Media Release December 1, 2015

Chinese dairy heifer demand – has the ship sailed?

The recent slowdown in Chinese demand for live dairy heifers has many New Zealand exporters and traders questioning if the boom period is over, according to a new industry report by agribusiness specialist, Rabobank.

In its report, Chinese dairy heifer demand – has the ship sailed? Rabobank says structural changes in China’s dairy industry have dampened demand for dairy heifers, with volumes and prices expected to remain well below 2014 levels over the medium term.

“Last year, we saw New Zealand’s exports of dairy heifers hit near-record levels,” says report author and senior dairy analyst, Michael Harvey, “with China accounting for nearly all of New Zealand’s heifer exports.

“However, Chinese demand has since dropped off, with trade volumes to China falling sharply throughout 2015, and prices also taking a hit – in the vicinity of 30 per cent.”

Mr Harvey says despite the subdued Chinese demand outlook, China will remain a major destination for New Zealand’s dairy heifers, with potential for future spikes in demand.

China has taken its foot off the accelerator

The Rabobank report says China has been the ‘engine room of growth’ for dairy heifer trade in recent years, driven by China’s growing appetite for dairy products and aspirations to lift its local milk supply through investment in the supply chain.

“Since the 2008 food safety crisis in China (where melamine contamination was found in infant formula, other dairy and food stuffs), there has been a marked shift to large-scale dairy operations in China, which has been supported by government assistance and tax incentives,” Mr Harvey says.

“However over recent months, we have seen a deceleration in this trend fuelled by pressure on farmgate margins – stemming from lower milk prices and persistently high costs – as well as, the increasing challenge of raising funds in equity and debt markets for new developments.

“Reduced profitability has seen some new large-scale farm developments being postponed or cancelled, which has led to the backlog of dairy heifers in global supply chains.”

Mr Harvey says China’s dairy sector is becoming increasingly self-sufficient in raising heifers, aided by improvements in fertility rates and herd management practices, reducing the need for local producers to replenish their herds through importing heifers.

Exporters and traders need to refocus

The Rabobank report says while China will continue to present significant market opportunities for dairy heifer exports, some of the structural changes taking place in its dairy market will permanently impact trade.

“We expect China to remain the cornerstone of trade, however their demand is likely to be at a lower rate than what we have witnessed in recent years,” Mr Harvey says.

“In the Chinese government’s five-year plan, there are calls for transformation in the country’s growth model by way of, amongst others, stepping up agricultural modernisation, so we would expect to continue to see small farmers exit the industry in place of larger operators.”

Mr Harvey says in light of this trend, volatility has increased in the dairy heifer market and there has been a downward adjustment to prices, which will see exporters and traders adjust their strategies accordingly.

“For example, we are seeing New Zealand producers retain heifers and replace older and less productive stock – although this has been primarily driven by the substantial drop in farmgate milk prices,” he says.

With New Zealand exporters and traders looking to other market opportunities for dairy heifers, Mr Harvey says it is important not to neglect China but to ensure there are the channels in place to supply alternative markets.

“New Zealand is well positioned to trade heifers with South East Asia, although trade with Indonesia, Sri Lanka, Pakistan, Malaysia and Vietnam may require adjustments to breeding and sourcing strategies, and a particular focus on sustainability and animal welfare,” he says.

“But there are certainly opportunities in these markets, with dairy demand in South East Asia expected to increase by more than three billion litres between 2014 and 2020 and ongoing efforts to boost local milk supply to help meet some of this demand.”

Rabobank New Zealand is a part of the international Rabobank Group, the world's leading specialist in food and agribusiness banking. Rabobank has more than 115 years' experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 40 countries, servicing the needs of approximately 8.8 million clients worldwide through a network of more than 1000 offices and branches. Rabobank New Zealand is one of New Zealand's leading rural lenders and a significant provider of business and corporate banking and financial services to country's food and agribusiness sector. The bank has 33 branches throughout New Zealand. Rabobank also operates RaboDirect, New Zealand’s first internet-only bank specialising in savings and deposits.

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