Ongoing trade tensions with China—a rapidly growing dairy import market— continue to be a major concern for the U.S. dairy industry. Demand for milk and dairy products is growing in China at a time when milk production in the country appears to be waning, making China a prime target for the world’s largest dairy exporting regions.

“On a per-capita basis, Chinese dairy consumption is still comparatively small, suggesting dairy consumption will continue to grow in years to come,” says Sarina Sharp, analyst with the Daily Dairy Report. According to Italy’s CLAL, 2017 per-capita dairy consumption in China was only 23.13 lbs., compared with the Organization of Economic Cooperation and Development’s global per capita consumption estimate of 111.3 pounds in 2016.

“China has been seeking to modernize its dairy industry, but the shift to larger facilities has resulted in contraction rather than consolidation.” In other words, the milk herd is shrinking. USDA’s attaché in China recently estimated China’s milking herd at just 6.6 million cows, and milk cow numbers are expected to decline to 6.3 million head next year.

“Small dairy operations are exiting the market faster than the mid- to large-scale dairies are adding inventory. These small-scale farms, often located in Southern China, are retreating from the market due to increasing feed costs, stricter environmental regulations, and low milk prices,” according to the latest Global Agricultural Information Network (GAIN) report from China.

China’s dairy herd has not been this small since 2004, Sharp notes. “If China’s milk-cow herd were to shrink as much as the attaché in Beijing projects, it would mark a 25% decline from the peak in 2014 and 2015,” she adds. At the same time, the Chinese milk-cow herd is contracting, however, productivity is increasing, which has helped stem the overall decline in total output, with production in China expected to decline just 7.6% from its 2015 peak, Sharp notes.

“Financial pressure on Chinese dairies is likely to continue to the detriment of milk output,” Sharp says. Higher tariffs on imported feedstuffs, particularly alfalfa, from the United States have played a role in rising production costs on dairies.

Year-over-year dairy imports to China are expected to increase next year after expanding in 2018 from 2017 levels, according to the GAIN report. Fluid milk imports in 2019 are expected to climb 13%, with whole milk powder imports up 15% and purchases of foreign skim milk powder up 11%.

“The report’s optimism regarding China’s dairy product imports this year does not jibe with trade data, though,” Sharp says. While China stopped reporting detailed trade figures in May, she notes that combined shipments from major dairy exporters suggest a marked slowdown in China’s dairy product imports that coincide with rising trade tensions.

“That said, given rising consumption and falling output in China, Chinese dairy product imports are likely to increase which could help tighten global milk powder inventories,” Sharp says. “But world prices likely will not rise until they see more product moving.”

Read more on the global dairy market here. 

Original article sourced from https://www.milkbusiness.com