Assessing current challenges for US dairy exports to China

At the International Dairy Foods Association (IDFA) Forum last week, the growing and volatile Chinese market was a hot topic among leaders of the industry. Following the new phase one deal between China and the US, dairy is examining what’s ahead for 2020.

According to Mary Ledman, global dairy sector strategist at Rabobank, 2019 was a strong year in China for dairy consumption. She estimates that Chinese milk production grew between 2%-3% last year, while imports of whole milk powder and skim milk powder are consistently growing.

Ledman projected for 2020 that there will be large carry over stocks for US dairy. This will slow exports to China, alongside other ‘disruptions’--the deadly coronavirus that originated in China is impacting the country’s economy on many levels.

Isolation rules in many parts of China have people confined at home, with restricted flights and other transport, and disrupted work schedules. Before the coronavirus outbreak, Ledman and Rabobank made predictions about the phase one trade deal bringing some stability to the Chinese economy.

There was a general economic slowdown in China during the trade war uncertainty, but the phase one deal was expected to revive things. In the agreement, China committed to purchasing $200bn worth of American agriculture products, which may be difficult while the coronavirus is spreading.

But Mekala Krishnan, a senior fellow at McKinsey Global Institute, believes that global trade struggles go a bit deeper. She said the main rhetoric has been about US and China trade tension, and Brexit. But what’s being overlooked is “longer structural shifts that are taking place in the world of trade and globalization.”​

Krishnan noted that from the mid-1990s to the mid-2000s, there was a general increase in global trade. But since the mid-2000s, McKinsey found that this has reversed, and less of what the average country is producing is being traded.

China is a big reason for that reversal, Krishnan said. More of what China is producing is not being sent across borders, but consumed domestically, leading to ‘the rise of the Chinese consumer.’  For dairy, Krishnan said that means the Chinese consumer is becoming more important and causing US dairy to compete with local producers.

“As a result, we’ve seen companies across industries fundamentally think about consumers in different ways. There is a wave of global companies thinking about how to localize their offerings - how to maintain a global footprint, but also sufficiently tailor products for local audiences,”​ Krishnan said.

More consumers are demanding products that are specific to them, and it’s difficult to strike a good balance and deliver on that in dairy. Domestic supply chains are also improving in China, sourcing for end products and building up value rather than importing ingredients like dairy from other countries.

Even though China’s GDP nearly equals that of the US, it’s growing much faster and has the resources to sustain the success rate. Young people ages 20-35 are driving the growth.

China's Gen Z population was born during the country's economic boom, and they increasingly want 'intangibles' associated with a product when making purchasing decisions. Their consumer landscape speaks to the notion of potentially segmenting consumers more carefully today than ever done in the past.