DESPITE THEIR large herd sizes China is still a long way from becoming self-sufficient in dairy and it is highly unlikely it ever will, says Matthew Smith, Alltech’s vice-president Asia Pacific.
Even India is likely to call on the world market more frequently over the next three to four years. And as we learned in recent years, when China and India call, the international market feels their presence.
The arrival of these two giants on the world stage will impact many players, both inside and outside the countries themselves.
In terms of the general market outlook, it broadens the basis for our medium-term story: another source of demand has arisen for internationally traded dairy products, and that demand will be difficult to fill without a sustained period of high prices to encourage more milk contributions from higher cost regions.
However, while improving the prospects for the continuation of high prices, it doesn’t mean that prices will be even higher – due to the simple fact that buyers’ willingness to pay ultimately limits price upside in dairy.
For processors, the rise of China and India – in terms of both domestic growth and expanding trade requirements – is a difficult opportunity to ignore.
Both markets offer a range of prospects for companies with well-considered strategies – whether seeking export opportunities, selling know-how and services, or investing on the ground to generate milk or dairy products.
Processors will also likely see more of Chinese companies, particularly beyond the borders of the Middle Kingdom, as the Chinese continue to contemplate closer relationships and offshore investments to secure supply.
For farmers, China and India are the new faces of a global market that has undergone substantial changes in recent years.
Most evidence suggests that producers’ adjustment to this new operating environment will be an ongoing process.
Deleveraging and refocusing on returns apart from capital gain are likely to continue for several years, though it should yield a group of farmers that has evolved to survive and thrive in a world of high and volatile prices on both sides of their business.
In the Northern Hemisphere, the structural increase in the price of dairy commodities (and inputs) is impacting the efficacy of industry support measures (in the US and the EU) and highlighting the costs of imperfect engagement with the world market (in the US).
Careful consideration of how to best address these challenges is required, for responses now will shape industry fortunes for many years to come.
While uncertainty remains high, Rabobank anticipates that the global dairy market will again remain tight in 2011.
Given the influence of higher feed costs, ongoing requirements for farmers to reduce debt levels and the likelihood of limited Southern Hemisphere growth beyond New Zealand, the current phase of supply growth may well prove relatively weak and short lived by the standards of previous cycles.
Meanwhile, dairy consumption is expected to strengthen, supported by improving labour markets in the West, strong economic growth in import regions and strong buying from China.
Tim Hunt is a senior analyst, Food & Agribusiness Research, Rabobank International, based in Sydney.