Feeding Fresh Milk to Pigs Reflects the Deep-Seated Problems Behind the Global Dairy Industry Cold Snap

In some parts of China, fresh milk is being fed to pigs, while the global dairy industry is simultaneously hit by a "worldwide cold snap"!

This round of global overcapacity in the dairy industry and ever-falling prices is rarely seen in 10 years, and the reasons behind it are worth analyzing.

1. As for China, data from the National Bureau of Statistics show that in 2015 the total sales volume of liquid milk nationwide was 27.389 million tonnes, up 3.6% year on year. But compared with the average annual growth of 5.1% during the "12th Five-Year Plan" period and the average annual growth of 11.1% during the "11th Five-Year Plan" period, the increase was noticeably low.

Slowing consumption growth is an important reason for the fall in raw milk prices. The liquid milk consumed domestically is still mainly sourced from domestic milk, and the slowdown in this part is indeed seriously affecting the upstream links of the dairy industry. At the same time, consumer confidence in domestic milk is still in a repair phase;

2. Obviously, this explanation has its flaws. If Chinese consumers still lack confidence in domestic milk, then how do we explain the global dairy downturn? Arguably, dairy consumption is still fairly rigid; if everyone bought less domestic milk, imports should have surged, and the global dairy market should have benefited. But the facts are not like this: domestic milk prices are falling, and so are those in the international market.

The deep-seated problem behind this may lie in the excessively large scale of global raw milk production capacity.

Before 2013, the Chinese market was extremely booming, which spurred major milk source countries to expand production capacity. Around that same year, many Chinese companies hoarded stock, and then global milk prices fell. Not only did major milk source countries and foreign companies actively build up raw milk production capacity, but a few years ago Chinese dairy giants also went abroad. Foreign dairy farming has a higher degree of scale and relatively better pasture quality, and imported milk sources are generally cheaper than domestic ones;

3. Not only is there international overcapacity, but in previous years the Ministry of Industry and Information Technology and the Ministry of Agriculture vigorously supported the development of the domestic dairy industry and corporate mergers and reorganizations, which may have accelerated investment in domestic pastures, especially with the emergence of many super-large "10,000-head pastures"; the current price decline also reflects the overcapacity problem;

4. Agricultural product prices generally have natural cycles, the so-called cobweb theory, so price declines are also a normal phenomenon.

It is worth noting that, according to fixed-point monitoring by the Ministry of Agriculture, by March the loss-making share of dairy cow farming had reached 51%, up 5.8% year on year; at the same time, the dairy cow inventory had decreased 11.9% year on year. More seriously, this situation is still continuing and still spreading. So much so that the dairy industry has been listed by some banks as a "high-risk industry". The decline in domestic inventory is not all bad, and international raw milk upstream production also shows this situation -- when inventory falls to a certain level, supply and demand will rebalance, which is conducive to a rebound in raw milk prices;

5. It is necessary to point out that, so far, the global economy has a unclear path ahead and has not returned to medium-to-high-speed growth. Therefore, on the demand side, the problem of weak growth in global dairy product consumption may continue for some time. Of course, the biggest variable may be China.

In terms of per capita dairy product consumption, China is still far below the major developed countries. As living standards and habits change, including the gradual upgrading of consumption, there is still great room for growth in China's demand for dairy products.

It can be imagined that, barring accidents, China will still be in the process of medium-to-high-speed urbanization for about the next 20 years. Relatively speaking, the dairy product consumption of urban residents is far higher than that of rural residents. In fact, even in China's rural areas, the growth in dairy product consumption has clearly shown an accelerating trend in recent years, and these factors will benefit the dairy industry in the long term.