China’s Dairy Product Imports and Prices Fall Amid Strong Domestic Production

China's milk production has tripled since 2002, with an astounding 30% increase in the past five years, reaching 39.2 million metric tons (mmt) in 2022. The National Bureau of Statistics reports that Chinese milk production rose to 20.9 mmt in the first eight months of 2023, a 3.6% increase compared to the same period in 2022. The United States Department of Agriculture (USDA) anticipates a 4% year-on-year (YoY) increase in China's milk production, reaching over 42 mmt by the end of 2023, and maintaining similar high levels in 2024. Rabobank's forecast suggests that China's milk supply is set to grow from an estimated 42 mmt in 2023 to 47.5 mmt in liquid milk equivalent (LME) by 2032, with a compound annual growth rate (CAGR) of 1.5% by volume.

Source: Statista, Tridge

China's increase in milk production can be attributed to a heightened focus on food security, primarily driven by geopolitical challenges in recent years. In 2017, China set an ambitious goal of achieving 70% self-sufficiency in milk production by 2020. Notably, China's self-sufficiency in milk now stands at a robust 80%, outpacing that of countries like Spain. This journey toward self-sufficiency was initiated by the 2008 melamine scandal, which eroded trust in domestically produced milk products among Chinese consumers. The scandal revolved around the contamination of milk and infant formula, as well as various other food ingredients, with the harmful chemical melamine.

Furthermore, China's Ministry of Agriculture and Rural Affairs (MARA) initiated a five-year plan aimed at revitalizing the domestic dairy sector in Feb-22, with a strong emphasis on promoting large-scale, modern dairy farms. From 2015 to 2020, the proportion of China's dairy herd on farms with over a thousand heads rose from 24% to 44%, with expectations of reaching 56% by the end of 2025.

China's National Bureau of Statistics highlights that, while the country's milk production has seen rapid growth over the past five years, the growth rate of dairy processing stands at just 3.6%. This suggests a slowdown in consumption. Additionally, the recovery in milk demand from the COVID-19 pandemic has not kept pace with production growth. Compounding this issue is the structural challenge of dairy farms being predominantly situated in northern China, such as Inner Mongolia and Ningxia, while the majority of consumers reside in the southern regions. Recent expansions and new dairy farm constructions have also been concentrated in the north. The considerable distances, cold chain logistics, and transportation costs make it expensive to ferry fresh pasteurized milk from northern to southern China.

MARA reported that the monthly average price of raw milk was USD 0.52 per kilogram (CNY 3.76/kg) in Aug-23, the lowest value since Aug-20. Aug-23 average price remained unchanged from Jul-23 but decreased by 8.74% YoY. Notably, raw milk prices have steadily decreased by 8.52% since Jan-23, with this downward trend dating back to Aug-21, primarily attributed to an oversupply of milk in the market.

Source: Ministry of Agriculture and Rural Affairs of China (MARA), Tridge

China's robust domestic milk production has notably impacted the country's import of dairy products. According to data from Chinese Customs, dairy product imports reached 2.02 mmt, valued at USD 8.8 billion as of Aug-23, an 11.8% YoY drop in volume and a decrease of 8.3% YoY in value. Among these imports, powdered milk products have dropped by 7.8% YoY to 1.48 mmt, with a 9.1% YoY value reduction to USD 7.7 billion. Fluid milk imports reached 542 thousand metric tons (mt) with a value of USD 1.1 billion, a substantial 21.1% YoY volume decrease, and a 1.9% YoY value drop. Import declines are prominent in bulk milk powder, condensed milk, and milk products, all experiencing reductions of over 20% YoY. Also, infant formula and cream product imports have fallen by less than 10% YoY. Nevertheless, whey powder and cheese imports, often used as supplements, are bucking the trend with strong growth.

Source: Trade Map, Tridge

Looking ahead, China is projected to become the world's third-largest cow milk producer in 2023. Despite the notable surge in domestic production and a concurrent decline in imports, China is expected to remain the largest dairy importer. This is primarily due to an increasing per capita consumption despite the declining population. Milk prices are anticipated to remain bearish in the near future due to an oversupply situation resulting from increased domestic production and imports. Rabobank projections indicate that China's annual demand for dairy is set to increase by an average of 2.4% from 2023 to 2032, reaching 62.2 mmt in LME over the next decade. The future pricing dynamics for raw milk in China are expected to hinge on factors such as consumer income growth, evolving demand patterns, and the country's economic performance.