Highlights

Fluid milk imports into China will continue to grow in 2017 due to the diminished size of China's dairy herd and continued low milk prices in the European Union (EU) and New Zealand. Post forecasts 2017 fluid milk imports at 900,000 metric tons—a 38 percent increase over 2016. Despite the high favorability ratings of U.S.-origin food products among Chinese consumers, U.S. dairy imports are still hindered by China's recent registration requirements.

Fluid milk PS&D table

Dairy, Milk, Fluid

Market Begin Year

China

2015

2016

2017

Jan 2017

USDA

Official

New

Post

USDA

Official

New

Post

USDA

Official

New

Post

Cows In Milk*

8400

8400

8500

8000

-

7000

Cows Milk Production

37550

37550

38000

35700

-

35000

Other Milk Production

1500

1500

1450

1600

-

1500

Total Production

39050

39050

39450

37300

-

36500

Other Imports

460

460

650

650

-

900

Total Imports

460

460

650

650

-

900

Total Supply

39510

39510

40100

37950

-

37400

Other Exports

25

25

25

20

-

20

Total Exports

25

25

25

20

-

20

Fluid Use Dom.

15360

15360

15570

14600

-

15380

Factory Use Consum.

24125

24125

24505

23330

-

22000

Feed Use Dom. Consum.

0

0

0

0

-

0

Total Dom.

39485

39485

40075

37930

-

37380

Total Distribution

39510

39510

40100

37950

-

37400

Production

Milk production will remain flat in 2017

Post forecasts China's 2017 milk production at 35 million tons, basically unchanged from 2016's production figures, due to low-priced imports, stable domestic consumption patterns, and whole milk powder (WMP) substitution. Post also adjusted 2016's production estimate down to 35.7 million tons, a 5 percent decrease from 2015. Low domestic and international milk prices were the cause for this

Low prices continue to depress Chinese production. Over half of China's dairy farms operated at a loss in 2016. It is estimated that 60 to 70 percent of fluid milk production in China comes from large scale dairy farms, while middle to small dairy farms occupy the remaining 30 to 40 percent. In 2016, many small dairy farms closed up shop and several large dairy operations culled their herds. Post estimates that China's entire dairy cattle herd was reduced by 10 percent in 2016. In further efforts to slow production, many Chinese dairy farms altered their feed frequency and/or formulation.

As a result of the herd reduction in 2016, Post forecasts that the herd size will not fully recover in 2017, causing fluid milk production to remain flat or possibly decrease slightly to 35 million tons. If the milk price recovers sufficiently in 2017, the production numbers may be raised slightly, but stagnant demand for domestically produced fluid milk will likely forestall a significant increase in production. Not only is domestic demand flat, but international prices are expected to remain low, especially in the European Union and New Zealand which together occupy 97 percent of Chinese fluid milk imports.

A further constraint on increased production is the widespread use of reconstituted whole milk powder (WMP). China is one of the only countries that reconstitutes WMP back into fluid milk for retail sale. As long as the imported WMP price is significantly cheaper than the domestic fluid milk price, dairy processors will continue to use WMP to produce milk and other dairy products, further curbing demand for increased fluid milk production.

Consumption

Fluid milk consumption demand will be stagnant, with a 1 or 2-percent increase at most.

As China's economic slowdown continues, Post forecasts milk consumption will remain flat, with a possible increase of 1 or 2 percent, driven by continued population growth and urbanization. Chinese consumers' milk consumption is still very low by international standards—about 33kg per capita, or less than one third of the world average. Milk consumption has plenty of growth potential but food safety concerns drag on increased consumer demand.

To analyze the fluid milk consumption in China, both imported fluid milk and reconstituted WMP must be considered. Chinese consumers generally prefer imported milk over domestic milk due to perceived differences in safety and quality. In addition, dairy processors prefer the higher profit margins associated with imported milk and higher-end products. The cheap plastic bag milk which only costs about USD 0.15 per bag have been abandoned by most dairy processors in favor of high-end products. As a result, these high-end products are dominating the market and alienating price-driven consumers, especially in rural areas, forcing them to substitute cheaper protein sources like soy products.

Trade

Flow of imported fluid milk will continue to increase in 2017

Post forecasts 2017 fluid milk imports will increase to 900,000 tons, about 38 percent higher than 2016. Although the EU and New Zealand started to curb their production, thus increasing the costs of imported milk, the rise in imported milk prices is expected to happen slowly. Because the imported Ultra High Temperature (UHT) milk price is currently lower than the domestic fresh milk price and Chinese consumers are still wary from past food safety scandals, Chinese consumers continue to prefer imported fluid milk. In addition, imported UHT products are shelf-stable, making then a convenient beverage for young, urban consumers.

Both the EU and New Zealand continue to expand their market share in China, aided by significant Chinese overseas investment in dairy herds and dairy processing facilities. Like many facilities acquired by Chinese investors, the majority of production is exported back to China.

The EU will continue to be the largest single exporter to China in 2017 as a result of the continued Russian ban on EU dairy imports. The overall production from the EU may be reduced slightly in 2017, but government stocks still need to be released back into the market. Accordingly, Post forecasts exports from the EU to China will remain stable. New Zealand remains a popular source for Chinese investment. The lower price and recognized safety factor will continue to attract Chinese investors to invest in New Zealand's dairy industry.

The United States remains a minor player in the Chinese fluid milk market, with less than one percent of market share. U.S. imports are constrained in part by new food safety regulations that stifle U.S. exports to China. The main culprit is China's new registration regulation requirements which can keep new exporters out of the market for years while awaiting regulatory approval. Once this regulatory bottleneck has been resolved, U.S. imports of fluid milk are expected to increase, due to overall good perceptions about the high quality and safety of U.S. food products in China.

