Report Highlights:
In 2022, China’s raw milk production is forecast to reach 36.7 million metric tons, a 3 percent increase, as producers make operational investments that should return more milk, per cow milk production improves, and additional facilities come online. Whole milk powder beginning stocks and domestic production in 2022 will weigh on imports, which are forecast to decline 6 percent to 850 thousand metric tons. Imports of skim milk powder, cheese and butter are projected to grow to meet rising demand from the bakery sector, use in processed products, and retail consumers. In 2022, whey and whey related imports are forecast lower as infant birth rates decline and animal feed sector demand weakens on lower livestock/meat prices. FAS China proposed revisions to Post’s cheese data series are included in this report.
Fluid milk
In 2022, China’s raw milk production is forecast to reach 36.7 million metric tons (MMT), a 3 percent increase, as per cow milk production improves, additional dairy facilities come online and as the dairy herd expands. Milk imports in 2022 are forecast to grow by 7 percent to 1.5 MMT driven by demand for ultra-high temperature (UHT) milk, which dominates the imported fluid milk market.
Whole Milk Powder
Whole milk powder (WMP) production in 2022 is forecast to increase gradually to 970 thousand metric tons (KMT) as raw milk production rises while higher input costs weigh down faster growth. In 2022, WMP imports are projected to decline 6 percent to 850 KMT as high beginning stocks and greater domestic WMP production limit continued import growth. While WMP imports are expected to decline slightly in 2022, imports are forecast at historically high levels as demand for bakery and processed products exceeds growth in domestic production.
Skim Milk Powder
In 2022, China’s skim milk powder (SMP) imports are forecast to rise 8 percent to 520 KMT. Demand from the bakery sector and low-fat food products is anticipated to support import growth. SMP domestic production is forecast to increase to 24 KMT, due to increases in cheese production. In China, SMP is a byproduct of cheese production. Domestic SMP accounts for a small percentage of overall SMP used in China
Cheese
FAS China revised its data series for China’s cheese production to account for the use of imported cheese as an ingredient in domestic cheese manufacturing. Imports of natural and processed cheese are forecast to climb to 220 KMT as demand for cheese in the hotel, restaurant, and institutional (HRI) service sector and as an ingredient in bakery products grows. Domestic cheese production is forecast to reach 19 KMT.
Butter
As the bakery sector expands, so has demand for high quality bakery ingredients such as butter. In 2022, China’s butter imports are projected to reach 170 KMT as bakery, food services and at-home baking bolster consumption. China’s domestic production is forecast to reach 12 KMT, due to larger quantities of raw milk, but butter production is constrained by limited production capacity and expertise.
Whey In 2022, imports of whey and whey related products are expected to slow compared to 2021. Whey and whey related products are used as ingredients for infant formula products and animal feed. In 2022, declining birth rates and low hog prices are forecast to weigh on imports.
PRODUCTION
In 2022, raw milk production is forecast to reach 36.7 MMT Currently, China’s average fresh milk price is at a 20-year historical high (see CHART 1). Consumer’s growing demand for milk products has kept domestic prices strong. Producers have responded to high
milk prices by constructing new dairy farms with modern equipment, larger dairy herds, and in areas with centralized milk processing such as in the north part of China.
Provinces in north China now hold more than 60 percent of China’s total dairy inventory. Multiple factors have supported the expansion of dairy facilities and farms in north China including financial support for producers through provincial subsidy programs, ease of access to land for animal husbandry, a favorable climate for dairy production, and the production of forage products used for dairy feed.
In 2021, China’s imports of live cattle (predominantly for dairy production) and frozen bovine semen exceed 2020 imports, a strong indicator of continued investments in China’s future milk production and cow productivity. China’s domestic breeding programs for dairy and other livestock production are not able to meet the demands of large scale and highly sophisticated producers. The Ministry of Agriculture and Rural Affairs (MARA) announced in April 2021 a 15-year-plan to improve domestic dairy genetics and to develop a complete breeding program
According to MARA, China’s Holstein cattle inventory (a breed primarily used for dairy production) reached over 5 million head and the average milk production per Holstein cow reached a historic high of 8.3 MT in 2020. In the first quarter of 2021, an industry survey across a sample of 1,000 dairy farms showed a 2 percent year-on-year increase in daily milk production per cow.
