China Dairy Sector Updates and Insights

Global trade with China Q1 2022

•  In Q1 2022 China imported 990,800 tons of dairy products down 12.3% YOY. This decrease is likely attributable to the significant negative impact of Covid restrictions (lockdowns and quarantine requirements, road closures, port congestion etc) on trade, domestic supply chains and international logistics.
• Powders as commodities (WMP – 64% and whey – 15%) and finished products (infant formula – 8%) accounted for the majority of imported dairy at 712400 tons representing an 11.7% decrease compared to the previous year. This decline was somewhat offset by an increase in the overall value of imports of 9.4% (3.4 billion US) however this increase reflects broader global inflationary trends impacting the dairy sector with energy prices, freight prices, feed etc. all translating to higher milk, processing costs and ultimately higher commodity prices.
• On aggregate importation of infant formula was down and suffered primarily due to the impact of covid restrictions. The EU bloc China’s major trade partner was an exception with trade volumes up 5.5% while New Zealand and Australia both suffered as volumes decreased by 30% and 10% respectively.
• Importation of fresh milk (UHT products) was also hit. Down 12.5% YOY to 277900 tons. Major trade partners EU, and NZ were all big losers down 15.6% and 12.5%. Only Australia managed to reverse the trend up to 4.5% YOY.
• Yoghurt importation suffered a massive hit down 98.1% indicative of the heavy disruption to supply chains wrought by covid restrictions particularly related to disruption of cold chain services, warehousing and mainland logistics making final step delivery very difficult.

Blitzscaling to Self Sufficiency: China Doubling Down on Dairy to Solve Food Security Challenges

While Western governments are unfurling plans to massively reduce dairy herd sizes and outputs to align with climate/environmental goals, China is going in exactly the opposite direction.  China has earmarked its dairy sector as fundamental in realizing food security which is unsurprising given the strong correlation between a population's access to high-quality protein and the continued growth of that society. China's heavy prioritization of dairy speaks to the long game China is playing. China’s current reliance on international dairy trade partners undermines food security goals and it is moving at breakneck speed to bridge the current ~30% self-reliance gap and realize its vision of dairy independence.

Its major dairy sector champions Yili, Mengniu and Bright are all directly (or via their multiple subsidiaries or wholly owned companies) flexing their financial muscle and implementing government policy to blitz scale domestic dairy output via massive investment, and all have recently bought up massive swaths of land earmarked for grazing of cows and construction of massive farms and processing equipment.

Via a mixed policy of building new farms and consolidating and improving industry efficiency via aggressive M&A activity, the top 3 of China’s D20 will in the next decade massively increase China’s domestic dairy production all of which aligns with high-level government rhetoric outlined in the major policy documents of the last several years. Tellingly, international players like Fonterra are now divesting in their capital investments in China and are selling farms to these Chinese players.

Mengniu is sticking to its strategy of buying controlling stakes in the smaller D20 players (Modern farming, Shengmu etc). Yili and Bright appear to realize that the opportunities in M&A are drying up. Geopolitical instability has also made the prospect of foreign investment riskier and out of sync with the broader self-sufficiency strategy. The solution for the Bright and Yili is increasingly appearing to be the construction of new mega-farms in remote traditional dairy geographies like Ningxia, Hothot and Anhui.