Is there really overcapacity in milk production? It's all down to importing too much

Last weekend I went to the supermarket to buy some yogurt and found that the discounts on milk were rather steep; for example, a certain brand's set yogurt had a retail price of less than 4 yuan, on a buy-one-get-one-free offer.

It is no coincidence that a report in this newspaper yesterday, based on a survey of the Shandong Weifang Inzone supermarket, found that to compete for the Mid-Autumn Festival consumption peak, dairy companies have been rolling out promotional advertisements: half-price sales, free gifts with purchase.

Mid-Autumn promotions may be just a surface phenomenon. Some analysts believe a deeper reason is that, after more than a decade of rapid development, China's domestic dairy industry has reached saturated production capacity.

Consider a set of figures. According to the "2015 China Rural Statistical Yearbook", in 2000 China's fresh milk output was only 9.191 million tons, with 4.694 million dairy cows, but fifteen years later, by 2015, China's fresh milk output had reached 38.702 million tons, with 15.07 million dairy cows.

In 2015, China ranked third in the world in the output of dairy cows in herd, raw fresh milk and dairy products. At the current level of domestic demand, supply is basically saturated.

However, imported milk powder has come on strong, and its impact on the industry cannot be underestimated. The "China Dairy Quality Report (2016)", compiled by the China Dairy Association, points out that with the influx of imported milk and the continued decline of international milk prices, China's dairy industry has developed new hidden worries.

Customs statistics show that from January to June 2016, a total of 407,800 tons of milk powder was imported, up 18.6% year on year; 314,000 tons of liquid milk was imported, up 77.55% year on year.

So, are the relevant companies doing well? A passage in Yili Group's 2016 semi-annual report may provide some answers: at present, demand growth in the international dairy market is sluggish, global dairy production capacity is in surplus, the supply price of raw milk has fallen year on year, and compared with domestic raw milk prices, foreign milk prices are more competitive, leading to an expansion in the scale of China's dairy imports.

So, can we understand it as this: because of overcapacity in the international dairy industry, a large amount of dairy products is hitting the domestic market at low prices, causing overcapacity in domestic raw milk production.

Of course, if China's dairy industry wants to develop, there are still quite a few problems to solve. As Minister of Agriculture Han Changfu said at the recently held China Dairy Top 20 Summit and Dairy Industry Revitalization Conference, China's dairy industry is still "big but not strong", with problems including a low degree of standardization, relatively high production costs, a disconnect between farming and processing, a lack of a stable mechanism for linking interests, and brands that are not well known, with a shortage of competitive corporate brands. In particular, currently affected by import shocks and weak consumption, it faces prominent problems such as low milk prices, difficulty in selling, reduced income for dairy farmers, and rising corporate inventories.