Analysis milk
Chinese planned economy clashes with dairy market
The Chinese dairy industry has done well, encouraged by the 14th five-year plan. The goal of 41 million tons of milk was achieved too quickly and overwhelmingly. Now the proverbial milk has boiled over.
The large Chinese state dairy companies, including Yili and Mengniu, have dutifully fulfilled their task. These companies - about twelve of them - have set up series of mega dairy farms modeled after the Fonterra farms, which the New Zealand company has since sold, and the Chinese imitators have run them at full capacity. For example, Yili's subsidiary Youran Dairy has 78 mega farms, Mengniu's subsidiary China Modern Dairy has 41.
As a result, these major dairy processors have been providing the majority of the Chinese milk production (growth) in a few years. Often with the help of imported feed (especially alfalfa from the US), but that is not so relevant. The result is there. But at the expense of many hundreds of thousands of smaller Chinese farmers and processors. They could not keep up with the scale jumps made by the (subsidized) dairy giants. Their production is now largely surplus and too expensive. In a short time, these entrepreneurs are being pushed out of business, resulting in significant but little noticed economic waste and devastation.
The excess milk that was produced was partly converted into milk powder, but even that is in surplus on the domestic market. China is now making desperate attempts to export this product, but is still reaping the bitter fruits of the 2008 baby food scandal. Foreign buyers do not have much confidence in the Chinese product, as they also do not trust the Chinese supervision system, at least when it comes to exports.
The economic difficulties China has faced since the COVID pandemic are exacerbating the situation. In 2021, Chinese dairy consumption was still 14.4 kilograms per capita, but by 2022 it had decreased to 12.4 kilograms per capita due to reduced purchasing power. The continuing decline in the birth rate also contributes to the problems. This is especially true for the sales of regular baby food. The super-exclusive products, sold by companies like FrieslandCampina, seem immune to these issues.
Despite the large dairy surpluses, it does not seem that the major dairy companies in China are slowing down. However, the import of alfalfa from the US is decreasing and large Chinese dairy farms are seeking cheaper alternatives, either domestically or in places like Mongolia. The downside is that these feedstuffs are also of much lower quality. The game remains the same: that of the state and the planned economy against the smaller entrepreneurs. Many 'frictional losses' occur in this process.
This situation is not unique to the dairy sector. The Chinese pig farming industry is also affected, as well as the automotive industry, which has a target to meet for the production of electric cars. The plan sets a goal that must be achieved, even if the market demands something else.
Against the backdrop of its own hybrid plan and market economy, China launching investigations into anti-competitive practices in Europe and the US feels like a bad joke. However, the international economic game is not a well-regulated affair either. Trade is also, and perhaps mainly, a power struggle among global players.
Klaas van der Horst
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