The Solid Potential of UHT Milk

U.S. suppliers have an opportunity to play a bigger role in China’s booming UHT milk market.

Ample evidence suggests a global opportunity in ultra high temperature (UHT) milk exports is unfolding as we speak. Chinese UHT milk imports are soaring. Demand scenarios conducted by USDEC suggest China’s appetite for imported UHT milk could more than quadruple from 150,000 tons in 2013 to at least 600,000 tons by 2020.

No less than seven major new plant projects are in the works around the world—in Australia, New Zealand, Ireland and Germany—focused on manufacturing UHT milk for export. Their combined output is still insufficient to meet demand projections.

 “U.S. suppliers have an opportunity to play a bigger role in China’s booming UHT milk market,” says Ross Christieson, senior vice president, market research and analysis. “To do so, they need to concentrate on 1) developing the right products and packaging to meet Chinese needs, which are very different from U.S. needs; 2) getting more price competitive (or accepting a smaller, niche share of the market); and 3) establishing price models that use longer pricing periods more akin to those offered by competitors.”

Australia, France, Germany and New Zealand are the major UHT suppliers to China. They have tailored their lines to Chinese preferences, specifically 1-liter cartons with no additives, not even vitamins. Their marketing, promotions and packaging have been designed to reinforce that the milk is imported from a quality dairy supply country.

The United States currently has less than 4 percent of the Chinese UHT milk import market.

 “But U.S. suppliers have a reputation for high quality food and have also established dairy trade routes with China over the past decade. And Chinese buyers have expressed interest in U.S. UHT milk to meet spiraling demand,” says Christieson. “Tailoring the package size and appearance and eliminating additives are relatively straightforward first steps to meeting that demand.”

Taking on pricing

Price is more challenging. German suppliers offer contracts up to a year long, while New Zealand and Australian suppliers offer 3-6 month contracts. Neither is amenable to U.S. suppliers, who com­pound the issue by having higher landed costs than competitors, particularly those from Germany.

The rule of thumb is that UHT imports typically sell at retail at about twice their CIF cost. Because the average landed cost for U.S. UHT milk runs anywhere from 22-68 percent greater than rivals from Oceania and Europe, U.S. retail prices top the market.

Due in part to past food safety scares, Chinese consumers have shown they are willing to pay for imported UHT milk up to two-to-three times the price of local labels. That being said, Chinese consumers are cost conscious. Competitive pricing is a key factor in the grocery retail sector, putting U.S. products at a disadvantage next to brands from Europe and Oceania.

“Pricing is currently a challenge, but given the potential, one worth accepting,” says Christieson. “We are new to this business, so we don’t currently enjoy the economies of scale that our competitors do. As we build more experience and start to use plants dedicated to manufacturing milk for export, we have the opportunity to get our cost models more in line with our competitors who, if anything, will face cost increases in the future.”

About 300 million people—a mass nearly the size of the entire United States—will move to Chinese cities over the next 17 years, encouraged by government programs aimed at shifting China’s economic model to one based more on internal consumption rather than exports. Urbanization is particularly important because dairy consumption in rural areas is neg­ligible, meaning there is huge room for growth as those rural dwellers move to cities.

“Given the relatively low per capita consumption levels, and the very low penetration of ‘added-value’ products like cheese, butter and ice cream, dairy consumption is likely to continue to grow well into the future,” says Christieson. “The increase in the consumption of imported UHT milk is a part of this greater trend.”

Plus, the potential payback is bigger than simply the Chinese milk market. USDEC sees opportunity for other regions and products, like UHT milk and cream and lactic acid beverages in Southeast Asia. A solid fluid opportunity indeed.

Sidebar:

Market Drivers of Chinese Dairy and UHT Milk Consumption

1. Sustained strong economic growth

2. Rising per capita incomes

3. Rapid urbanization

4. The development of large, relatively wealthy second-tier cities

5. The development of a national transportation infrastructure

6. Increased commercial and economic freedoms

7. A shift to higher protein diets

8. The expansion of Western foodservice operators

9. The establishment and expansion of modern, national supermarket retail chains

(This article first appeared in the March 2014 edition of Export Profile.)

Image copyright: 123RF Stock Photo

The U.S. Dairy Export Council is primarily supported by Dairy Management Inc. through the dairy farmer checkoff that builds on collaborative industry partnerships with processors, trading companies and others to build global demand for U.S. dairy products.