However, China’s dairy industry faces several challenges in the near future. For example, per cow efficiency rates may be constrained due to limited access to water resources and land to grow forage products, increased input costs from high quality imported feed, and diminishing access to live cattle imports. On the other hand, the expansion in China’s dairy production may lower milk prices as production exceeds demand.
CONSUMPTION
Consumption to rise to 38.1 MMT on increased demand for milk and dairy products Milk consumption is increasing across multiple age groups in China. Government messaging following the COVID-19 pandemic emphasized the health benefits of consuming dairy products, including for older adults. Younger generations born in the 1990’s and 2000’s, as compared to their parents, are already more likely to consume dairy products as part of their normal diet. Television advertising by famous athletes, including during the 2021 Tokyo Olympics, also promotes the use of dairy products as an important source of protein, calcium, and as an aid for supporting muscle growth. Finally, school feeding programs are increasingly utilizing pasteurized milk products in addition to UHT milk. These factors are expected to support continued dairy consumption growth in China.
Domestic raw milk can be processed into fluid milk products such as UHT milk, pasteurized milk, extended shelf-life milk, and yogurt products. In China, UHT milk dominates fluid milk consumption due to a longer shelf life and the convenience of storing the product at room temperature prior to opening. The production and consumption of milk are concentrated in different parts of China making the expansion of low temperature and pasteurized milk products dependent on the continued development of cold chain logistics across a greater number of cities and rural areas.
In cities like Beijing, Shanghai, Guangzhou, and Shenzhen, where cold chain logistics are well developed, consumption of low temperature milk including pasteurized and extended shelf-life is gaining popularity. Industry sources indicate that greater milk consumption has negatively affected the market share of yogurt products. However, high-end yogurt products with added nutritional benefits or fewer additives prolonging shelf life have not been impacted.
Off-line supermarkets are an important consumption channel in China. Consumers, however, are increasingly purchasing milk products at convenience stores and through e-commerce platforms. In response, industry sources indicate that more and more dairy companies are developing e-commerce platforms to target consumer purchasing.
TRADE
Imports are forecast to grow 7 percent to 1.5 MMT driven by demand for UHT milk China’s imports of fluid milk have seen continued growth since 2018. China’s milk imports and milk consumption are dominated by pre-packed UHT milk. Imported UHT milk, which is considered a safe, high quality and a reliable product by Chinese consumers, is also competitively priced compared to domestically produced UHT milk.
In 2021, Germany and New Zealand supplied more than half of all fluid milk imports to China. In 2022, imports of fluid milk will grow but at a slower rate than past years. Poland’s market share is forecast to increase in 2022. Poland has invested in promoting dairy products and building a positive image targeted for the China market. This investment, competitively priced products, and an extended market presence has led to more long-term contracts with Chinese importers.
Other market opportunities for imported products exist within the e-commerce marketplace. As more consumer purchases move online importers should consider utilizing these platforms to build awareness and brand recognition WMP production forecast to rise to 970 KMT based on increased raw milk production
In 2022, WMP production is forecast to rise marginally over estimated 2021 production on increased raw milk availability and declining milk prices. However, WMP production will be constrained by other input costs, such as energy prices, and competitively priced imports. In China, WMP is typically produced during a period of surplus raw milk. Industry sources report that in June and July 2021, during a typically low raw milk production period, milk powder production increased. This could signal that those producers may have a seasonal oversupply of raw milk. Beginning stocks in 2022 are forecast higher as increased domestic WMP production is expected to be retained in ending stocks as producers utilize more competitively priced imports for processed products.
