China is grappling with a significant milk surplus, a situation that has arisen from a confluence of economic factors, demographic changes, and a strategic misalignment in its dairy industry. As the world's top importer of dairy products, China's current surplus illustrates the unintended consequences of its ambitious efforts to boost the dairy sector in a bid for food security.
The backdrop to this surplus is a growing disconnect between dairy production and consumer demand. Falling birth rates and a shift in consumer preferences have led to a decrease in demand for milk and milk products, even as dairy farms have expanded their operations in recent years. This overproduction has put immense pressure on smaller dairy farmers, many of whom are now facing the harsh reality of closure or downsizing.
Economic Downturn and Consumer Spending
The sluggish state of the Chinese economy is a crucial factor contributing to reduced demand for higher-priced dairy products such as cheese, cream, and butter. With consumer spending constrained, many households are prioritizing essential items over premium food products. According to data from China's statistics bureau, per capita milk consumption dropped from 14.4 kg in 2021 to 12.4 kg in 2022. This decline reflects not only a decrease in demand for liquid milk but also for dairy products that require higher disposable incomes.
The economic slowdown has compounded issues for the dairy sector, leading to reduced purchasing power among consumers. The impact of this economic climate has been felt most acutely in the infant formula market, which has suffered a notable decline. China’s birth rate reached a record low of 6.39 per 1,000 people in 2023, down from 12.43 in 2017, resulting in fewer infants needing formula. According to A2 Milk Company, sales of infant formula in China decreased by 8.6% in volume and 10.7% in value during the fiscal year ending June 2024.
Overproduction and Market Saturation
The milk production sector in China has also expanded rapidly, fueled by government policies that encouraged the establishment of more dairy farms. Milk output surged to nearly 42 million tons last year, exceeding Beijing’s 2025 target of 41 million tons. However, this increase in production has occurred alongside a significant drop in consumer demand, leading to a market oversupply.
With milk prices dropping below the average production cost of around 3.8 yuan ($0.5352) per kg, many farmers are unable to cover their costs, resulting in herd reductions and even the closure of operations. Modern Dairy, one of China’s major producers, reported a drastic reduction in its dairy cattle herd in the first half of this year, with a net loss of 207 million yuan ($29.07 million).
Li Yifan, Head of Dairy (Asia) at commodity financial services firm StoneX, summarized the situation succinctly: "Dairy farming companies are losing money on selling milk and selling meat." This loss is symptomatic of a broader issue affecting the industry, where producers find themselves squeezed between falling prices and rising production costs.
Export Challenges and Global Competition
China’s ability to export its surplus milk is hampered by several factors. The legacy of the 2008 adulteration scandal, which led to the deaths of at least six children and hospitalized thousands, continues to linger in the minds of both consumers and international markets. This historical context limits the potential for Chinese dairy products to gain a foothold abroad, even as the country attempts to export whole milk powder.
Despite efforts to improve food safety regulations and rebuild consumer confidence, many Chinese consumers still prefer foreign brands. This sentiment further constrains the domestic industry’s export capabilities. In the first half of 2024, China exported just 55,100 tons of dairy products, an increase of 8.9% annually but still only a fraction of its surplus.
Shifts in Consumer Preferences
Another layer to this complex situation is the shift in consumer habits, particularly in relation to dairy products. The Chinese government has attempted to promote a transition from "drinking milk" to "eating milk," aiming to diversify consumption through cheese, cream, and other higher-value products. However, these efforts have largely stalled in the face of cost-conscious consumers who are reluctant to pay a premium for these items.
Liquid milk still accounts for approximately 80% of dairy consumption in China, and despite a push for product diversification, the market for cheese and other value-added dairy products has not developed as anticipated. This gap between supply and demand further exacerbates the surplus issue.
The Future of China's Dairy Industry
Looking ahead, the situation for China’s dairy industry appears precarious. Analysts project that net dairy product import volumes in 2024 are likely to decline by 12% from the previous year, with the extended downcycle expected to continue into 2025. The International Energy Agency anticipates that demand for diesel and gasoil will contract by 0.9% this year, further underscoring the sluggishness in global demand.
As dairy farmers attempt to manage their excess output, many are converting raw milk into powder, leading to a surplus of more than 300,000 tons by the end of June, nearly double the previous year's figure. The reliance on costly animal feed means that production costs for Chinese dairy farmers are nearly double those of top exporter New Zealand, where cattle benefit from more natural grazing conditions.
Despite these challenges, some industry players still see potential for growth in the long term. Charlie McElhone, general manager of sustainable dairy at Dairy Australia, expressed optimism, stating, "We still see cheese expanding in the future." This perspective highlights the resilience of the industry and the potential for adaptation in response to shifting consumer preferences and market dynamics.
China’s dairy industry currently finds itself at a crossroads. The combination of a declining birth rate, a slowing economy, and shifting consumer preferences has created a significant milk surplus. As the industry grapples with these challenges, the focus must shift to sustainable solutions that align production with actual consumer demand, ensuring the viability of dairy farming in China for the future.
