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U.S. faces challenges in China’s growing dairy, infant formula markets

Increased domestic production and competition from other countries limits U.S. opportunity.

China’s dairy and infant formula markets have grown substantially over the past decade and are expected to continue to expand. In fact, between 2016 and 2021, China’s dairy and milk formula markets are expected to grow by 10% and 25%, respectively.

While a deceleration of growth in China’s dairy market did occur in 2016, and economic growth is expected to remain relatively flat — the result of general economic slowdown in China — the country’s dairy market is projected to continue to grow. This provides a great opportunity for the U.S. dairy industry, but marketplace potential for the U.S. may be limited, a new report from the U.S. Department of Agriculture’s Economic Research Service (ERS) suggests.

In the report, ERS researchers Elizabeth Gooch, Roger Hoskin and Jonathan Law pointed out that China represents the primary source of demand growth in global dairy markets. Calculations using Euromonitor data show that China’s share of the world dairy market grew from less than 5% in 2002 to 12% in 2016, and by 2021, China’s share is expected to equal that of the U.S., at 14%.

The researchers also noted that China’s growth is partly responsible for driving down Western Europe’s share of the world dairy market to less than 25%.

China’s share of the milk formula market has grown even faster, from less than 15% in 2002 to more than 40% in 2016, the researchers added. In 2016, China’s dairy market was the world’s third largest, and its milk formula market was the largest. Continued growth in both are expected.

According to the researchers, China’s domestic dairy industry is in the midst of rapid modernization to meet that demand. The China Ministry of Agriculture’s National Dairy Industry Development Plan for 2016-20 projects that three-quarters of all dairy consumed in China will continue to be produced domestically; the remaining demand will be satisfied by imports.

This presents an opportunity for the U.S. dairy industry to capture that one-third share, but the researchers explained that this may be challenging because major dairy exporters New Zealand and Australia have free trade agreements that lower tariffs on their dairy products entering China. Additionally, they said the European Union’s removal of quotas on dairy production in 2015 increased global dairy supplies, and a larger portion of this surplus may be exported to China.

While the U.S. has a well-established trading relationship with China and the modernization of China’s dairy industry has encouraged U.S. exports of feedstuffs and other intermediate inputs, the researchers noted that U.S. dairy exports to China fell in total value and market share in 2015 and 2016.

This decline, they said, may be attributed to a combination of bureaucratic issues and a stagnant U.S.-China exchange rate, while rates for the euro and Australian dollar have declined.

Still, the researchers noted that a June 2017 memorandum of understanding between the U.S. and China facilitates the registration of U.S. dairy facilities as eligible to export to China, which could lead to an increase in trade.

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