Despite a slowdown, the Chinese economy continues to perform well. Retail sales growth for the early part of 2019 was 7.9% – high relative to Europe and the US, but the slowest growth in China in 16 years. Some economists are blaming the trade war with the US for the slowdown in the Chinese economy.

On the ground, there is not much sign of a slowdown. Shanghai is the largest city in China and while not the capital of China, it is the business capital of Asia.

With a population of over 27m people it is one of the three “tier one” cities in China. Government policy has been to move people from the poor and underdeveloped rural areas to the cities where there are more work opportunities and a better quality of life. There are 130 cities with more than one million people living in them in China.

From a food and farming perspective, this has had two major consequences: firstly, the demand for food has increased as more people live in cities. Secondly, as income levels increase, people spend more money on food.

According to James O’Donnell of Bord Bia, it is not so much a westernisation of Chinese diets, but more a case of the Chinese eating more milk and dairy which up to now constituted a small part of their diet.

That said, eating baked goods such as croissants and pastries is increasing in popularity, especially among the wealthy and trendy in large cities, which is also helping to increase demand for dairy.

Domestic dairy production hasn’t changed much since 2008, but demand for dairy has soared.

Nearly all of the extra dairy being consumed has been imported. In January 2019, China imported almost 250,000t of milk powder with 60,000t to 70,000t imported in February and March, respectively.

The milk powder imported in January 2019, is more than all of the milk powder imported during the years 2009 and 2010. This just shows how much the Chinese market for dairy has grown. A staggering 71% of the milk powder imported into China comes from New Zealand and on a liquid milk basis, 50% of New Zealand’s milk goes to China. New Zealand has invested heavily in the Chinese market.

The Chinese haven’t been shy about spending money in New Zealand either. Oceania, a subsidiary of Yili – the largest milk processor in China – is spending €371m building a new milk drying plant in Canterbury.

Yili are also in the process of trying to buy the financially challenged Westland Co-op. Chinese investors also own a 39% stake in Synlait which has a 4% share of the NZ milk pool. The smaller Yashili milk processor is also 100% Chinese-owned.

If the sale of Westland goes ahead, the Chinese will control about 7% of milk processing in New Zealand. It also owns a 50% stake in Silver Fern Farms, New Zealand’s largest meat processor.

And then we have Fonterra. The largest dairy exporter in the world says 11% of all dairy consumed in China comes from Fonterra farms.

The company has 1,500 employees in China, including those running their farms.

Fonterra has had an interesting relationship with China. It spent €460m investing in farms in China which have never made a profit, only losses.

The farms lost €12m last year, five years after starting up. It has also had to write off about €250m of its stake in Beingmate – the Chinese infant formula manufacturer. Its remaining investment in Beingmate is in doubt. In 2010, it wrote off €117m of its 43% stake in Sanlu.

That company was deemed responsible for the melamine food scare which resulted in the hospitalisation of 54,000 babies, the death of at least six babies, the execution of the two men found responsible and the life imprisonment of the former chairwoman of Sanlu.

On reading this, you might get the sense that China hasn’t been an easy place in which to do business. It’s not.

For Irish processors getting product to China poses higher costs, a higher risk and if higher value European markets are available then it’s down the priority list.

These companies are then selling their branded products in China while taking all the risks and getting all of the rewards

While it is true that Irish infant milk formula makes up 14% of the Chinese market, Irish processors are selling the milk powders used in these high-value products to multinationals such as Danone, Wyeth and Abbott.

These companies are then selling their branded products in China while taking all the risks and getting all of the rewards.

The only exception to this is Kerry, which went into partnership with Beingmate in 2014, but like Fonterra, that partnership has not gone as well as planned.

The strategy by the Irish processors of keeping China at arms’ length may have had its merits up to now, but now might also be a good time to reassess that strategy.

It is just over 10 years since China emerged on the global market as an importer of dairy products.

Over that time, it has grown to be the largest importer of dairy in the world. Yes, New Zealand may have captured most of that market, but the market continues to grow.

Bord Bia and the Department of Agriculture led a trade mission to China last week. While the main focus was on increased access for Irish beef, the minister led a contingent from Dairygold, Glanbia and Kerry Group to Inner Mongolia in China. There, they met management teams from Yili (which owns milk processing in New Zealand) and Mengniu.

The Glanbia stand at the SIAL trade fair in China.

Between them, they process 13.6bn litres of milk annually.

They already have strong links with other EU processors with Arla supplying raw materials for the Mengniu range of infant milk formula.

Cheese

Likely areas for future collaboration between the Irish processors and the Chinese are in cheese and specialised nutrition for the elderly. Cheese is a major growth area in China, but mostly in processed cheese aimed at children.

While the calorie content of this cheese may be higher than more natural cheese, retail analysts point to the fact that cheese is nutrient-dense, so while the calorie count might be high so too is the level of important nutrients for growing children.

This type of cheese is being heavily promoted in China and is aimed at school lunch boxes. Demand for mozzarella cheese is also growing in China.

Nutrition for the elderly is another growth area. Like in western societies, China has an aging population.

And while dairy ingredients are important for babies, they are increasingly seen as being important for the elderly in areas such as gut and bone health

Despite the removal of the one-child rule, Chinese birth rates continue to fall so the proportion of older to younger people increases.

And while dairy ingredients are important for babies, they are increasingly seen as being important for the elderly in areas such as gut and bone health.

These are emerging markets and Ireland has an opportunity to capture a significant share of that market.

On the whole, the Irish dairy farmer has not fully benefitted from supplying product to China up to now – the multinationals have.

Yes, it has shifted product and diversified product mix, but it has not added real premium value.

The Irish dairy industry now has an opportunity to build a market share in a high-value segment where that value goes back to the farmer.

Co-ops should view the mistakes made by others as lessons and learn from them.

The onus is on co-op management and Bord Bia to find value for dairy farmers in China

What we don’t want to see happening is Irish farmers paying for more processing capacity (either through milk price or other means) that just provide cheap but high-quality ingredients for another business to capture most of the value, whether that business is based in China or not.

The onus is on co-op management and Bord Bia to find value for dairy farmers in China. This wasn’t achieved with milk powders, the same cannot happen with cheese and nutrition for the elderly.

Otherwise, in 10 years’ time, co-op management will have moved on but dairy farmers will still be getting the same milk price.

Perhaps Ornua, which currently does very little business in China, is the best vehicle to deliver value for Irish farmers from China?

Read more

Still opportunities for Irish dairy in China

African swine fever to cause unprecedented volatility in protein market