billion pounds in 2017. The last time China came close to that volume was during the 2013/14 import bubble, when Chinese buyers overestimated their dairy needs and imports spiked.

This time around, the rise is more logical. For the decade prior to the bubble, Chinese milk powder, cheese, butterfat and whey imports were rising at a compound annual growth rate of about 12% per year. Then came the spike and subsequent popping of the bubble when imports soared by 778 million pounds one year only to plummet by 732 million pounds shortly thereafter.

Where is China now? Back at a more stable, long-term growth pace of about 12% per year. A number we feel is sustainable for at least the medium-term, given population growth, continued urbanization and the overall shift to higher protein diets as incomes improve and the middle class blossoms.

Questions also surround China’s domestic milk production capacity. Unofficial data suggests flat output as small and medium-sized farmers continue to leave the sector more quickly than large-scale operations expand. Milk production costs are high and profitability issues plague the industry.

In addition, while China’s evolving food regulations can sometimes create challenges for companies looking to ship there, two recent moves actually facilitate dairy trade. Last month, Chinese regulators granted a two-year grace period for new certification requirements for food imports.

Prior to that, the U.S. and Chinese governments signed a memorandum of understanding in June that unclogged a backlog of U.S. dairy suppliers shut out of the market due to separate Chinese certification regulations implemented in 2014. USDEC worked with the National Milk Producers Federation and both governments to resolve that issue.

The supply and demand factors at play have lifted 2017 dairy exports to China. Through the first eight months of this year, Chinese whole milk powder imports grew 11% compared to the same time frame in 2016: Skim milk powder was up 29%, cheese rose 23%, butterfat gained 19% and whey increased by 9%.

There are some indications September results might not be as strong as June through August, when Chinese dairy commodity purchases rose 34% compared to the same period in 2016.

But even a down month is unlikely to blunt China’s steady import growth, nor its lofty position as a bellwether for global dairy trade.