CONSUMPTION
WMP consumption forecast to reach 1.92 MMT driven by a booming bakery industry
WMP consumption is forecast to grow to 1.92 MMT supported by demand in the bakery sector. In 2022, declines in infant formula, reconstituted milk and milk drink products will be outweighed by demand from an expanding bakery sector. Bakery will drive overall WMP consumption higher.
A growing niche market for WMP includes adult and elderly supplemental and fortified milk drinks. These innovative milk drinks provide supplemental nutritional benefits and may be used as meal replacements.
In 2022, a declining infant birth rate and increasing preference for UHT, pasteurized milk and other lowtemperature milk products is expected to lower demand for infant formula, reconstituted milk and milk drink products. However, even as usage of WMP for these products declines, these products will continue to be an important component of overall WMP consumption in China.
TRADE
Imports forecast at 850 KMT on increased domestic WMP supplies Imports of WMP are forecast to decline in 2022 from FAS China’s revised estimate for 2021 imports as growth in WMP production and larger beginning stocks in 2022 lowered demand for imports. Still, however, consumption remains strong. In 2021, WMP imports are estimated at 900 KMT due to competitive prices, high quality and desired characteristics, and strong demand from the bakery and processed product sectors. In 2022, New Zealand is expected to remain the dominant supplier of WMP to China. In 2021, New Zealand supplied over 90 percent of total WMP imports to China.
PRODUCTION
SMP forecast to reach 24 KMT on increased cheese production China produces a limited amount of SMP. Most of the SMP used in China is imported. Domestic SMP is mainly a byproduct of cheese and butter production. In 2022, forecast growth in domestic cheese production will be the primary driver of increased SMP production. A declining raw milk price may contribute to some additional SMP production, though such declines are not expected to make domestic SMP competitive to imported SMP. FAS China does not have any revisions to 2020 or 2021 estimates.
CONSUMPTION
SMP consumption forecast to reach 543 KMT on demand from bakery and low-fat products Industry sources report that SMP and WMP can be interchangeable ingredients in some processed products, so long as the costs of SMP plus fat content remain lower than the cost of WMP. In 2022, raw milk prices are forecast to decline slightly lowering the cost of domestically produced SMP. Imported SMP accounts for over 95 percent of all SMP usage in China. For this reason, imported SMP will be the dominant ingredient for processed products such as reconstituted low-fat drinks and low-fat bakery products. In 2022, demand for these products with SMP as an ingredient is forecast to continue to grow in China’s first and second tier cities.
TRADE
Demand for SMP will boost imports by 8 percent to 520 KMT In 2022, demand for SMP will boost imports benefiting established sales channels for the top three suppliers New Zealand, Australia and the United States. Imports from Australia may face issues depending on the political relationship between the two countries. Imports from the European Union, as a whole, will similarly benefit from increased demand for SMP.
PRODUCTION
Cheese production forecast to grow to 19 KMT 1 on food service and retail demand China’s cheese production is concentrated in a limited number of specialized large dairy processors. The majority of China’s cheese production is processed cheese, which uses imported natural cheese as an ingredient. Natural cheese production in China is often produced within a province for local consumption. Historically, natural cheese consumption was not common and limited to milk producing areas. Consequently, in China, the technology and facilities for cheese production are underdeveloped. Additional expertise in cheese production will be needed to expand this niche sector. In 2022, growth in cheese production will come both from cheese produced from domestic raw milk and imported cheeses used as an ingredient for domestic manufacturing.
CONSUMPTION
Cheese consumption forecast to reach 239 KMT as consumer tastes change. The average per capita consumption of cheese products in China is approximately 0.2 kg, far lower than that of traditional cheese consuming countries such as the United States (above 17 kg) and the EU (above 18 kg). Food service and the bakery sector have adapted to changing consumer preferences by introducing new and innovative cheese products. Chinese consumers are also choosing cheese-based products for children as ready-to-eat, convenient and nutritious snacks.
