Monthly Dairy Market Update - May 30, 2024

China Sets Path to Self-Sufficiency

In 2019, China’s central government declared that 60% of infant formula could be supplied domestically. This was a courageous move for a nation that faced significant erosion in consumer confidence that began a decade earlier when melamine-tainted formula produced by a domestic manufacturer led to infant deaths and illnesses. Despite global skepticism, China has succeeded in shifting consumer demand toward domestically produced infant formula. The country’s imports of infant formula peaked in 2019 at approximately 345,000 metric tons (MT) and have dropped dramatically to 223,000 MT as of last year—a remarkable 35% decline. This marked a significant triumph for China’s dairy industry, showcasing its resilience and adaptability. 

China’s central government is once again highlighting its strategic vision. The country plans to continue advocating for daily dairy intake given that per capita dairy consumption in China still lags the global average. However, this year, there’s a new twist: China also plans to boost consumer intake of fresh dairy products and away from reconstituted milk. Drawing from its successful approach with infant formula, the Chinese government appears to be poised to leverage labeling to influence consumer choices. This innovative strategy could have a profound ripple effect on the global dairy industry.

USDA’s Foreign Agricultural Service (FAS) recently reported that China’s dairy cow herd stood at 6.5 million head at the end of last year. Over the past five years, the country has added 50,000 to 100,000 cows per year. These cows produced an estimated average of 13,900 lbs. each last year, which is about 58% of the average output for U.S. dairy cows. This output level has been more than enough to meet domestic demand. In fact, milk was in surplus last year, leading processors to produce 12% more whole milk powder (WMP) in 2023 compared to 2022. Instead of producing WMP for reconstitution and export, China could begin to meet fluid milk demand through domestic production rather than from imports and reconstituted products. This shift would be a practical way for China to balance supply and demand, and it would ensure that the nation’s dairy industry has room to grow.

CME Markets Turn Lower

MCT Forecast May 2024

After weeks of racing higher, CME spot markets started to contract in the final days of May. The April Cold Storage report, which showed butter stocks swelled 9% compared to last year, halted the butter market’s ascent, causing spot prices to reverse course and head back toward $3/lb. CME spot cheese markets remained elevated, but at levels less than recent highs. The blockbarrel price spread was inverted, with barrels 11.75 cents higher than blocks as of May 29. Nonfat dry milk markets, while higher than they were at the beginning of the month, were showing signs that they would idle for a few more weeks.

. . . surplus milk funneled to WMP

To put this in perspective, FAS estimated China’s domestic fluid consumption, both fresh and reconstituted, at 16.7 million metric tons (MMT) last year. Beijing Orient Agribusiness Consultant reported that fresh milk consumption was close to 2.8 MMT. That leaves a significant proportion of total milk consumption to eventually be filled through fresh milk channels. For China, growing its dairy industry would fall under food security policy. Moreover, the country’s ability to supply a substantial amount of its domestic needs internally rather than from imported products would make the country more independent in times of global strife. Milk was included in the central government’s No. 1 Document released in February. The document specifically noted that China would promote fresh milk consumption and label reconstituted milk products. This is a subtle shift but one that’s likely designed to influence consumer buying decisions in favor of fresh, domestically produced products.

Last year, China’s WMP imports fell 38% compared to 2022. Typically, a recovery year follows a year in which imports are down as a way to reset supply and demand, but the 2024 recovery could be meager if the central government has its way. For the first four months of this year, China’s dairy imports improved a paltry 1.9% compared with the same months last year. Through April, China’s milk and cream imports lagged last year’s pace by 10% after adjusting for leap day, with the most significant declines coming from Germany, Australia, and Poland. In a short time, the world’s most voracious customer of dairy products could look more like a competitor, which would require the rest of the global industry to pivot.

Ken Myers MCT Dairies President

Ken’s Corner

by Ken Meyers President, MCT Dairies Inc.

Last year, China’s population fell for the second consecutive year, as birth rates dropped and death rates climbed. According to the National Bureau of Statistics, at the end of 2023, 1.409 billion people called China home, 2.08 million fewer people or 0.15% less than in 2022. The decline was nearly 2.5 times larger than 2022’s 850,000, the first annual population decrease since 1961 during Great Famine.

While part of 2023’s decline was likely due to a spike in COVID deaths, the country’s population slowdown is systemic. Births in China have been declining for decades, the result of the one-child policy, which was in effect from 1980 to 2015, and rapid urbanization in which hordes of people moved from rural areas to cities, where having children is more expensive. New births last year fell 5.7% to 9.02 million on a record-low birth rate.

Regardless, China—with nearly 18% of the global population—is still the world’s second most populous country next to India, and it will continue to import large volumes of dairy products even as it becomes more self-sufficient in dairy. Still, it would be prudent for U.S. dairy exporters to court alternative fast-growing markets as exports to China likely continue to soften.

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