(Source:www.straitstimes.com)
The backdrop to this surplus is a growing disconnect between dairy production and consumer demand. Falling birth rates and a shift in consumer preferences have led to a decrease in demand for milk and milk products, even as dairy farms have expanded their operations in recent years. This overproduction has put immense pressure on smaller dairy farmers, many of whom are now facing the harsh reality of closure or downsizing.
Economic Downturn and Consumer Spending
The sluggish state of the Chinese economy is a crucial factor contributing to reduced demand for higher-priced dairy products such as cheese, cream, and butter. With consumer spending constrained, many households are prioritizing essential items over premium food products. According to data from China's statistics bureau, per capita milk consumption dropped from 14.4 kg in 2021 to 12.4 kg in 2022. This decline reflects not only a decrease in demand for liquid milk but also for dairy products that require higher disposable incomes.
The economic slowdown has compounded issues for the dairy sector, leading to reduced purchasing power among consumers. The impact of this economic climate has been felt most acutely in the infant formula market, which has suffered a notable decline. China’s birth rate reached a record low of 6.39 per 1,000 people in 2023, down from 12.43 in 2017, resulting in fewer infants needing formula. According to A2 Milk Company, sales of infant formula in China decreased by 8.6% in volume and 10.7% in value during the fiscal year ending June 2024.
Overproduction and Market Saturation
The milk production sector in China has also expanded rapidly, fueled by government policies that encouraged the establishment of more dairy farms. Milk output surged to nearly 42 million tons last year, exceeding Beijing’s 2025 target of 41 million tons. However, this increase in production has occurred alongside a significant drop in consumer demand, leading to a market oversupply.
With milk prices dropping below the average production cost of around 3.8 yuan ($0.5352) per kg, many farmers are unable to cover their costs, resulting in herd reductions and even the closure of operations. Modern Dairy, one of China’s major producers, reported a drastic reduction in its dairy cattle herd in the first half of this year, with a net loss of 207 million yuan ($29.07 million).
Li Yifan, Head of Dairy (Asia) at commodity financial services firm StoneX, summarized the situation succinctly: "Dairy farming companies are losing money on selling milk and selling meat." This loss is symptomatic of a broader issue affecting the industry, where producers find themselves squeezed between falling prices and rising production costs.
Export Challenges and Global Competition
China’s ability to export its surplus milk is hampered by several factors. The legacy of the 2008 adulteration scandal, which led to the deaths of at least six children and hospitalized thousands, continues to linger in the minds of both consumers and international markets. This historical context limits the potential for Chinese dairy products to gain a foothold abroad, even as the country attempts to export whole milk powder.
Despite efforts to improve food safety regulations and rebuild consumer confidence, many Chinese consumers still prefer foreign brands. This sentiment further constrains the domestic industry’s export capabilities. In the first half of 2024, China exported just 55,100 tons of dairy products, an increase of 8.9% annually but still only a fraction of its surplus.
Shifts in Consumer Preferences
Another layer to this complex situation is the shift in consumer habits, particularly in relation to dairy products. The Chinese government has attempted to promote a transition from "drinking milk" to "eating milk," aiming to diversify consumption through cheese, cream, and other higher-value products. However, these efforts have largely stalled in the face of cost-conscious consumers who are reluctant to pay a premium for these items.
Liquid milk still accounts for approximately 80% of dairy consumption in China, and despite a push for product diversification, the market for cheese and other value-added dairy products has not developed as anticipated. This gap between supply and demand further exacerbates the surplus issue.
The Future of China's Dairy Industry
Looking ahead, the situation for China’s dairy industry appears precarious. Analysts project that net dairy product import volumes in 2024 are likely to decline by 12% from the previous year, with the extended downcycle expected to continue into 2025. The International Energy Agency anticipates that demand for diesel and gasoil will contract by 0.9% this year, further underscoring the sluggishness in global demand.
As dairy farmers attempt to manage their excess output, many are converting raw milk into powder, leading to a surplus of more than 300,000 tons by the end of June, nearly double the previous year's figure. The reliance on costly animal feed means that production costs for Chinese dairy farmers are nearly double those of top exporter New Zealand, where cattle benefit from more natural grazing conditions.
Despite these challenges, some industry players still see potential for growth in the long term. Charlie McElhone, general manager of sustainable dairy at Dairy Australia, expressed optimism, stating, "We still see cheese expanding in the future." This perspective highlights the resilience of the industry and the potential for adaptation in response to shifting consumer preferences and market dynamics.
China’s dairy industry currently finds itself at a crossroads. The combination of a declining birth rate, a slowing economy, and shifting consumer preferences has created a significant milk surplus. As the industry grapples with these challenges, the focus must shift to sustainable solutions that align production with actual consumer demand, ensuring the viability of dairy farming in China for the future.
(Source:www.straitstimes.com)
