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China holds trade growth opportunities for Australian dairy: Rabobank

From the July 2017 issue.

China holds trade growth opportunities for Australian dairy, but largely limited to higher-end products, says Rabobank Australia & New Zealand.

A pick-up in China’s appetite for dairy imports will create trade growth opportunities for Australia, albeit largely in higher-end products, according to Rabobank Shanghai-based senior dairy analyst Sandy Chen.

Sandy says after a two-year hiatus from the global dairy market, China’s appetite for dairy commodity imports is starting to revive, at a time when global supply across the export engine is returning to growth.

Long-term, Sandy anticipates that Chinese dairy demand will continue to expand, creating trade opportunities for Australia, however much of this will be limited to higher-quality and value-add dairy products.

Sandy says while Australia is in a good position to take up some of the medium-term trade growth opportunities into China, many challenges would remain and hinder access to the Chinese market.

“China remains a market and industry in transition with the country’s dairy consumption fluctuating significantly over the past 15 years, while local production is also still undergoing considerable structural change,” Sandy says.

He adds that while China’s per capita dairy consumption remained well below that of some of its east Asian neighbours, such as Japan, Korea and Taiwan, there were some dairy product categories exhibiting strong growth opportunities such as cheese, butter, yoghurt and “premium” white milk compared with a high protein content of 3.3 to 3.4 per cent.

Australia’s fresh pasteurised milk imports into China represents 5 per cent of China’s liquid milk imports, but it is facing intense competition from domestically-produced milk.

“To remain sustainable exporters supplying that market will to invest in a strong brand presence to warrant a premium retail price,” Sandy says.

However he says China’s import gap is set to widen over the medium term, with Rabobank forecasting China to have a 24 per cent gap between domestic supply and demand in 2020, up from 20 per cent in 2016.

Given China’s relatively slow consumption growth prospects, Sandy says much of the gap would be due to the constraints hindering expansion in local production such as land and water availability, high costs of production (particularly feed) and environmental regulations.

“The Chinese dairy sector has been undergoing significant structural change in recent years as smaller producers have been exiting the industry and there has been the emergence of mega farms,” Sandy says.

“The cost of production on a Chinese corporate farm (which typically has 8000 to 13000 cows) is just over US50c/litre, whereas in Australia it is around US30c/litre,” he says.

In the short-term, Sandy says China’s demand for dairy commodities is set to increase in the second half of 2017.

“China started 2017 with below-average inventories, and even with slow consumption growth, it will be looking for imports in coming months,” he says.

“However, with China buying commodities again in the short term, this will play an important role in keeping global markets in balance and support sustained higher commodity prices, which will help deliver a higher farmgate milk price in Australia in 2017/18.”

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