china dairy industry in global in global development

PRESENTED BY Hal QinBeijing Orient Dairy Consultant

Nov. 16 2016 in Hannover

H in GlobalDevelopment

China Dairy Industry

CONTENTS

2 Supply & Demand

3 Global Trade

4 Outlook

1 Big Picture

Big Picture:

Overview of

Chinese Dairy

Industry

01

01 CN Dairy big picture

• Consumer performance and level

The world’s third milk producer with the least milk per capita in Asia

As an Asian country without the history of drinking milk，our consumption level can not

compare to western countries.

01 CN Dairy Farming Situation

In 2015, >100 heads farms account for 48%（2008 19%）

Grouping and large-Scaled

27

80

32 32 34

6 8

2714 14

144

6

0

20

40

60

80

100

120

140

160

Number of farms in large dairy group

companies 108.6

90.0

66.8

40.035.3

30.025.0

42.7

15.0 13.6

52.9

20.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Herd size of Cows（1000）


In 2015, >100 heads farms account for 48%（2008 19%）

Grouping and large-scaled

840.6

700.0

536.6

370.0338.0 314.6

255.0224.4

147.0 138.5 126.6 110.0

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

Raw milk Prodution（1000 tons）

0

200

400

600

800

1000

1200

1400

1600

2008 2009 2010 2011 2012 2013 2014

Farms no >100 heads


Rich Natural resource in China allow farmers can raise more dairy cattle

Debate 1. huge population food demand, no enough land for dairy

Debate 2. strict environment policy and serious issues

Herd sizeFarming

landLand/cow

1000 Heads Mil. Ha Ha

NZ 4922 3.3 0.7

US 9257 151.8 16.4

Canada 959.3 45.9 47.9

Germany 4296 11.9 2.8

France 3729 18.3 4.9

Netherlands 1600 1.0 0.6

China 7000 106.3 15.2

Compare to some

Advanced dairy

Countries, China

Have enough

Natural resource

01 CN Dairy Farming: Evolution

• Yili purchase Shengmu

• Skxin purchase Huaxia

• Zhongding take over small farms

• Huishan new 50k head farms in

south china

• 100 new farms in HLJ since 2013

• National and private:

ICBC, COFCO, Insurance

• Overseas

• Financing from stock market

• Financing from leasing

• Listed on HK or NEEQ

Stock and Financing

Investment

Expansion

Integration

MengniuSuppier 4000 2000

YiliSuppier 4000 2000

Scaled farmsHerd size >100 cows

19% 50%

Farms number

sharply decline

Imported breeder

decline 50% in 2015

Dairy cows decline

10.2% in Aug 2016

Best cows are kept

in big farms

01 Changein decades

Employees in

Farms

Dairy Cattle in

China

Young & Specialize

Educated and graduated

from college: animal

science or veterinary

Clear Responsibility and

job division

Better training and

management

Supply

& Demand

02VS

02 Supply & Demand: Structure

Raw milk source in North, Dairy consumption market in South

9 Province milk production > 1 million tons/year

All in North China, accounts for 80.9%

Keeps cattle 81.8%

Unit 2005 2010 2015

Dairy cattle Mil. 12.16 14.20 15.07

Raw Milk Mil. MT 27.53 35.76 37.55

Liquid milk Mil. MT 11.46 18.46 25.21

Dry Mil. MT 1.65 3.14 2.62

Processor 698 784 638

consumption kg 11.7 2013 12.6 2014

Urban Kg 17.1 2013 18.1 2014

Rural KG 2.9 3.55 6.3

Yield per cow:

From 3.89 ton 2005

To 6.0 ton 2015

Milk per people

22kg to 27.3kg

02 Supply & Demand: Price

Raw milk Price has decline 1/3, still higher than most countries

Highest, only next to few countries: Japan and South Korean

China Vs Global = 2.2

Vs NZ 2.2; Vs EU 1.7; higher 1-2 RMB/Kg

20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 100.00

Argentina

EU28

USA

Uruguay

Russia

New Zealand

Japan

Brazil

Chile

China

IFCN

USD

/10

0kg

Av Price 2014-2016

2016

2015

2014

02 Supply & Demand: consumption

Among hundred of FMCG, liquid milk and yogurt still has biggest market share

In 2015, most of FMCG growth decelerated

In 2014, dairy consumption went into growth stagnation. yogurt is

the driving of dairy growth.

