China flexes muscle in global dairy

China flexes muscle in global dairy

Chinese economy increasingly influencing the global dairy trade, say economists at Rabobank.

IT'S not news that China is a major force in the agricultural marketplace, but a pair of reports from Rabobank's Food & Agribusiness Research & Advisory Team underscored just how much of an influence the Chinese economy is having on global dairy trade.

Last week, the bank said China is buying huge quantities of dairy products on the international market and squeezing out other buyers in the process. A domestic supply crisis has kept China on the buying side of the export market, underpinning global dairy prices in the third quarter.

"The easing of international dairy prices from their record peak in April lasted barely eight weeks," Rabobank analyst Tim Hunt said. "Forward pricing on the GDT Price Index suggests we are in a period of high pricing that is unprecedented in terms of level and duration."

By mid-September, prices for most dairy products delivered to Asia were higher than they were at the beginning of the quarter, with milk powder and butter prices 10-15% off record highs and cheese prices off just 3% (Figure).

China is already the world's largest dairy importer, and its domestic supplies remain extremely tight. The country imported 27% more product in the second quarter than it had in the 12 months prior, and Hunt said reports from within the country suggest a 6% contraction in the domestic supply.

"Most likely, the prospect of any significant softening in world prices will be delayed, possibly until the second quarter of 2014," he concluded.

U.S. milk production returned to meaningful year-over-year growth in May, with all-milk prices in August up 6% from year-ago levels. Higher prices encouraged increased production in regions where producers grow a larger share of their own feed needs, particularly in the Midwest.

The European Union and New Zealand are also seeing expanded production compared with last year as prices have improved (Table). How China behaves in the market over the next month will largely dictate pricing, which will, in turn, play a role in the pace of expansion moving forward.

At home, the domestic U.S. market saw some encouraging signs in the second quarter. Hunt noted that domestic sales volumes returned to growth, with an improving employment outlook buoying consumer sentiment.

Cheese disappearance rose 3.3% in the second quarter, and retail yogurt sales were up 5% in July. Exports surged, meanwhile, with shipments up 21% during the quarter on a year-over-year equivalent basis.

In its monthly "Cold Storage" report, the U.S. Department of Agriculture put stocks of natural cheese as of Aug. 31 down 4% from the previous month but still 5% larger than the same period in 2012. Butter stocks were down 9% for the month but up 34% from year-ago levels.

Domestic fluid milk sales, meanwhile, remain a disappointment, with sales off 2% during the second quarter. Rabobank expects the domestic milk supply to grow 2% in the second half versus year ago, based on vastly improved production margins as feed costs have moderated considerably over the past few months.

Exports will remain critical to the U.S. market, however, with supply growth expected to continue to outstrip domestic needs.

 

Top five

While the biggest players in the global dairy sector consolidated their hold on the marketplace, Chinese firms have continued to grow and at least one U.S. heavyweight lost ground in Rabobank's annual ranking of the world's 20 largest dairy companies.

In its report, released earlier this month, the bank found that the top five companies, including Nestlé and Danone, continued to drive consolidation and further entrenched themselves at the top of the heap. Kraft Foods, meanwhile, slipped out of the top 10, falling from ninth to 16th on the list.

"The top five companies remain unchanged in their position on the list, yet there are now two Chinese companies that rank among the largest 15, whereas there were none in the top 20 until 2008," Hunt explained. "In contrast, the lack of a U.S.-based global consolidator means that the rankings of U.S. companies have declined."

Nestlé, the largest company on the list, saw 23% revenue growth in dairy sales last year. It acquired Pfizer's infant nutrition business last year and also expanded sales of its other dairy products as well.

Dairy Farmers of America was the largest U.S. company on the list, clocking in at sixth place; its dairy turnover was estimated to be half of Nestlé's, at $12.1 billion. Dean Foods fell a spot to eighth, with Kraft and Schreiber Foods being the only other U.S. companies on the list.

"With the rapid growth of the Chinese giants Yili and Mengniu (numbers 12 and 15, respectively), it is quite possible that the U.S. dairy giants will be pushed further down the list in coming years, with the global landscape largely being shaped by others, at present," Hunt said. "Size should not be a goal in itself, and U.S. companies can participate in growth offshore by developing their export business."

However, with much of the sector's growth in the coming years expected to happen on foreign shores, U.S. firms will need to closely evaluate their efforts and alliances abroad to secure a reasonable share of the growth and value that are likely to develop.

China flexes muscle in global dairy

Milk production growth in key export regions, May-July 2013

 

-Year-over-year, % change-

 

July

May-July

European Union

2.0

0.3

U.S.

2.6

1.8

New Zealand*

7.0

4.5

Australia

-3.5

-5.8

Argentina

-0.3

-1.7

Brazil

3.8

2.1

Total*

1.6

0.2

*Rabobank estimates.

Note: New Zealand and U.S. are August and three months to August.

Source: Rabobank.

 

Volume:18 Issue:40

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