Analysis: China’s Dairy Farms Face Surplus as Fewer Babies and Slow Economy Decrease Demand By Reuters

By Mei Mei Chu

BEIJING – China is currently facing a surplus of unwanted milk as declining birth rates and price-sensitive consumers decrease demand, despite the expansion of dairy farms in recent years. This situation has led to the closing of smaller farms and challenges in shipping to the world’s largest importer.

The milk surplus in China highlights the unforeseen repercussions of government initiatives aimed at enhancing food security by promoting dairy consumption and farm expansions. However, high production costs and the aftermath of a significant food safety scandal in 2008, which tragically resulted in the deaths of at least six children and numerous hospitalizations, have restricted export opportunities.

The sluggish economy, coupled with an aging population, has diminished demand for higher-priced dairy products such as cheese, cream, and butter. Consequently, milk consumption in China fell from 14.4 kg per capita in 2021 to 12.4 kg in 2022, the most recent figures available from the national statistics bureau.

Simultaneously, China’s milk production surged to nearly 42 million tons last year, a significant increase from 30.39 million tons in 2017, surpassing the government’s 2025 target of 41 million tons.

Prices for milk in China have dropped below the average production cost of approximately 3.8 yuan per kg since 2022, prompting many unprofitable farms to shut down or reduce their herds by selling cattle for beef, which is also in oversupply.

Major dairy producer Modern Dairy reported a 50% reduction in its dairy cattle herd in the first half of this year, resulting in a net loss of 207 million yuan.

“Dairy farming companies are losing money on both milk and meat sales,” stated Li Yifan, Head of Dairy (Asia) at a commodity financial services firm.

Furthermore, dairy imports—predominantly from New Zealand, the Netherlands, and Germany—declined by 13% year-on-year to 1.75 million metric tons in the first eight months of this year, with milk powder, the largest dairy import, falling by 21% to 620,000 tons.

Looking ahead, net dairy product import volumes for 2024 are projected to decrease by 12% compared to the previous year, with an ongoing downcycle in the dairy sector potentially influencing import levels in 2025.

The rapid expansion of China’s dairy industry started after a government push in 2018 for increased farm numbers and production as part of a broader strategy for enhanced food self-sufficiency, leading to the establishment of numerous farms and the importation of hundreds of thousands of Holstein cattle.

However, the declining birth rate in China means that there is less demand for milk formulas, as evidenced by the record-low birth rate of 6.39 per 1,000 people in 2023, down from 12.43 in 2017.

The market for infant formula has similarly contracted, declining by 8.6% in volume and 10.7% in value during the fiscal year ending in June 2024, with further declines anticipated.

China’s dairy sector has also struggled to pivot consumer preferences from drinking milk to “eating milk,” an initiative aimed at increasing overall dairy consumption. Currently, liquid milk accounts for 80% of dairy consumption, while efforts to promote products like cheese, cream, and butter have been hampered by cost-conscious spending habits.

To manage the surplus, producers are converting raw milk into powder, resulting in a surplus of over 300,000 tons by the end of June—roughly double the previous year’s level. Efforts are also underway to export whole milk powder, although potential remains capped due to lingering effects from the past food safety scandal and a consumer preference for foreign brands.

In the first half of 2024, China exported 55,100 tons of dairy products, an increase of 8.9% year-on-year, but this figure represents only a small fraction of its surplus.

Rising production costs, largely due to reliance on expensive animal feed, mean that Chinese farmers face costs nearly double those of top exporting countries where cattle graze on pasture.

The domestic surplus has allowed Beijing to focus on restricting imports of European dairy products amid trade tensions, yet these are niche items and such measures will not significantly resolve the glut.

“While limiting EU dairy imports may offer temporary relief for Chinese farmers, it does not tackle the underlying issues of overproduction and stagnant demand,” warned a consumer goods research analyst.

Despite current difficulties, long-term prospects remain on the horizon, as industry stakeholders continue to see growth opportunities within China’s expansive market for dairy products.