Yogurt support the quick growth of the category of sour/acid milk

Normal temperature yogurt grow fast in 2015: from 9.3% 2014 to

15.7% 2015 High end liquid milk grow better in the category of liquid milk:

DELUXE (Menniu), SATINE(Yili), Anchor (Fonterra) and Shengmu

organic

Organic is the most focused label in 2015. organic pure milk

accounts for 20.6%, growth rate 9%


Among hundred of FMCG, liquid milk and yogurt still has biggest market share

8.2 7.6

5.6

3.6 3.6 3.5 3.4 3.3 3.3 3.2 3.2 2.9 2.8 2.8 2.7 2.7 2.4 2.2 2.1 1.8

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11

-2 -1

4 10

-0 -2 2

10 7 4 5 7

-1 -5

4 1

6 1

-9

market share% growth rate%


Chinese consumers more focus the concept of Organic in the attribute of dairy

33

33

35

36

39

45

53

54

54

58

Low Fat

Natural flavors

Low sugar/ Sugar free

High in fiber

Low salt/ sodium

Organic

GMO free

No artificial flavors

All natural

No artificial colors

%

32

34

34

34

37

37

42

43

44

45

Low Fat

Organic

Low salt/ sodium

Low sugar/ Sugar

free

High in fiber

Natural flavors

No artificial

flavors

GMO free

No artificial

colors

All natural

%

Global

China

Consumer Top 10 concern concept of dairy

02 Consumption: Yogurt

Low temperature yogurt: 28.7% of acid milk category, growth rate 10%

Normal temperature yogurt: 15.7%, leap growth

International

Trade

03VS

03 Trade

Biggest dairy importer, 15.1% in 2015, 19.2% in 2014

Top Five Importer : China, Mexico, Saudi Arabia, Algeria, Russia

03 Trade

2015 imported dairy covert to raw milk: 9 million tons

2016, expected to 11.4 million tons

Infant formula Liquid milk

yogurt

Milk powderwhey

cream

cheese

Condensed milk

03 Trade: milk powder

2016 1-8 imported milk powder 480,000 tons, +14.2%

In the price of 2402 USD/Ton, -13.4%

Amount Price

03 Trade: impacting

2016 production no change, more importing make whole supply + 5.5%

New farms construction: reduced

Big farms production: steady or reduced

Less live cattle (heifer) imported

Imported liquid milk 750,000 tons，impacts domestic

market Imported liquid milk: 1.8% of all liquid milk, 3% of UHT milk.

Impacts markets and consumer trend 2016.1-8 423,000 tons，nearly whole year importing last year

+63.4%

2015, 470,000 tons, +43%

03 Trade: liquid milk

2016 production no change, more importing make whole supply + 5.5%

03 Trade: impacting

2016.1-8 423,000 tons， +63.4%

Germany

35%

France

19%

NZ

19%

Australia

11%

Poland

4%

other

12%

Jan – Jun China Liquid Milk Import

（Ton）

Germany France NZ Australia Poland other

03 Trade: impacting

Sino-Euro Railway reduce half of liquid milk transportation time

Outlook:

Direction of

CN dairy

Industry

Developing

04+

04 Outlook: Difficulties of CN Dairy

The defect of our development model begin to show up

• Corporatization and Scaled Dairy Farming Mode: big farming group

company’s production capacity is rigid

It is easy to increase production, but hard to reduce production when

depression

• Their investments are mainly from capital market

Investment sufficient when the industry is good, which is easier for production

capacity expansion

When big farming companies need cash to expand market or increase

inventory in bad situation, there is also investment shortage from capital

market.

