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China milk 'shortage' to last until at least 2015

The shortfall in Chinese milk output, which has sent imports soaring, will continue until at least 2015, the country's top dairy supplier said - unveiling a rise in profits which contrasted with a tumble in earnings at New Zealand giant Fonterra.

Bai Ying, senior vice-president at China Mengniu Dairy, said that China's "raw milk shortage situation will continue this year", albeit with a declining influence on the group itself.

"It may still have an impact on the company, but to a lesser extent," he said, highlighting China Mengniu's efforts to ramp up its own output, having four dairy operations in production, a further four set to open this year, and two on the drawing board.

Mengniu has also become the largest shareholder in producer China Modern Dairy, paying HK$3.18bn in May to raise its stake to 28%, and spending HK$470m ($60m) on a stake in YST Dairy in November.

"Given the present intense situation of milk sources in China, the increase in equity shareholding in Modern Dairy and YST Dairy better assures Mengniu of quality raw milk supply," China Mengniu said.

Import needs soar

Indeed, the shortfall in Chinese milk output - attributed to poor weather, disease and a government drive to close backyard groups in favour of larger operators whose quality control can be better monitored has driven the country to record dairy imports, supporting international prices in turn.

Imports as a proportion of the country's dairy consumption has soared 10-fold to some 20% between 2007 and 2013, data from New Zealand exporter Fonterra showed separately on Wednesday.

That proportion is expected to nudge higher this year, Fonterra forecast, as it estimated China's dairy imports at 1.5m tonnes, equivalent to 13.4% of the world total.

"The outlook for dairy remains strong," Fonterra chief executive Theo Spierings said, noting also strong import demand by Russia, at 1.4m tonnes.

'Hikes in prices'

However, China Mengniu and Fonterra revealed diverging fortunes despite the strong markets.

China Mengniu unveiled a 25% rise to 1.63bn remninbi ($209m) in earnings for 2013, an increase reflecting the government drive to crack down on smaller operators, and on foreign dairy groups investigating over the pricing of infant formula.

The group also launched a series of branded dairy products, such as Black Bean Cereal Breakfast Milk and Energiser milk for elderly consumers, to ensure margins on top of rising milk costs.

"In 2013, we have faced challenges brought by the tighter supply and the hikes in the prices of raw milk," Sun Yiping, the group's chief executive, said.

Rising costs

Meanwhile, Fonterra, which controls about one-third of world dairy exports, unveiled a 53% drop to NZ$217m in earnings for the six months to the end of November.

Although revenues grew 21% to $11.3bn in revenues, the co-operative's margins were pressed by higher milk costs.

It is expecting to pay farmers for milk a record NZ$8.65 per kilogramme of milk solids in 2013-14, up 48% year on year.

Powder vs cheese

Furthermore, its ability to exploit the dairy market rally has been curtailed by its inability to process more than 75% of milk into powder, where the price rises have been greatest.

"We processed as much of this milk into the higher returning milk powder product streams as we could," Mr Spierings said.

"However, our current asset footprint meant that around 25% had to be processed into cheese, casein and other products which earned negative returns over the period."

Shares in the Fonterra Shareholders Fund closed down 1.1% at NZ$6.15.

In Hong Kong, China Mengniu shares closed up 8.6% at HK$38.65.

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