Canadian dairy producers missing out in China

To see the opportunity for foreign dairy products in China, look no further than supermarket shelves in its fast-modernizing cities. In the grocery section of a central Beijing Wal-Mart, cans of baby formula promise contents from the United States, New Zealand and Australia. In the dairy case, butter from New Zealand sits alongside American cheese, sales of which are growing as upper-middle-class palates acquire a taste for more Western foods.

Chinese consumers’ suspicion of local milk
means big business for foreign milk producers

Chinese consumers’ suspicion of local milk has changed little since the 2008 scandal in which half a dozen babies died and scores more were sickened by melamine-laced milk powder. Even now after sweeping industry reforms Chinese newspapers still carry occasional reports of quantities of melamine-laced milk being seized by inspectors.

That translates into big and growing business for foreign milk producers. China imported some 406,000 tons of milk powder alone last year, a number which is expected to grow to about 550,000 this year.

But very little of that is Canadian milk, and trade lobbyists warn Canada is missing the boat on this growing opportunity because of dairy industry protections back home. “Apart from the barrier that these programs of supply management have been to Canada making other gains in trade negotiations—quite apart from that, they’re bad for Canadian consumers, and they’re bad for Canadian producers,” said John Manley, the former industry minister who now heads the Canadian Council of Chief Executives, in an interview in Beijing late last year.

Canadian forays into the Chinese dairy market have been modest: about C$9 million in a trade category that includes dairy products, eggs and honey, at the peak in 2009. Exports dropped to $4.19 million in 2010, after China tightened import regulations.

Compare that modest number with New Zealand, whose exports in that category were the equivalent of US$1.41 billion in 2010. Most of those are through dairy co-operative Fonterra, owned by a majority of the country’s farmers, which also owns two large dairy farms in China and is now constructing a third.

Canada, Manley said, needs to be more like New Zealand. “If you look at what New Zealand has accomplished in dairy since they unwound their own protections, they have become a dominant supplier around the world,” he said. “It’s a country the size of Toronto. So what could our dairy farmers do if they were actually getting access to markets? It’s not as though there’s too much food in the world. There are huge markets for food and we think producers could be getting into that.”

Such access does carry some risk in this emerging market. Fonterra almost saw its business in China come to a crashing halt over the 2008 milk scandal. Its Chinese partner Sanlu Group, in which it held a 43% share, faced a recall of 10,000 tons of milk powder and eventually went bankrupt, its senior executives imprisoned. However, the company has weathered the storm and today sells its products both commercially under its own brands and wholesale to Chinese companies, gaining market share through training sessions with local partners that include everything from improving feed quality for dairy herds to working with local bakeries to show them how to use their dairy products.

“They have got a good reputation and they’ve managed to build on it,” said David Oliver, a New Zealander who is a Beijing-based dairy consultant. “A country’s wealth increases and people consume more dairy products. When I first came here 15 years ago, you’d go to a supermarket and there might be a little bit of UHT milk and that’s it. … It’s a good market, and it’s going to be a better market.”

Securing access to that market, however, would mean major changes to the supply management system in the Canadian dairy industry. A government-determined quota system ensures producers earn a guaranteed income, but also limits ambitions to expand—a double-edged sword, especially since improving technology means smaller herds are producing more milk than ever before.

In a written statement, Agriculture Canada said there are no plans to change its system of supply management, which leaves dairy production focused almost completely on the domestic market and limits exports to very specific products like ice cream, powdered milk and protein concentrates. Last week, the department handed out $130,000 to the Dairy Farmers of Ontario to develop more niche markets for specialty cheeses.

Agriculture Minister Gerry Ritz is in Beijing this week promoting Canadian beef, grains and livestock genetics as part of Prime Minister Stephen Harper’s visit to China, which has a heavy emphasis on trade. Ritz has so far maintained publicly there are no plans to change the system. But an eventual review is not entirely out of the question, given the recent legislated end to the Canadian Wheat Board’s 60-year monopoly on marketing wheat and barley.

Such supply management programs would likely come under some review if Canada seriously pursues joining the Trans-Pacific Partnership, free-trade negotiations under way among nine Pacific Rim countries including the United States, Australia and New Zealand, in which such protectionist measures are decidedly unwelcome.

“I think there is some concern. I think people are looking at that [Wheat Board experience], but the dairy industry is very strong and their lobby is very strong,” said Doug Yungblut, past-president of the Agricultural Institute of Canada and now an agricultural consultant in Waterdown, Ont. He said that, while the industry could expand production if the system were reformed, most dairy producers are content to live with the status quo. “It’s doing so well for so many people, they don’t want out of it.”

Still, the opportunity for Canadians in China is clear, given the continuing crisis of faith in China’s domestic industry.

“[Imported milk] is more secure and safe, and there are fewer fakes,” said Li Youhe, 60, as he examined milk powder brands on the shelf at Wal-Mart for his now three-year-old granddaughter. She was a tiny baby at the time of the scandal, when his family switched to formula from New Zealand and Germany; today, he purchases a domestic brand of children’s milk powder, on the reassurance that it is made with ingredients imported from Europe.

Canadian entrepreneurs at home and abroad still see opportunity. Zhao Youming, a Chinese agrologist running the private Canada-China Agriculture and Food Development Exchange Centre based in Hamilton, said in a telephone interview that his efforts to sell Canadian dairy products to China have so far been largely unsuccessful because of the lack of supply, though he is consulting with dairy associations on plans to open Canadian agrifood stores in Beijing and Shanghai.

“I travel to China many times. In the supermarket I see dairy products from Australia and New Zealand, but not so much Canadian,” he said. “From my point [of view], I think this is a good opportunity, because Canadian products are seen as good.”