Investors and share holders can not bare zero or negative growth even if the

whole industry is not good


The defect of our development model begin to show up

• Corporatization and Scaled Dairy Farming Mode:

Higher anti-risk and longer price cycling

In past, Chinese milk cycle is generally 2 year, and low price

will lead to a bigger decline in milk production

Big dairy farming corporations are financially strong. When

raw milk supply is excessive and milk price is lower, they need

more time to adjust production and sometimes reverse growth


High-end marketing orientation leads high marketing risk

• High-end dairy products influence consumption

market expansion

• High-end dairy products’ high price leads imported

products more competitive in domestic market


Listed farming companies loss in first half 2016

Low price and huge stock: > 400,000 ton milk powder; imported powder +19%;

Farming Company

Sales value

ChangeNet

profitsChange

Sales amount

Change Price Change

Billion￥

%Billion

￥% Ton %

￥/Kg

%

MordenFarming

2.229 -8.54 -5.66 -218.60 476,555 7.20 4.02 -10.86

Shengmu 1.617 16.85 4.02 20.60 278,260 10.66 4.73 -6.32

Yuanshengtai 0.514 -5.05 -1.36 -1,339.41 128,439 9.00 4.01 -12.88

Sino Farm 0.504 119.39 0.66 55.11 107,615 162.11 3.81 -13.42

04 Outlook: hope of CN Dairy

No change of fundamentals of Chinese dairy industry development

No change of consumption market demand

China is still the biggest potential dairy market

Dairy consuming space is big

Primary development strategy is still domestic supply

The dilemma we are facing is the oversupply from

world


Farming companies cost reduced in first half 2016

Facing depression, reduce producing cost Yuan/kg raw milk

Farming Company Cost Type 2015 2016 Change %

Yuanshengtai Total Cost 2.85 2.63 -7.78

Sino Farm Total Cost 4.25 3.73 -12.33

Morden Farming Total Cost 3.03 2.71 -10.58

Shengmu (Organic) Total Cost 2.78 2.40 -13.63

Shengmu(Non Organic) Total Cost 2.70 2.46 -9.02

Yuanshengtai Feed Cost 2.21 1.94 -12.09

Sino Farm Feed Cost 2.40 2.28 -4.74

Morden Farming Feed Cost 2.37 2.06 -13.37


Lower cattle price; more farm construction investment

Junlebao Dairy builds new 10000 heads farm in Baowei

Huishan Dairy’s project in Jiangsu, 100000 heads in sum

Jiuniu Livestock are constructing a new 10000 heads farm in Shanxi

Many new farms in Heilongjiang are constructing

• Big farming companies are importing live cattle

Jan-Jun 2016, breeding cattle imported is 58287 heads, -

10%

Buyers are big livestock companies Come from Oceania


Milk supply decline, it is a matter of time

MoA: in July, herd size decline 10.27% compare same

period last year

Extreme weather and heat stress

Flood and extreme heat sweep central China

MoA: first half of 2016, milk collection -5%

Milk production -40% in some farms in south


Milk supply decline, Price recover,

Some local processor begin to collect milk out of their area

Nestle Qingdao: from August 20th, 0.08-0.12 higher Yuan/Kg

Serious milk shortage in Ningxia

price reach 4.2 Yuan/kg (0.6 Euro/Kg)

Main reason: production reduce and demand increase

when it is close to mid-autumn day and National Day


In 2020，dairy production reach to 64m tons,

with a growth at 5% per year

Supply Outlook of Raw Milk in China

Chinese MOA turned down the goal of dairy industry 1%

MOA 《Plan of Grain Saving Type Livestock Husbandry(2011-2020)》

goals:

MOA《 Guiding of Improving Herbivorous Livestock Husbandry

Development》 goals:

In 2020, dairy production reach to 41m tons,

with a growth at 1% per year

04 Outlook: Hope of CN Dairy

Per capita consumption of urban households

2012 17.9 Kg; 2020 42.9 Kg; 2030 46.2 Kg

04 Outlook: Hope of CN Dairy

Per capita consumption of urban households

2012 17.9 Kg; 2020 42.9 Kg; 2030 46.2 Kg

Dairy consumption demand in the future

If Per capita consumption of milk achieve the following

standards

Beijing 40Kg Per capita , need 54mil tons , gap 18mil tons

Japan 60Kg Per capita ,need 82mil tons, shortage 45mil tons

How to satisfy?Domestic supply: 36 mil tons, should increase 10 mil tons

Importing supply: 10 mil tons, should increase 10 mil tons


National Crop Policy Adjustment:

huge reduction of livestock farming cost

herbivorous animal husbandry area overlay with major crop area.