Import Policy

U.S. producers who want to export to China must comply with Decree 145, administered by China's Certification and Accreditation Administration (CNCA). Since the implementation of Decree 145 in 2014, many U.S. companies have noted delays in getting their dairy plants and products registered.

Dairy, Dry Whole Milk

2015

2016

2017

Market Begin Year

Jan 2015

Jan 2016

Jan 2017

China

USDA

Official

New

Post

USDA

Official

New

Post

USDA

Official

New

Post

Beginning Stocks

300

300

145

350

0

150

Production

1300

1617

1375

1375

0

1400

Other Imports

347

347

375

400

0

460

Total Imports

347

347

375

400

0

460

Total Supply

1947

2264

1895

2125

0

2010

Other Exports

4

4

2

2

0

0

Total Exports

4

4

2

2

0

0

Human Dom. Consumption

1798

1910

1843

1973

0

2010

Other Use, Losses

0

0

0

0

0

0

Total Dom. Consumption

1798

1910

1843

1973

0

2010

Total Use

1802

1914

1845

1975

0

2010

Ending Stocks

145

350

50

150

0

0

Total Distribution

1947

2264

1895

2125

0

2010

Production

Production of WMP will be stable in 2017 at about 1.4 million tons. Post forecasts the milk price in China will start to recover in 2017, but the rate of recovery will be slow. In the first half of 2016, almost every dairy company in China was converting fluid milk into WMP to deal with the production surplus and low milk prices. In 2017, the WMP production will be back to normal. The WMP production in China is also affected by imports. Although WMP utilization will likely increase in 2017, such an increase will largely be filled by imports versus domestic production.

Currently, imported WMP is two-thirds the price of domestic WMP, with double the shelf life. The imported WMP cost advantage may narrow in 2017, but is expected to continue asserting a chilling effect on domestic production.

Consumption

Consumption continues to increase in 2017

Post forecasts 2017 consumption of WMP at 2.01 million tons, a two percent increase over 2016. Although utilization of WMP for milk beverages and reconstituted milk is expected to decrease in 2017, due to lack of innovative milk beverage products and lack of consumer awareness of reconstituted milk, WMP usage in yogurt and bakery products is expected to rise. Overall, the growth in these two categories will surpass the reduction on the milk beverage and reconstituted milk usage. In addition, infant formula usage is expected to decrease slightly in 2017, with large Chinese companies heading overseas to establish infant formula plants and then exporting product back to China.

Trade

Imports continues to increase in 2017

Post forecasts WMP imports at 460,000 tons in 2017, about 15 percent higher than in 2016. New Zealand continues to dominate the WMP import market with over 90 percent market share. Chinese dairy facilities produced a significant amount of WMP in the first six months of 2016 that needs to be consumed by the first quarter of next year, based on the shelf life. However, any increases in demand for WMP will be met primarily through imports, due to lower prices, longer shelf life (imported WMP can be stored for up to two years, instead of one for domestically produced WMP), and rigorous food safety standards. However, this price differential is expected to decrease as New Zealand slowly reduces its milk production in 2017.

In addition, another important factor contributing to increased WMP imports is the continuing Chinese investment in overseas dairy facilities, mainly in Australia and New Zealand. These newly acquired facilities send the majority of their production back to China, further cementing their market position in China.

Exports

China exports a negligible amount of WMP. Post forecasts that exports will remain at 2,000 MT in 2017, with most exports heading to Hong Kong, North Korea, and Myanmar.

Nonfat Dry Milk (also referred to as Skim Milk Powder) PS&D table

Dairy, Milk, Nonfat Dry

2015

2016

2017

Market Begin Year

China

Jan 2015

Jan 2016

Jan 2017

USDA

Official

New

Post

USDA

Official

New

Post

USDA

Official

New

Post

Beginning Stocks

0

0

0

0

-

0

Production

45

45

40

40

-

40

Other Imports

200

200

210

180

-

180

Total Imports

200

200

210

180

-

180

Total Supply

245

245

250

220

-

220

Other Exports

1

1

0

0

-

0

Total Exports

1

1

0

0

-

0

Human Dom.

244

244

250

220

-

220

Other Use, Losses

0

0

0

0

-

0

Total Dom. Consumption

244

244

250

220

-

220

Total Use

245

245

250

220

-

220

Ending Stocks

0

0

0

0

-

0

Total Distribution

245

245

250

220

-

220

Production

Production of nonfat dry milk (also referred to as Skim Milk Powder, or SMP) forecast to be flat in 2017

Post forecasts the production of SMP to be steady in 2017 at 40,000 MT. Unlike WMP, China has more limited production of SMP, the majority of which is consumed domestically by dairy processors and is not for outside sales. Despite the continuing increase in demand for infant formula, new Chinese policies effectively constrain major domestic production increases.

Consumption

Post forecasts 2017 consumption at 220,000 tons, unchanged from 2016. SMP is mainly used in infant formula and milk beverage drinks. Milk beverage consumption has been decreasing due to lack of new and innovative products.

Trade

Post forecasts 2017 imports at 180,000 tons, the same as 2016. As a result of China's limited SMP production, China relies on imports to meet demand in the food processing and infant formula sectors. The majority of imports are sourced from New Zealand and the EU.

Policy

On June 6, 2016, the China Food and Drug Administration (CFDA) announced the Administrative Measures for the Registration of Recipes for Formula Powder Products for Infants and Young Children (CFDA Decree 26). While announcement stated that the new rules would become effective on October 1, 2016, CFDA has indicated that it is still in process of rolling out the new regulations and has moved the effective date to January 1, 2018. The measures provide requirements and procedures for registration of infant formula recipes, and elaborate on the requirements for labeling and product descriptions.