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How does the Chinese consumer impact me?

Amanda Miller Published on 11 October 2011

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In 2008, the Chinese government said it would like to increase the recommended daily intake of dairy protein per Chinese citizen from 100g to 300g. Can you guess how many more dairy cows would be needed in China to meet that need? It would be the equivalent of 65 million additional lactating dairy cows in China.

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What would those numbers look like if we were in the U.S., using higher-producing, more efficient cows? Only 12 million more cows would be needed. I hope when you read those numbers, the first word that comes to your mind is “opportunity” for our dairy industry.

As China grows and considers options to meet this increased demand, where does it go shopping? Fortunately, it goes to the global market, where we are the second-largest milk producer (13.5 percent of the total).

China’s actions affect our daily operations. Milk prices have increased (as have feed prices) as China looks for more quality inputs than it can grow.

We then have to decide: Would we rather sell our dairy products, such as whey, and feed supplies to China? As you ponder this, consider other impacts China has on our industry.

Increase in demand
Fluid milk consumption in China has increased dramatically over the past few years. Positive changes in milk consumption patterns are likely to continue as more Chinese buy their food from supermarkets (instead of the local fresh market) and store it in refrigerators.

The implications are far-reaching, from international trade opportunities to mitigation of some potential food safety issues. It is also clear that China is trying to meet its own demand by quickly building a dairy industry.

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Yet it is running into challenges because it does not have the inputs and resources (think water, land, etc.,) to support the industry.

Demographics in China present opportunities for the industry. For example, wealthy households in China consume much less cheese than do those in Japan, Taiwan or Korea. From this perspective, cheese demand has a tremendous growth potential.

Couple this with the changing family in China. Typical today is a young couple with one child (due to the one-child policy put in place in 1978), as well as four grandparents who are extremely interested in what that child consumes.

The demand for a safe baby formula (whey product) is huge, as families pool together resources to pay a hefty price for baby formula for up to five years per child. These shifts in buying behaviors are opportunities for the global milk supply.

The impacts
As China continues to focus on its dairy industry, it is discovering the need for high-quality forages to produce more milk. Considering the high population of people in rural China with no access to a resource like the U.S. Corn Belt, Chinese farmers are quickly adapting and discovering input markets of higher value than they can produce.

For example, as you look at the larger dairy operations in China, you will find many large alfalfa hay bales that were shipped from California. Of course, we consider the impact on our hay prices and other commodities, but also an opportunity if we are willing to diversify our American operations.

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China’s dairy production was only about 1 million tons per year in 1980. During the following 15 years, output increased steadily by about 14 percent annually.

However, because China was starting from such a low base, total dairy production was only 6 to 7 million tons by the mid-1990s, a level that placed China about 20th in overall milk production internationally.

Milk production technology in China is extremely diverse, ranging from farmers in remote, mountainous villages with one or two dairy cows to state-of-the-art dairy operations with thousands of cows. New technologies and high-quality genetics are available, but it is unclear to what extent China’s small farmers are able or willing to adopt them.

Complicating matters further, China’s National Statistical Bureau does not collect information in many categories critical to understanding some of the most fundamental elements.

Since 1980, improved genetic material, feeding rations and milking and handling equipment have become available, partly as a result of several large and sustained government development aid efforts undertaken by the European Union, Canada, the World Bank and other international agencies.

Dairy processors play a strategic role in capturing scale economies through collective action. In some places, unique institutional structures have appeared to try to capture scale effects.

For example, in Inner Mongolia there are several processor-run milking stations where farmers can bring their cows and milk using the processor’s milking machine.

There are also companies investing in partnerships in China, such as China’s Bright Dairy & Food Co. partnering with New Zealand’s Synlait, or Arla Foods partnering with Yili of China. Synlait Milk will help establish the infant formula brand for Bright Dairy and secure a milk market in China.

The opportunity
Looking ahead, there are many reasons to believe the rapid growth in demand for dairy products in China will continue unabated. Incomes are forecast to continue to rise. If China is successful in modernizing, there will be hundreds of millions of new urban residents.

As China’s dairy processing industry matures, media attention, advertising and promotion of dairy products will accelerate. All of these factors will contribute to a growing number of households that integrate dairy products into their daily diets.

Now that the U.S. is playing on a global level, we have the opportunity to increase our dairy product diversity and offer China what its consumers are demanding. As we consider baby formula and cheese, where can we lead our U.S. market to deliver these high components and ingredients the world is asking for?

As you make decisions on your operation and integrate with your cooperative board, how can you use this consumer knowledge to influence supply chain and assure we capture these new markets?

Finally, let’s focus on dairy’s brand in the eyes of the consumer. We should learn and partner with the Chinese dairy industry to assure that we do not lose consumers due to fear of our dairy case, but instead gain them as we grow our brand.

As we continue to move into a global trade environment and leave our domestic-only market behind, our span of influence will broaden and thinking globally will become more and more important. A consumer in China will become just as important as our neighbor down the road.

Whether you are working on your communications plan, managing the volatility of your milk check or the costs of production or working with your cooperative board, remember that growing markets such as China have an impact on your business and will even more in the future.

Put yourself in China’s shoes: Where would you want to go shopping? PD

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Amanda Miller
Elanco Animal Health

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