Beijing-based analyst China Policy pointed to the steady implementation since the start of the year of government measures to consolidate the industry in order to focus on local brands with the potential to be marketed as high- end.
At first, following the 2008 scandal of melamine being added to local milk to add to its analysed protein content, small producers were steadily squeezed out, helping to raise the price as supply contracted. In China, 2013 was dubbed “the year of the milk famine” as a result of this trend.
But global production has soared since then, and the Chinese government has again sought to promote local output.
Li Shengli, a professor at China University of Agriculture, told The Australian that local milk companies in Hebei province, for instance, were given subsidies last year “to enable them to compete with foreign milk”.
But such interventions have in the past missed their mark as China has struggled to support its agribusiness.
Last year, 300,000 to 400,000 tonnes of domestic liquid milk went unsold, and was turned into milk powder, Professor Li said. Overseas powder was today “highly competitive against the Chinese product in price”, he said.
The government has developed a new strategy and created the D20 Alliance of 20 “national champion” Chinese dairy firms formed eight months ago.
Vice-Premier Wang Yang said the D20 was established to restore confidence in the domestic product, to establish and supervise strict standards, to focus on markets, to deepen vertical integration from the supermarket shelf to the farmer, and to create an environment for fair competition with international imports.
The past three years, said Professor Li, had seen “dramatic milk market fluctuations”, with per capita consumption even appearing to decline. But that is most likely due to a switch in the dominant urban markets from traditional retail purchases, where sales are monitored by government statisticians, to online, where they are not.
Demand has in general been sustained in China, although global supply has shredded margins.
David Mahon, whose company manages stressed assets and provides advice on the China market, especially for agribusiness, said that the global financial crisis struck immediately before China’s dairy boom took off, as consumers’ awareness of its nutritional value soared.
This reinforced the perception that China might be the place to sell the entire output, with anecdotes spreading about milk being priced at huge multiples, and driving supply growth.
Now, Chinese producers, “who suffer from continuing consumer distrust”, have realised their most defensible move is to focus on fresh milk — rather than converting powdered milk to liquid — and build regional pasteurising plants.
Mr Mahon said “the market will recover for infant formula and for very high-end products with special ingredients, but the Chinese government will protect the local industry in some ways, because its environment is so expensive”, with the high price of land and feed.
“They have a strategic view, and will therefore compensate for the high cost structure.”
Source: The Australian