October 25, 2007 -- China's dairy industry is in a period of rapid development, spurred by government efforts and the promotion of awareness in urban and rural areas. This growth has been particularly marked in Inner Mongolia, where the last few years have seen a substantial increase in numbers of dairy cattle and quantity of milk production. The capital, Hohhot, whose government owns two of the Chinese milk industry's biggest companies, Mengniu Group and Yili Co. has been named the capital of milk.

A country's dairy production is generally regarded as a measure of its agricultural development. In the United States, Netherlands, New Zealand, Australia, and some other developed countries, the share of the milk industry in the total agricultural output exceeds 25 percent. According to the National Statistic Bureau, in 2006, the total output value of China's animal husbandry was more than 1.4 trillion yuan (US$186.67 billion) accounting for about 34 percent of the total agricultural output, but the share of the milk industry in the total agricultural output was less than 2 percent.

"China's dairy industry is still in a developing stage. Although in 2006 China's dairy production has reached 32.94 million tons and China has become the world's third largest milk [producing] country, China does not have a strong milk industry," Min Li, senior consultant of Drozak Consulting GmbH, told Emerging China. He says that although China's dairy industry has made significant gains, it still lags behind developed countries in terms of the total quantity, scale of development, per capita milk consumption levels, product quality and production management level.

The development of milk production in Inner Mongolia has attracted investors from some of the major global players in the milk industry. Tetra Pak, one of the world's leading processing and packaging solutions providers, this year announced plans to invest 616 million yuan (US$82.14 million) in a state-of-the-art packaging material manufacturing plant in Hohhot to open next year. And Nestle, which had already acquired an Inner Mongolian milk producer in 2004, completed a major upgrade to its facility in July. Total investment in this facility, located in Erguna, Hulunbuir, which includes the purchase of the original factory, as well as constructing the new factory, reached 200 million yuan (US$26.7 million).

Mengniu Group and Yili Co. have been listed on the Hong Kong and Shanghai stock exchanges, respectively. According to the Inner Mongolia Statistic Bureau, in 2005, Yili Co. and Mengniu Group accounted for 46.76 percent of the market, while in 2006 their combined market share had risen to 56 percent.

This rapid development of Inner Mongolia's milk industry has not been an overnight occurrence. The Chinese government at the end of the nineties began an agricultural adjustment of China's industrial structure, implementing the National Dairy Development 10th Five Year Plan, "2020 Vision," and "China Food and Nutrition Development Program from 2001 to 2010."

Since the fourth quarter of last year, however, due to soaring prices of material, prices of animal products like meat and eggs have risen rapidly. The rise in animal products prices had little affect on the price of milk, however.

"Milk prices have not risen, leading farmers to sell cattle. The rising cost causes the decline of dairy enterprises' cost-effectiveness," Jianping Jiang, a consultant of China Milk Industry Association, said in a statement. "The main causes of the above problems are that the dairy market supply and demand pattern changes, dairy farmers feeding levels are too low and the products of enterprises are very similar."

"The dairy industry chain is very long, it involves planting, cow breeding, the veterinary pharmaceuticals industry, the dairy processing industry, transport, machinery manufacturing, packaging and package materials industry, commerce," Lei Qi, an analyst at Pingan Securities Ltd., told Emerging China. He added that although the industry had a long way to go, the government will continue to fully support the accelerated development of the industry.

At present, the consumption of milk products in China is still among the lowest in the world - only about 10 kg as compared with the world average of 100 kg a year.

"The production value of the dairy industry takes up only 0.5 percent of the total of the industry, while that in France, US and Japan, [the value] is 30, 50 and 18 times more than that in China respectively. There are about 1000 milk-processing factories all over our country, which are mainly located in Heilongjiang, Inner Mongolia and Xinjiang Autonomous Region, with milk powder as their staple products," Jinshan Wang, spokesman of Yili Co. told Emerging China. In the milk product consumption structure, fresh milk has a major share while yogurt and cheese consumption is on the rise year by year.

"The dairy market has developed into a modern food manufacturing industry with advanced techniques and complete varieties in the past ten years. The total output of milk was 28.648 million tons in 2005, up by 20 percent over the previous year, which is 3.3 times higher than that of 1995. The total industry value of dairy products reached 88.67 billion yuan (US$11.82 billion). With the improving living conditions of Chinese people, dairy consumption market is now getting expanded and matured gradually," Weixing Liu, vice manager of the Beijing branch of Inner Mongolia Mengniu Group, told Emerging China. He added that the potential for growth of the milk industry was vast and predicted an annual growth rate of 15 percent for liquid milk consumption.

Consumption of cheese, cream, blue cheese and butter forms a relatively large portion of the total dairy product consumption, while products like liquid milk, yoghurt and powdered milk are hugely popular in China, leading to constant and fierce competition among the major enterprises.

"Processing enterprises endure increasing competition which leads to the industry verticals year after year," Qi said. "Beginning from 2004 to the present, and even in the next five or six years, the competition in the market of China's dairy industry has shifted to capital competition."

According to Qi, the focus of market competition in the future will be product packaging. It is expected that the entire line of PET plastic bottle packaging will become a packaging trend. Tetra Pak's aseptic packaging is already popular with a growing number of dairy production enterprises. Consumers can only benefit from all this competition.

"I believe that in the coming decades, the Chinese government will continue [to support] the milk industry as an important pillar of the agricultural industry to increase attention on the development of China's dairy cattle rearing level. The average annual consumption of people will gradually be increased," said Li.

China has more than 1,600 dairy processing enterprises. In recent years, a number of large, powerful companies have come to dominate the industry with milk production being concentrated in the large scale enterprises. Smaller weaker companies have been pushed into the background.