China’s Economy & Dairy Industry: Cooling?

Keyword:
Publish time: 18^th July, 2012 Source: CCM
Information collection and data processing: CCM For more information, please contact us

The slowdown in China’s economy during H1 has impacted on the dairy industry as expected. According to the National Bureau of Statistics (NBS), China’s GDP reached USD1.69 trillion (RMB10.8 trillion) in Q1, up 8.1% over Q1 2011. Whilst in theory impressive this was the 5th quarterly slowdown and the slowest rate of growth in almost 3 years. Recent estimates for Q2 tend to range between 7.2-7.5%, according to CCM International’s June issue of Dairy Products China News.

Moreover many economists suggest that in reality a growth rate of about 6% in Q1 is likely to have been a fairer reflection of the situation; this view is supported by various indicators which have proven less positive, such as production volumes of steel and cement, total export values and so on.

Electricity production — a key indicator for economic development — is a prime example: it stood at 1,144.6 billion kwh in Q1, up 7.1% over Q1 2011. However production in May was 389.8 billion kwh, just up 2.7% over May 2011. The June Purchasing Managers Index has slipped and all the figures suggest that the economy is decelerating.

The Dairy Association of China (DAC) has quoted data from NBS giving the dairy industry’s output at 5.47 million tonnes in Q1, up by only 5.8% over Q1 2011. However, this figure is 120,000 tonnes lower than that given for Q1 2011 by the China Economic Monitoring and Analysis Centre (CEMAC) – this organisation, itself part of the NBS – hasn’t released its figures this year, possibly due to the downtrend being seen.

In January-May, the output of domestic dairy products is being given as 9.37 million tonnes, up 7.1% over the same period of 2011 – this represents a slow down, as the growth rate in January-May last year (vs. the same period in 2010) was 12.1%.

Similarly, liquid milk products represented 7.93 million tonnes – up 8.3% over the same period of 2011, compared with a rise of 11.6% in the first five months of 2011.

This situation exerts great pressure on the domestic dairy industry, with some northern provinces now stockpiling milk powder. Some producers have also resorted to culling, and there have been warnings that if the situation deteriorates as in 2009, the industry will be badly hit again.

However, this is a shortsighted perspective. Recently Mr. Zhang, Vice President of School of Agricultural Economics and Rural Development at the Renmin University of China, noted that China’s economy currently faces a cooling period due to the problems in the real estate and equity markets — the 2 key drivers for the development of China’s economy in the past 10 years. The management rights transfer of rural farmland is expected to be the key driver of China’s next economic cycle. In China, the only way to obtain large amount of rural farmland is to invest in agriculture. At present, the Chinese government has only hinted at its intentions in this respect on CCTV – this is a likely area of policy developments once Mr. Xi Jinping takes over as State President later this year. It is clearly timely for businesses to invest in agriculture now, hence the recent expansion of groups such as COFCO, Modern Dairy, Fonterra and Yihai Kerry in the agricultural sector.

Despite the present economic difficulties, the future dairy market potential is evident. In fact, ongoing food safety concerns seems likely to represent a much more significant problem for the local dairy industry: this is amply highlighted by processors who need to recombine relying on imported milk powder whilst some local milk powder producers are left with capital tied up in stocks!