TRADE
Imports forecast to grow over 20 percent to 220 KMT on strong consumer demand In 2022, imports of cheese products are forecast to reach 220 KMT as consumer demand drives growth. New Zealand is projected to remain the top supplier of cheese products to China. New Zealand supplies more than half of the imported cheese products with well-developed brands, a dominant market share, and preferential tariff rates under a free trade agreement with China.
In 2021, the United States has seen growth in exports of fresh cheese, cheddar cheese and other processed cheeses, as an increasing number of products compete on quality and price with other cheese supplying countries. However, China maintains Section 301 retaliatory tariffs on U.S. dairy products, including cheese. Importers may apply for tariff exclusions, which are approved on a case-by-case basis. These exclusions do not automatically extend to all importers. For more information see Appendix section below.
In 2022, cold chain products could face disruption challenges within China. At the end of July 2021, local and provincial governments reacted to new COVID-19 outbreaks by implementing heightened inspections and/or testing for imported food, cold-chain products, port workers and truck drivers.
For dairy products requiring cold storage and temperature control, such as cheese and butter, importers should be aware of China’s COVID-19 testing and disinfection measures. These measures will require importers, ports and clearing officials to adapt. However, adjustments to changes will likely cause added costs and delays for imported products
PRODUCTION
Butter projected to increase to 12 KMT as demand grows, but constrained by capacity. In 2022, limited production capacity and domestic raw milk prices will moderate butter production.
Only a few large dairy processors, mostly in Inner Mongolia and eilongjiang provinces, are able to produce butter products for national distribution. Butter production typically occurs during the wintertime when the fat content in milk is higher. In 2022, the raw milk price is projected to decline due to an abundant supply of raw milk. However, the cost of domestically produced butter will remain above that of imported butter products.
CONSUMPTION
Butter consumption projected to grow to 180 KMT on bakery demand Consumer research indicates generally that butter and butter products consumers include those of a younger generation, those who are female, and those with middle class incomes. Greater disposable incomes will allow these consumers to purchase more products containing butter as an ingredient, such as bakery goods and food service products. Additionally, the bakery sector is incorporating butter into Chinese style innovative products as well as western style bakery goods to improve flavor.
TRADE
Butter impots forecast to reach 170 KMT as domestic producers mainly rely on imports. In 2022, butter imports are forecast to reach 170 KMT to meet domestic demand. New Zealand dominates China’s imported butter market with nearly 80 percent of the market share. Butter imports from the United States are forecast to see growth in 2022, based on a strong performance in 2021. In the first 8 months of 2021, butter imports from the United States grew 56 percent year-over-year.
Whey and whey related products (HS040410, HS350220) are used as both feed additives and food additives. In 2021, imports of whey and modified whey products (HS040410) saw substantial annual growth of more than 30 percent, while HS350220 declined by 6 percent. Some industry contacts note that whey and whey products are used as an ingredient for infant formula and animal feed. The projected decline in China’s birth rate may slow the growth of whey imports. Furthermore, and possibly more importantly, declining hog prices in China will likely put additional pressure on hog feed prices that could result in less use of whey and whey products as a hog feed ingredient.
In 2022, the United States is forecast to remain the dominant supplier of products under HS040410 with more competitive prices than the EU. Importers of U.S. whey and whey related products are eligible for tariff exclusions under the Section 301 exclusion process (see Appendix section for more information).
Section 301 Retaliatory Tariffs
China maintains Section 301 retaliatory tariffs on most U.S. dairy products. On September 16, 2021 China extended tariff exclusions on whey for feed use (HS04041000, protein content by weight 2-7 percent and lactose content of 76-88 percent) through April 26, 2022 (See GAIN Report CH2021-0112).
On February 18, 2020, the State Council Tariff Commission (SCTC) announced a tariff exclusion process for U.S. agricultural commodities impacted by Section 301 retaliatory tariffs levied by China.
Importers may apply for tariff exclusions which are approved on a case-by-case basis. These exclusions
do not automatically extend to all importers. Please refer to GAIN Report CH2020-0106 for more information on the exclusion process.