China Losing its Domestic Industry Due to Cheap Imports

Despite strong efforts from the Chinese government in recent years to put the country’s dairy industry squarely on a path toward expansion, the recent crash in world milk powder prices has forced many Chinese dairy farmers to call it quits.

“The soured outlook” for a commodity once dubbed “white gold” in China comes on the back of crashing international prices, reports the Financial Times. Plunging milk powder prices have caused farmers across northern China, in particular, to slaughter their herds, the newspaper adds.

“Several recent news reports have noted that Chinese dairy farms are dumping milk and exiting dairy at a quickened pace after 10 consecutive months of depressed milk prices,” says Sara Dorland, analyst with the Daily Dairy Report and managing partner of Ceres Dairy Risk Management, LLC, Seattle. “When global milk prices were high, China’s less-than-competitive dairy industry remained buoyant, but now that global milk powder prices have plunged by half, China’s unsustainably high-cost model of dairying is starting to crack.”

With world skim and whole milk powders priced so low, Chinese milk processors have been able to import product to reconstitute and sell as fluid milk. “This practice has been driving down farm margins and further eroding demand for domestically produced fresh milk in China,” says Dorland. And that is driving some farmers to give up on the milk business entirely.

Even in the best of times, China’s domestic dairy industry faces challenges, says Dorland. According to the Financial Times, China’s cost of milk production is estimated to be at least twice as high as the cost of production in New Zealand, Argentina, and the United States.

Chinese fluid milk processors are also being squeezed, which has made cheaper milk powder imports an attractive way to jumpstart 2015 margins, notes Dorland. However, the Chinese government, which has spent considerable money and effort trying to grow its domestic milk supply, is not about sit on the sidelines and watch its homegrown supply evaporate.

According to the Financial Times, with so many dairy farmers slaughtering their herds, Beijing is expected to issue regulations to curb the practice of reconstituting inexpensive imported milk powders to sell in place of domestically produced fresh milk.

If the Financial Times is correct and Chinese regulators “curb the practice”of rehydrating milk powder for use in fluid products, Dorland says that global milk powder markets could be pressured even lower.

On Feb. 19, the Chinese New Year—the Year of the Sheep—begins, and while that tyically bodes well for dairy demand, there’s a slight chance it could also be a good omen for global dairy markets.

“The sheep is a symbol of calm,” says Dorland. “If China were to strike a balance between dairy self-reliance and imports, it would provide much needed calm to dairy markets—but that seems like a feat that could ultimately prove insurmountable for one of the world’s largest consumers of fresh milk and milk powders.”

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