73% milk from this area

Reaping Hook Bay’




Too much corn with

national supporting price!

policy for corn purchasing and temporary stock :National protection and supporting price: 2000 Yuan /ton

Feedstuff do not get aid

Increase farm land leasing cost

Farmer grow alfalfa, oat hay on waste land, sand land, salty

land and mountain land

Huge price gap between domestic corn and international corn




Corn production: 116 mil ton 2003 225 mil ton 2015 +100 %

Since 2004 area of grain +13.23 mil ha, corn +13mil ha

Too much corn with





Too much corn with


State Crop aid: average 1800Yuan/ha in 2016Grain and Cereal direct aid:

Depends on hectare, total 14.05 billion Yuan. Too few.

General direct aidDepends on price change of diesel, fertilizer, pestcide

Fund of 107.1 billion Yuan

Certified seed aidDepends on better crop variety farmer planting

Fund of 20.35 billion Yuan




CN

US

Big price gap leads much

more corn import from US.

Making huge stock of corn




Too much corn with


Consequences Serious excess of corn Yield 225 mil ton、consumption 180 mil ton. 60% used as feed

Corn and its substitution imported 55 mil ton, 30% of demand

Importing big amount of DDGS, corn and hay

Shortage of high quality forage, 1.2 mil ton imported

By July, corn stock 260 mil ton, 50% of all grain stock Inventory cost 65 billion Yuan



huge reduce of livestock farming cost

China stop policy of national corn intervention, price

depends on marketUS Corn F.O. price: 1500 Y/ton

Domestic corn price: 2080 Y/ton, -30%

Policy of ‘Alter Grain to Feed’ in ‘Reaping Hook Bay’ :

less cost, higher efficiency2020，reduce corn plantation area 3 million ha

2020，increase feedstuff plantation area to 6.5 million ha

Silage corn 1.7 million ha; alfalfa 2.3 million ha



huge reduce of livestock farming cost

National aid unchanged and cancel protection price Separate corn price factor from aid

Domestic price integrate with international price, -30% to1700

In Changchun, 1250 Yuan/ha; in Harbin, 1100 Yuan/ha

Reduction of land leasing cost From 9000-15000 y/ha to 4500-12000 y/ha

Reduce waste land of foodstuff planation, increase quality

of domestic hay


Opportunity from Russia Dairy

Russia import dairy converted to milk 7m tons every year

Mainly are Cheese, Butter, pure milk and whey powder

Liquid milk comes from Belarus and the other CIS countries

Cheese came from EU before2013 2014 2014.1-10 2015.1-10 %Change

Pure milk 27.24 30.00 26.24 20.41 -22.22

Cheese 44.04 31.61 27.29 16.35 -40.08Butter 14.56 15.04 12.79 7.83 -38.75

Milk powder 14.72 13.22 9.94 11.60 16.66

Whey 14.32 12.63 10.86 12.06 11.14

Covert to milk 695.00 488.00 410 295 -28



The demand of Russia is existing, but the imports from

China is 0 The cost of producing must be reconsidered. The ban is

temporary. Once Russia begin to import from EU and US again,

how can we get into this competition?

According to GTA, Russia have not imported any dairy products from China



AustAsia built plants with Russia FOOD UNION produce fresh cheese in China and export to Russia, processing milk 800

tons /day

FOOD UNION is the biggest cheese importer and dairy company in Latvia

Zhongding Farming built new Farms at Heilongjiang Group farms with 100K heads of cows, get ready for exporting dairy to

Russia

Qizhi Dairy and Chia Tai build farms and a processing plant at Russia The first plan is to build three farm groups with 80k heads of cows and a

dairy processing plant.

H THANK YOUFOR WATCHING

感谢聆听

china dairy industry in global in global development

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