China Struggles with Dairy Surplus

By Mei Mei Chu
BEIJING (Reuters) – China is facing a significant surplus of milk due to declining birth rates and cost-sensitive consumers, while dairy farms have expanded in recent years, forcing smaller farmers out of business and straining shipments.

The milk surplus highlights the unintended consequences of Beijing's food security initiatives aimed at boosting the dairy sector, promoting consumption, and encouraging production. However, high production costs and lingering fears stemming from a 2008 milk adulteration scandal limit export possibilities.

The economic slowdown has weakened demand for premium dairy products like cheese and butter, and consumption of milk dropped from 14.4 kg per capita in 2021 to 12.4 kg in 2022. This comes as milk production surged to 42 million tons last year, surpassing 2025 targets set by Beijing.

As a result, milk prices have fallen below average production costs of around 3.8 yuan ($0.5352) per kg, leading to significant losses for many dairy farmers. For instance, Modern Dairy, a major producer, reported a halving of its cattle herd and a net loss of 207 million yuan ($29.07 million) in the first half of the year.

Dairy imports to China from countries like New Zealand and Germany dropped 13% year-on-year in the first eight months of 2024. Rabobank Research projects a further decline in net dairy imports, potentially continuing into 2025.

The dairy sector, which expanded in response to Beijing’s 2018 encouragement for increased farming, is now grappling with reduced demand for infant formula due to record low birth rates. In 2023, China’s birth rate fell to 6.39 per 1,000 people, significantly down from 12.43 in 2017.

The country’s infant formula market experienced an 8.6% volume decline during the 2024 fiscal year.

Liquid milk makes up 80% of dairy consumption in China, while efforts to diversify into higher-value products like cheese and butter face challenges from price-sensitive consumers. To manage the surplus, producers are converting raw milk into powder, resulting in a surplus of over 300,000 tons by June, as reported by the China Dairy Association.

Export opportunities remain limited due to consumer preference for foreign brands stemming from past scandals. In the first half of 2024, China exported 55,100 tons of dairy products, an annual increase of 8.9%, which is still a small fraction of its surplus.

The reliance on expensive feed makes production costs in China nearly double those of top exporter New Zealand. Despite the current oversupply, there remains long-term growth potential in the Chinese dairy market, particularly for cheese products, as indicated by industry leaders.

($1 = 7.1007 Chinese yuan renminbi)