Coronavirus Disrupting China’s Entire Dairy Supply Chain; Imports Could Fall

While the impact of the coronavirus epidemic on China’s dairy demand should be short-term, the uncertainty over the actual duration of the impact and the lingering psychological impact could potentially bring meaningful damage to consumption, which then affects processing, production and imports, according to a recent report from Rabobank.

The coronavirus is “disrupting the entire dairy supply chain in China,” said the report, entitled “Coronavirus Impact on Chinese Dairy Sector: an Initial Assessment.”

The report looks at what a 30-day disruption could bring to dairy consumption.

Retail outlet closures and falling foot traffic at grocery retailers (partially offset by online retailers) had a material effect on retail sales during the recent Chinese New Year holiday, the report noted. As a result, retail inventories, which were well-stocked before the Chinese New Year, continue to build. There has been some recovery of delivery capacity of online retailers post-holiday, but mobility remains an issue in many places.

Based on industry interviews with Chinese sources regarding retail performance, Rabobank initially estimates a 30-day impact could reduce liquid milk consumption by 2 to 4 percent year-over-year for the full calendar year, assuming part of the retail loss is compensated by online sales.

During Chinese New Year, premium liquid milk products, traditionally purchased for gifting purposes, were “severely impacted,” although this was potentially offset by higher sales of more basic products for drinking at home, the report said. If the situation is prolonged, this could mean a process of de-premiumization, at least during the first quarter of 2020, negatively impact retail sales value.

As foodservice is among the hardest-hit sectors, consumption through this channel is likely to suffer the greatest year-on-year percentage change, the report said. Cheese consumption in China is heavily tilted toward foodservice channels. Rabobank initially estimates that a 30-day impact could potentially reduce Chinese cheese imports by at least 5 percent year-over-year for the full calendar year, or over 6,000 tons (consumption estimated based on 2019 imports of almost 115,000 tons).

Distributors have experienced a slower movement of inventory through retail channels, the report said. As a result, they are delaying restocking from processors. Restocking is also impacted by road traffic control and a shortage of labor post-Chinese New Year, as a result of reduced mobility.
If it takes an extended period of time for restocking to resume, retail inventory will start to erode through the remainder of the first quarter.

Tighter road traffic controls are being used in an attempt to contain the coronavirus epidemic, which is causing disruptions to inter-provincial logistics around China and even within provinces, affecting raw milk shipments in various regions, the report noted.

China’s central government issued circulars at the end of January 2020 and the beginning of February 2020, stating the importance of a stable food supply in terms of production, distribution and logistics, but it may take time at the grassroots level to help with this, the report continued.
This could put more pressure than usual on milk prices, which generally trend lower after the Chinese New Year.

Rabobank is aware that milk supply contracts have generally been honored between large processors and large farms which have been able to deliver milk. However, prices for deliverable raw milk outside the contracts tend to be sold at a much lower price than the contracted price.

In some regions, farms have encountered tight feed supplies due to an extended Chinese New Year holiday and partly due to the road traffic controls. Any persistence of the situation could have a further negative effect on milk production.

China imported a total of almost 670,000 metric tons of whole milk powder in 2019 (up 30 percent from 2018), second only to 2014, and a record high skim milk powder of 340,000 metric tons (up 23 percent from 2018). Rabobank was expecting China’s first-half 2020 imports to fall by 3 percent year over year and to grow by only 1 percent for the full year.

However, the coronavirus situation is “very likely to change this forecast significantly,” the report stated. At least in the near term, this should reduce China’s appetite for dairy ingredients, following abundant arrivals of December 2019 and January 2020 shipments, slow-moving inventory, ongoing higher levels of dry spraying of milk and with carryover of inventory from last year.
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