Just reading again some of what I wrote over two years ago [late 2013] when I wrote a review of Irish agri-food strategy. This I found particularly relevant when thinking about the root causes behind the current dairy crisis. They are a few paragraphs to note when one hears executives from the processing sector saying that nobody saw the depth of this crisis coming!
“With so much talk about the Chinese market for infant formula and milk powder, the author’s reaction was to investigate what its various suppliers are doing. In the past he has seen perfectly rational decision-makers all working with similar information all reaching the same decisions without fully reflecting upon the consequences of what may happen if they all make the same decision at the same time. The consequences can be dire.
Clearly New Zealand is the leading supplier into China and it has a free trade agreement in place. In 2011 NZ accounted for 75% of China’s milk powder imports. Since then the market has continued to expand and China has diversified its sources but what has the reaction been? Well in NZ Fonterra has just opened (December 2013) a new 2.2 million litres of milk a day, 85,000 tonne per annum milk-powder facility. It has also announced the development of another, new,marginally larger facility. All will, of course, be target at their export markets.
It appears that the Chinese themselves are directly investing in France and entering into joint ventures elsewhere in Europe. One press article states that one-third of Chinese milk powder imports in 2012 derived from production facilities that were by then directly controlled or had agreements with Chinese businesses that have a track record supplying their own domestic market. The USDA reports that Friesland Campina is investing in three new infant formula facilities and Arla Foods is planning to expand its milk powder sales to China. It also reports that in France nine milk-drying facilities are being built or expanded. Hence, the supply side is currently very dynamic.
Although nobody appears to be predicting that the demand for imported infant formula or infant-formula based upon imported raw materials is going to change anytime soon, there remains the question of just how long will this market boom last? Will Chinese government efforts to restore confidence in home-produced infant formula succeed?When will new Chinese, industrial milk production investments kick-in and impact upon the market? Will the Chinese companies investing overseas develop a supply-base that is sufficient to fulfill domestic demand and will the supply-base even include Ireland? How will foreign-owned brands fare into the long term? There are a lot of questions that a milk producer at the bottom of a supply-chain-to-China should be asking if the supplier that they supply [and maybe investing to supply more] milk to is specifically investing to supply the Chinese market.”