[Author: Stefania Elementi, Advisor: Sofia Shi]
Parallels in the Dairy Industry & What it shows about the Current Chinese Economy
In 2018, the Chinese government implemented a policy aimed at increasing self-sufficiency through increased milk and dairy production and consumption, with a target of 41 million tons by 2025. Although milk output in China reached nearly 42 million tons in 2023 – two years ahead of schedule, there is a significant mismatch between milk production and consumption.
The situation in China mirrors challenges faced in the United States after World War II, when an abundance of milk supply led to promotional campaigns advertising the benefits of milk consumption: the fallacy that milk is good for growth — a concept which is still being debated despite some scientific support. (For more on this, watch this video)
The 2018 Chinese campaign was supported by advertising aimed at shifting consumer behaviour towards the consumption of protein and calcium rich dairy products as well as subsidies to farmers to increase herds. Half of this input has proven successful, as production has outpaced consumption, generating significant surplus, leaving farmers in an unfavourable situation.
Milk producers have had to lower their prices by 28%, often leading to prices to fall below the costs of production, especially for smaller-scale farmers, given that they are unable to export this surplus. This is because China faces significant economic adversity in exporting milk due to a variety of factors. Firstly, the high costs of imported cattle feed make exporting the finished product inefficient. Additionally, the resulting poor reputation following the 2008 adulteration scandal where Chinese companies were found to be adding melamine (a dangerous chemical) to their milk powder, resulting in the death of six babies, and hundreds of thousands people falling ill, has made exporting milk into international markets a challenge. Finally, fierce international competition within dairy markets, mainly from Australia and New Zealand, make China’s milk and dairy production unexportable to a large enough extent to compensate for this surplus. Some farmers are thus dumping milk, and the state is encouraging banks to provide loans by taking cattle as collateral, whilst others believe the problem is too many cows.
However, the root causes of this surplus extend much deeper than mere overproduction. Whilst Chinese parents today are much more likely to encourage the consumption of milk products of their children, thanks in part to marketing strategies such as sponsorship of Olympic athletes by dairy companies, dairy products have not become staples. This is largely due to cultural and genetic differences that do not favour widespread dairy consumption, except in certain regions.
Thus, although culture may be an important factor, the extensive presence of this surplus indicates a relative period of stagnation within the Chinese economy. China is experiencing a fall in birth rates and a decline in consumer demand of normal, highly income elastic goods such as processed dairy products (cheese, cream, butter), as well as an ageing population. Cumulatively, this has led to a decrease in Chinese milk consumption of 2kg per capita between 2021 and 2022. Declining birth rates means a decline in demand for infant formula milk, whose industry experienced a decline by 8.6% in volume in 2024.
However, dealing with the demand side of this problem may be much harder than dealing with its supply. The current surplus has backed the increased trade barriers for EU dairy products, but this will likely only provide short term relief for struggling Chinese producers. Stagnating demand is a problem that will persist and will require a much broader solution not limited to the growth of one industry or sector. Given that this policy was implemented in 2018, before the contractionary effects of the pandemic, there is a need for a swift change in policies to boost consumer confidence.
Bibliography
Chu, M. (2024) China dairy farms swim in milk as fewer babies, slow economy cut demand | Reuters, Reuters. Available at: https://www.reuters.com/world/china/china-dairy-farms-swim-milk-fewer-babies-slow-economy-cut-demand-2024-09-20/ (Accessed: 25 October 2024).
The Economist (2024) Why China is awash in unwanted milk, The Economist. Available at: https://www.economist.com/china/2024/10/03/why-china-is-awash-in-unwanted-milk (Accessed: 25 October 2024).
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