Strong demand for high-quality dairy products in several emerging countries
Dairy farming has been a vital part of human life for thousands of years and plays an important role in the sustainable agriculture mix to this day.
In humid coastal regions, mountainous areas and semi-arid zones, arable farming is often too risky as plowing the land could result in soil erosion, but the natural grassland in these places is ideal for grazing cattle. In addition to providing an important source of protein through their meat and dairy products, cattle also provide leather for shoes and clothing, and milk powder can be used in infant formulas for babies whose mothers are unable to breastfeed.
Dairy represents a huge growth market, with demand from many emerging markets growing rapidly in recent years as they adopt a more Western diet. Demand growth is forecast to outstrip supply growth in the key markets of China, India, and the Middle East and North Africa up to 2020: In the chart above, the circles represent current supply and demand, while the bars show forecast annual supply (green) and demand (blue) growth rates.
One of the highest-growth areas is in the provision of high-quality infant formulas to China and the countries of Southeast Asia. The infant formula market in China is growing rapidly, and is currently worth around USD 13 billion per year1. Since the milk contamination scandal in 2008 the government has put in place much more rigorous regulation, and sales of foreign brands have increased sharply. The country’s rapidly growing number of middle-class mothers are willing to pay a premium to ensure their children get the best product, which means companies meeting the highest quality standards can earn attractive margins.
The number of milk formula brands in China has been slashed from over 800 in 2008 to fewer than 100 today1, so firms with access to the market could make attractive investments. New Zealand-based Fonterra, the world’s biggest dairy exporter, was granted approval by the Chinese authorities in May1, and others include Mead Johnson and Danone. There are also good opportunities for local producers complying with the regulations, such as Biostime.
Senior Analyst RobecoSAM
Sustainable Agribusiness Strategy