By Andrea Fox of New Zealand Herald
China, the primary destination for New Zealand's dairy exports, is rapidly approaching the position of the world's third-largest milk producer. This development may cause concern for exporters who eagerly anticipate China's recovery in dairy imports.
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Image credit: Author with Ai and Wei Cheng
New Zealand produces around 21 million metric tonnes of milk a year
According to Rabobank, China's overall dairy import volumes decreased by 15.7 percent in 2023 compared to the previous year. Notably, imports of whole milk powder, a significant export from New Zealand, dropped by 39 percent. Other noticeable declines were seen in imports of liquid milk and cream (-17 percent), yoghurt (-10 percent), butter (-9 percent), and infant milk formula (-16 percent). However, there were some positive signs, with imports of skim milk powder and cheese, also key exports from New Zealand, as well as whey powder, experiencing year-on-year growth of 3 percent, 22.5 percent, and 9.5 percent, respectively.
While Rabobank predicts a modest 1.1 percent growth in China's total net dairy imports for the current year, it warns that the country's real estate market downturn and slower economic expansion might hinder the recovery of dairy consumption. This situation could lead Chinese consumers to prioritise saving amid declining household wealth and consumer confidence.
In the backdrop, China has been steadily advancing its domestic milk production and processing capabilities. Data from official reports and Rabobank indicates that between 2019 and 2022, China's milk production exhibited a compound annual growth rate of 7.1 percent, reaching nearly 40 million metric tons by 2022. This figure surpasses New Zealand's annual milk production of around 21 million metric tons.
However, there are signs of caution for New Zealand's dairy leaders. China's milk production growth decelerated last year, mirroring its economic slowdown, and leading dairy companies reported warnings of potential net profit losses or significant declines in FY23 net profit. Furthermore, fewer imports of dairy cattle contributed to slower production growth, particularly with a 75 percent reduction in cow imports from the Oceania region due to unfavorable on-farm economics and New Zealand's ban on live cattle exports by sea.
Rabobank's research analyst Michelle Huang anticipates a 2 percent growth in milk production for this year, followed by a further slowdown in the first half of the next year. Despite these challenges, New Zealand's dairy leaders are closely monitoring China's domestic milk production growth, which has been bolstered by government incentives and support for the development of large-scale dairy farms and the cultivation of high-quality feed.
Rabobank reports that from 2015 to 2020, the proportion of dairy farms with over 1000 cattle rose from 24 percent to 44 percent, with expectations that large-scale dairy farms will represent 56 percent of China's herd by the end of the following year.
This expansion, along with the overarching emphasis on developing a self-sufficient dairy sector, is propelled by Chinese government initiatives aimed at ensuring food security, considering China's status as the world's largest dairy product importer.
According to the Ministry of Foreign Affairs and Trade, the total value of New Zealand's dairy exports to China in the first 11 months of 2023 was $6.1 billion, marking a 4.1 percent decline from the same period in 2022.
In January, tariffs on milk powder were eliminated, allowing New Zealand dairy products to enter China without duties, as outlined in the New Zealand-China Free Trade Agreement, initially negotiated in 2008.
New Zealand holds the position of the leading exporter of dairy products to China, capturing an estimated 42 percent market share in 2023. Other notable importers include the US, Germany, and Australia. China represents 35 percent of all New Zealand dairy exports, according to the Ministry for Primary Industries, with powdered products making up nearly half of New Zealand's export volume.
Leaders in dairy exports appear confident about the expansion of China's domestic dairy industry.
Fonterra, New Zealand's largest dairy business, predicts that China will maintain its demand for imported dairy products. Teh-han Chow, Greater China's chief executive, asserts that their analysis indicates a sustained need for imports, projecting that imports will hover around 30 percent through 2030. Even in scenarios of high milk production and lower consumption rates, a significant gap between domestic production and consumption is expected to persist.
Chow emphasizes the evolution of Fonterra's product mix in China, moving towards higher-value ingredients like cheese and protein, as well as foodservice items such as UHT cream, butter, and cream cheese, where demand remains robust. He anticipates that with the removal of FTA tariffs, Fonterra's market share for skim milk powder will continue to rise, benefiting from a competitive advantage over US and EU products.
Mark deLautour, CEO of Open Country Dairy, underscores China's prioritization of food security. He believes that as long as China can ensure food continuity, its prosperity and social stability will continue. However, he notes that China's current self-sufficiency in dairy production, at 65-70 percent, may decrease when economic conditions improve, creating opportunities for New Zealand's dairy market.
Richard Wyeth, CEO of Westland Milk Products, notes the growth in dairy consumption in China and New Zealand companies' efforts to move towards higher-value products. He suggests that while China's industry growth presents challenges, New Zealand's low-cost production system maintains its competitiveness.
Overall, experts like Rabobank's Huang see significant opportunities for further growth in China's dairy consumption, given its large population and comparatively low per capita consumption. China's pivotal role in global dairy markets is undeniable, reflecting its immense potential for growth.