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China's dairy sector has large growth potential

(Shenzhen Daily/Agencies)
Updated: 2006-11-21 08:51

There is enormous growth potential in China's dairy sector, Dutch banking group Rabobank said in a note on Monday.

The domestic dairy sector is attracting new entrants and the return of foreign companies, which failed in their past attempts in the market and are now looking to cooperate with local partners, Rabobank said.

Demand for dairy products in China, Asia's second-largest dairy market, more than doubled in the past five years to more than 25 million metric tons of liquid milk equivalent in 2005.

China remains in a milk net deficit despite production beginning to outpace demand. Demand for high end dairy products such as yogurt and cheese may grow in cities, the note said.

"Consumption is in the growth stage in the smaller cities and rural areas," Rabobank said. Demand for milk in large cities is becoming saturated, it added.

The note said that China's dairy companies have become major targets for mergers and acquisitions and joint venture projects. Foreign companies are trying to enter the market by cooperating with local partners. In the past, dairy giants failed in their "greenfield" approach and are now looking at local cooperation as the best route into China's dairy market.

China remains a net dairy importer but its import structure has changed over the past few years. It's shifting from importing raw materials to "value-added processed products" due to the narrowing price difference between imported milk powder and domestic procurement of raw milk, Rabobank said.

The trend in China's dairy market will be consolidation, Rabobank said.