China Demonstrates the Power of Emerging Markets

In late November, more than two years after China issued a blanket recall of all domestically manufactured dairy products in an attempt to choke off its melamine scandal, Chinese authorities found yet another batch of products—this time a corn-flavored dairy beverage—with excessive levels of melamine.

It was the fourth new melamine incident this year. More importantly it was a reminder why Chinese consumers are still having trouble fully trusting domestic dairy suppliers and a sign that the nation’s accelerated dairy import appetite of the past two years might continue for some time.

If trends hold for the remainder of 2010, Chinese whole milk powder (WMP) import volume will hit 340,000 metric tons (more than seven times the 2008 total). Its share of international WMP trade will jump from just under 3 percent in 2008 to more than 15 percent in 2010.

The increase makes the nation’s projected two-year, 66 percent bump in skim milk powder imports (to 91,000 metric tons) appear moderate rather than extraordinary in its own right.

The numbers are remarkable. They also are a big reason why we’ve seen fairly stable and relatively high dairy commodity prices in a year in which global milk production was reenergized. In an increasingly globalized dairy industry, China (as well as other emerging markets) is playing an increasingly bigger role.

In USDEC’s Nov. 16 “Global Dairy Outlook: 2011” webinar, panelists pointed to China’s milk powder purchases as the “global thermometer” to market sentiment and pricing. However, they also wondered if the buying could go on indefinitely.

You have to have a wary eye, panelists said. The region, after all, wants to be self-sufficient.

Indeed, that’s a universal goal. But a number of challenges stand in the way of self-sufficiency.

The melamine scandal brought on the realization that China would have to abandon the notion of being a low-cost producer in order to ensure a safe milk supply. Higher operating costs discourage expansion and dampen the industry’s recovery.

The scandal’s effects on consumer attitudes and milk production run deeper than originally suspected.

“Some Chinese consumers still prefer imported products, despite official assurances that domestic supplies are safe. And it’s now clear that Chinese milk production levels fell below official figures in 2008 and 2009,” says Tim Hunt of Rabobank Food & Agribusiness Research in a recent reassessment of China’s and India’s roles in global dairy markets. “The factors underpinning the major shift in Chinese dairy imports may last longer than anticipated.”

At least twice as long—three years or more instead of Rabobank’s previous estimate of 18 months, according to Hunt.

USDA’s latest “Dairy and Products Annual” for China supports the findings. Despite a projected 2 percent increase in 2010 and 5 percent gain next year, the country’s milk output will remain well below the 77 billion pounds of 2008, before the melamine fallout, USDA says. Significantly reduced herd size, a widespread outbreak of foot and mouth disease, and comparatively low animal productivity are hindering milk production recovery.

As Rabobank puts it, China “faces a structural market deficit that will be difficult to erode in the coming years.”

At the same time, dairy consumption in China continues to rise and import demand grows, despite prices that are higher than historical averages. (Many believe a new, elevated price band has become accepted, but more on that in next month’s column.)

And China is not the only game in town. Solid demand continues in many parts of the world, including India, Southeast Asia, Africa and the Middle East.

In Rabobank’s revised forecast for India, the firm notes that rising demand and changing global weather patterns would make the country a periodic butter importer. While that may not sound like big business, “with a population of over 1 billion people, a small market shortfall in Indian terms represents substantial volumes for the international dairy trade,” says Hunt. India’s “topping up” of butterfat last year, when a poor monsoon season left store shelves empty for weeks, made the country one of the world’s top-10 butterfat importers.

Although USDEC and the U.S. government continue to push to resolve dairy certificate differences that currently prevent U.S. suppliers from taking advantage of potential Indian opportunities, the point remains the same: Supply and demand factors, represented most clearly in China and other emerging markets, provide a strong reason for the world’s dairy suppliers to be optimistic.

(This article first appeared in Cheese Market News in December 2010.)

The U.S. Dairy Export Council represents dairy farmers, proprietary processors, cooperatives, ingredient suppliers and export traders. Its mission is to enhance U.S. competitiveness and increase global sales of U.S. dairy ingredients and products.