Domestic milk market faces gap in supply

An employee stocks dairy products at a supermarket in Beijing.[Photo/China Daily]

The widening gap between milk demand and supply will lead to a shortage totaling about 15 to 20 percent of China's market value in 2017, or 66 billion yuan ($10.75 billion), a report has said.

Driven by increasing consumption and deeper distribution networks stemming from the country's urbanization drive, China's milk market volume will grow at an 8.2 percent compound annual growth rate, or CAGR, between 2012 and 2017, compared with the 1.2 percent CAGR estimated for the domestic milk supply during the same period, according to a report released on Wednesday by United Kingdom-based research firm Mintel Group Ltd.

China's dairy consumption has been rising steadily over the past 20 years, but its domestic production capacity has been unable to keep up with the growth in demand for an increasing range of dairy products such as liquid and powdered milk, ice cream and cheese.

Per capita milk consumption in China has grown from 16 liters in 2007 to 24 liters in 2012, a 50 percent increase, said the report.

"There are simply not enough farms to support China's growing appetite for dairy products. With milk supply increasing at 1.2 percent annually between 2007 and 2012 as the cow population increased by 4.3 percent over the same period, milk production per cow is falling," said David Huang, senior research manager at Mintel.

He added that the rising demand versus the insufficient supply may push up dairy prices.

But the demand-supply imbalance may also provide huge business opportunities for milk producers, according to Xu Ruyi, a deputy research manager at Mintel.

Xu estimated that the gap may widen without new acquisition deals, which could bring business opportunities for milk producers at home and abroad.

Quite a few domestic dairy farms are speeding up the pace of their overseas M&A deals to tap into the country's huge demand.

After spending nearly two years convincing authorities that a deal would benefit the local economy, the privately owned Shanghai Pengxin Group Co Ltd completed the acquisition of 16 dairy farms in New Zealand in 2012.

Similarly, China's second-largest food manufacturer, Bright Food Co, is reportedly discussing an acquisition deal with Israel's largest food producer, Tnuva Food Industries Ltd. If completed, the deal is expected to be the largest purchase of an Israeli firm by a Chinese buyer.

China's milk industry is suffering due to its fragmented and underdeveloped supply chain, said Xu at Mintel.

Xu expects to see an industrial integration process especially with policy stimulation and the support of the country's industrial giants.

According to Xu, the strong demand growth makes China an attractive market for international players. And with increasing competition, driving consumption and building brand trust will become key challenges for players in the market.

"The participation of international players will not only make up for the supply gap but will also help domestic companies to acquire state-of-the-art technology and resources," Huang said.