|Even though China's white-hot economy is expected to slow, it's still projected to see an 8% growth rate this year.
Its urban shopping malls carry Gucci and Rolex brands. Supermarkets in the large cities resemble modern American stores. Baskin-Robbins shops and Häagen-Dazs ice cream are popular. Tall buildings dominate once-humble skylines.
China today is a far different place than it was 20 years ago, say those who've recently visited the Communist country. Increasingly market-oriented, China's economy has roared along at 8% to 11% for the past six years, boosting the standard of living for many of its 1.3 billion people.
That's created a new class of Chinese consumers with an appetite for electronics, fashion and improved diets. For U.S. dairy suppliers, particularly those in California, that signals huge opportunity.
China already accounts for 8% of the global dairy import trade, says recent visitor Richard Cotta, who is the CEO of California Dairies, Inc. (CDI), California's largest processing cooperative.
But the giant Asian nation is hungry for more.
"China has seen a 10% annual increase in dairy consumption,” Cotta says. "Its income has increased fourfold over the last two decades. Eighty-seven percent of urban Chinese households now have refrigeration. That was unheard of 20 years ago.”
Cotta traveled to China last November on a 10-day trade mission organized by the California Milk Advisory Board (CMAB). It was Cotta's third trip to China.
Also joining the group was CMAB consultant Ross Christieson. He returned to China in February 2009 with a group led by California's lieutenant governor.
"China's dairy market could expand 15% per year over the next five years,” Christieson says. "When economies grow, their dairy consumption grows.”
In the wake of the melamine scandal that rocked China last year, the Chinese want and need foreign producers who can deliver safety and quality in their dairy products. The CMAB, responsible for the "Happy Cows” advertising campaign, believes California is the ideal supplier.
"California is well positioned to supply Pacific Rim countries because of its proximity to the Pacific Ocean and its access to the major West Coast seaports of Los Angeles, Oakland and San Francisco,” Christieson says.
That proximity gives California's dairy industry a competitive edge over Eastern and Midwestern regions. "It's been estimated that it costs more to truck a container of cheese from Wisconsin to San Francisco than it costs to ship that same container of cheese from California to China,” Christieson says.
California, the nation's leading dairy producer, could certainly use the China business. The Golden State is struggling with a shortage of processing capacity to handle its annual 41 billion pounds of milk.
CDI's Cotta says his co-op already sells butter and milk powders in China. On his latest trip, he saw CDI products—along with the Land O'Lakes brand and California oranges, raisins and almonds—in supermarkets in Beijing and Shanghai. But Cotta believes there's potential for much greater business since he is convinced that China will never be able to feed itself.
"China is covered by steep mountains, deserts and dry grasslands,” he says. "Its water availability is a real problem, too. It's very inefficient. China will be limited in providing all the products its people need.”
Although China has made "a massive investment” to build modern commercial dairies, Christieson says, its production capabilities have a long way to go.
|CDI's Richard Cotta and California dairy producers Ann Silva (left) and Essie Bootsma find their co-op's butter, sold under the Suki brand, in a Beijing supermarket on their November trip to China.
While Cotta expects to sell more CDI products to China, he also sees expanded prospects for sales of cheese, something his co-op doesn't produce. He notes China's growing appetite for pizza and cheeseburgers as its diet becomes more westernized. Ice cream is also hugely popular among the Chinese.
The recent visits to China come as U.S. dairy export sales are slowing. Hurt by the global recession, U.S. exports dropped 21% in the second half of 2008, the U.S. Dairy Export Council (USDEC) reports.
Even so, dairy analysts don't expect the slowdown to alter the upward trend of overseas dairy sales for long. Growing demand from Mexico, Southeast Asia, Canada, Japan and China helped propel the U.S. to its sixth straight year of dairy export growth in 2008, even with the late-year volume decline.
"Global dairy analysts are virtually united in predicting that long-term demand factors and strong markets will return,” says USDEC President Tom Suber.
Considering that just 25% of China's population outnumbers the entire U.S., it's clear that even a small share of the Chinese market can mean a whole lot of business. California's dairy industry is already knocking on Chinese doors. Other U.S. dairy suppliers may want to prepare passports and business cards—and follow suit.
THE MELAMINE SETBACK
Since 2000, China has been one of the world's fastest-growing dairy industries, says the U.S. Dairy Export Council (USDEC).
In fact, China has become the world's third largest milk-producing nation, even though it produces less than half of the milk supply that the U.S. does.
But the massive tainted-milk scandal that broke in September 2008 will set back China's export ambitions for years.
Six infants died and more than 300,000 people were sickened from infant formula milk powder that was contaminated with melamine, an industrial chemical, according to USDEC and media reports.
Further investigation revealed other dairy products, including fluid milk and yogurt, as well as foods that use dairy ingredients, such as cookies, candy and baked goods, also were melamine-tainted.
As a result, 11 countries curtailed their imports of Chinese dairy products. "Buyers in 10 countries still require a certification assuring them that each shipment is in compliance in regard to melamine,” says Margaret Speich of USDEC.
"Confidence in the Chinese dairy sector—as well as in government regulation and enforcement—was crushed,” says Daniel Chan, USDEC's international representative in China.
The substantial losses both in sales and in goodwill toward its dairy processors will constrain China's financial reinvestment in its milk production for years, Chan adds.
Since the scandal broke, the Chinese government has addressed structural flaws in its regulatory system and established hundreds of product-testing centers. It has also granted subsidies to farmers and processors to keep them afloat during the crisis.
"China may one day become a dairy export competitor,” Chan says. "But that day is now much further away than it was before this crisis.”
China''s Economy by Business Exchange
China Economy by Economy Watch