A price rebound hinges on whether the country resumes its buying spree
By Jim Dickrell and Fran Howard
World dairy markets in 2014 were largely driven by the beat of Chinese drums. The more China bought, the more milk prices rose.
When that buying spree stopped this past summer, prices fell. Whether they’ll rebound depends largely, though not solely, on China’s returning to the market.
“China is the dragon in the room,” says Marin Bozic, a dairy economist with the University of Minnesota.
“It front-loaded its dairy imports in the first half of 2014,” he says, buying nearly 80% of its imports in the first five months of the year. USDA expects China to cut back its purchases of whole milk powder (WPM) as much as 12% in 2015 (from 680,000 metric tons to 600,000), due in part to a substantial build-up of stocks from its huge buying spree in 2014.
Russia is the second wild card in 2015. It stopped buying dairy products from the European Union, U.S. and Australia in retaliation for sanctions those countries imposed on Russia for its Ukraine adventures.
“[USDA’s] 2015 forecasts assume the Russian ban will be lifted in early August, and China will continue to be a major buyer of whole milk powder, but at volumes near 2013 levels,” says Mary Ledman, dairy economist with the Daily Dairy Report and president of Keough Ledman Associates Inc., Libertyville, Ill. “At this point, neither is a given.”
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But China has been and will likely remain the biggest driver of world markets. In 2013, China accounted for 34% of global WMP trade and 27% of total milk powder trade.
This year, nearly a third of China’s consumption could come from cows outside its borders. That’s a doubling of imports in just three years.
The need will likely to continue to grow, since per capita consumption is about 65 lb. of milk, roughly 10% of what Americans consume. Even by Asian standards, Chinese dairy consumption is low. Japanese and South Koreans each consume 150 lb. to 175 lb. of milk annually.
In fact, China could likely become the world’s largest cheese importer over the next decade. That’s according to an upcoming report from the U.S. Dairy Export Council (USDEC).
“From 2008 to 2013, Chinese cheese imports grew an average of 28% per year by volume,” says Ross Christieson, a USDEC market research analyst. “The country went from being the world’s 16th largest cheese importer to the 8th largest.”
In 2014, cheese imports were up another 51% through September, likely pushing China to the No. 7 spot worldwide, he says.
The important point, however, is that U.S. companies are already in China, Christieson says.
“In other major cheese buying countries like Japan and South Korea, the U.S. was the second or third supplier to enter the market,” he adds. “We had to claw back share from established suppliers … In China, the U.S. is in on the ground floor.”
China imported about a fourth of its dairy needs in 2014, and industry leaders estimate it might grow to a third this year.
Could China Feed Itself?
Some believe China could become self-sufficient in dairy production and even a dairy eporter by 2030. Over the past few years, it has imported 250,000 dairy cows from New Zealand, Australia and Uruguay.
But most China observers, like Tim Hunt, Rabobank’s managing director for dairy global strategy, believe otherwise. “The Chinese can become self-sufficient in dairy, but I don’t think they want to,” Hunt says.
Despite China’s immense land mass, it’s resources, arable land and water are still limited. “The Chinese have to decide what they want to use their land and water for—and what their priorities are,” Hunt adds.
Despite growing consumer demand for dairy, Chinese officials are opting for more wheat, rice and corn. In 2014, price supports for domestic corn production sustained prices above $9 per bushel.
The dairy products Chinese consumers want doesn’t require fresh, liquid milk, Hunt says. Baby formula,
yogurt and dairy beverages can easily be manufactured using imported milk and whey powder.
Importing milk might actually be cheaper. In 2014, China was paying $28 per cwt for milk to support its domestic dairy industry, who had to pay for $9 corn and $500 per ton alfalfa imported from the U.S.
China has made a massive investment in large-scale dairies with 3,000 to 4,000 cows per facility. Most of these dairies use the latest U.S. and European technology. But cows, feed and management lag by decades, says Mike Hutjens, a University of Illinois dairy specialist who has visited China.
Feed quality is also an issue. Much of the forage is domestic “sheep grass,” which would make our Bermuda grass look like fancy forage, Hutjens says. Corn silage, minus the cob, is the other main forage source.
Consequently, cow diets are low in milk-making ability. Daily production per cow typically ranges from 50 lb. to 60 lb.
Labor is plentiful, but experience is not. “What they don’t have is the cadre of dairy managers to manage large-scale farms,” he says. “They don’t have the 40- and 50-year-olds who have grown up on dairies with several decades of dairy management experience.”
Given these constraints, Hutjens believes China is still decades away from becoming self-sufficient in dairy production.
The Chinese goal is to provide each child with two glasses of milk per day, which is double the current consumption. “That will take a lot of milk,” Hutjens says. “The government is really trying to modernize, but how many billions of dollars will it take?”