China sees liberalised EU as fertile market for milk supplies


The sight of China's companies and even tourists buying up European baby milk products has given farmers a glimpse of what could be the export upside of an at times feared opening up of Europe's dairy market.

China's overseas quest for infant formula, the result of a deep distrust of domestic supply dating back to a deadly contamination scandal in 2008, has been embraced by Ireland as an outlet for the extra milk it plans to produce when the European Union scraps its 30-year-old limits on output in 2015.

Amid pastureland in the country's southeast, Glanbia Ingredients Ireland, a joint venture between food group Glanbia and a dairy cooperative, has been busing in potential overseas buyers to present the single biggest Irish dairy investment, a planned €150-million milk powder plant.

A visit by Chinese customers this year to the site in Belview showed what buyers from China are looking for and what Ireland is suited to offer.

"On the farm visit … they were eating apple pie and looking out at the cows and [one] said, 'if I could capture this moment and market this to my consumers, this is where I want my milk to come from'," Glanbia Ingredients' commercial director Nick Whelan recalls.

Chinese dairy firms have struck deals in the last year to invest in European plants. Among these, Biostime partnered with Denmark's Arla Foods while Synutra teamed up with France's Sodiaal.

Back home, they pack advertising with references to imported content and images of green fields and European families.

This drive for foreign supply, in a Chinese infant formula market projected to double in value to €19 billion by 2017 according to research firm Euromonitor, comes at a welcome time for EU producers preparing to emerge from a milk quota system.

For the first time since quotas were introduced in 1984, to halt chronic oversupply resulting from the production-focused farm subsidies of the time, EU countries will have the scope to increase freely their output.

EU growing more competitive

As well as appealing to Chinese buyers in search of wholesome rural settings, the EU's pasture-based dairy regions are increasingly competitive internationally as rising prices of cereal and oilseed feed make non-grass rearing more expensive.

Milk production costs in major EU countries are now close to US levels, after higher grain prices and a lower euro eroded a 20-30% advantage enjoyed by American producers in the previous decade, IFCN Dairy Research Centre estimates, although they remain above costs in New Zealand, China's top supplier.

IFCN says growth in Chinese imports could in theory soak up all of the extra supply it forecasts in the EU by 2020, or some 7.5 million tonnes in new milk output expected to come mainly from core producing regions like Ireland and a northern European coastal belt running from Denmark down to northwest France.

The EU is not alone in targeting China and a turbulent retail market, in which foreign baby-milk brands face a pricing probe, has its risks.

But analysts see good long-term demand in China and Asia, where population growth and changing diets mean demand is outpacing local production, and Europe as well placed to supply cheese by-product whey used in baby milk and many other foods.

Chinese investments in plants in Europe also offer access to market without retail risks and provide welcome financing to some cooperatives with limited funds. Synutra is putting up €90 million of the €100 million investment in the whey powder plant it plans with Sodiaal.

Market uncertainty

EU expansion will depend on market conditions, however.

Rabobank International, which sees EU milk production rising by 7-8% between 2015 and 2020, stresses that EU countries still have higher costs than some rival exporters and that output could be curtailed by land and capital constraints.

Many farmers are wary about what a more open market holds, despite the lure of exports and a pledge by the EU to ensure a "soft landing" for the dairy sector in 2015.

As in other agricultural sectors, the years since 2007 have seen a series of wild swings in dairy prices.

Memories remain fresh of a market slide in 2009 that triggered a delivery strike by some producers. The past year has seen farmers suffer record-high grain costs before getting relief in record peaks for world dairy prices.

"With a major export share you are connected to world prices and you're on a rollercoaster," IFCN's Managing Director Torsten Hemme said. "I would say that the top 10% of EU dairy farmers are prepared, for others this volatility is an existential challenge."

Unease about liberalisation is perhaps strongest in France, where the government wants to use subsidies to favour livestock farming including in less profitable zones.

Northern EU states are torn, with Denmark and the Netherlands long geared up to exports through cooperative giants Arla and FrieslandCampina, and top EU milk producer Germany already encouraging farm consolidation within the quota regime.

"Agriculture was losing ground but now it's seen as a good industry and my son wants to be part of that," said Kevin Meade, 56, who farms 170 cows north of Dublin. "He wants to milk at least 300 cows. I haven't got the energy for that!"

The EU as a whole is the world's largest dairy producer. But it exports only a small share of its supply, mostly to nearby markets to such as Russia and North Africa, and has a limited presence in China compared to top world exporter New Zealand.

Ireland has been among the most ambitious EU countries in the run-up to liberalisation, setting a target to raise milk production by 50% between 2015 and 2020. The government projects this would generate €1.2 billion in investments and 5,000 jobs, lending support to an Irish economic recovery.

Subscribe to our newsletters