Sales 'Halved' as Dairy Industry Tackles Pandemic 'Big Test'

After the COVID-19 outbreak, milk, the most common gift during the Spring Festival, experienced its worst sales season in recent years. Dairy companies have been producing large quantities of milk powder (spray-dried for storage), inventories have surged, and farmers have been dumping milk. Experts believe the pandemic may force some dairy farmers out of the market, and as dairy consumption recovers after the outbreak, the supply-demand imbalance for raw milk will intensify. Combined with frequent international 'black swan' events and currency depreciation in some major milk-producing regions, China's dairy revitalization faces many uncertainties.

-01- Sales Slump Pressures Entire Supply Chain

According to industry surveys, over the past month or so, dairy sales in major supermarkets in first- and second-tier cities have generally fallen by more than 50% year-on-year. It is expected that in the first half of 2020, industry-wide sales will decline significantly, with some companies at risk of cash flow disruptions.

A reporter at Victoria Supermarket in Hohhot, Inner Mongolia, saw dairy products stacked like small mountains, with promotional labels such as 'Buy One Get One Free' and 'Special Offer,' but few buyers. Supermarket staff were giving away soon-to-expire yogurt for free.

Song Liang, a senior dairy analyst, said that Spring Festival sales typically account for 1/8 to 1/10 of annual dairy sales, but this year's Spring Festival sales were almost zero. He said: "The pandemic is not over yet, and the impact will continue for some time. The first-quarter results for dairy companies will not be good, and dairy sales in the first half of the year will drop by 20% to 40%."

By category, pasteurized milk and low-temperature yogurt with shorter shelf lives have been hit harder. A southern dairy company that mainly sells pasteurized milk said that due to transportation blockages, fresh milk could not be delivered to township supermarkets or urban residential areas, and sales have only recovered to about 40% of normal levels. The company's head said: "A few days ago, a truck of fresh milk was headed to a township, but the township officials blocked it, and the entire truckload had to be dumped by the roadside."

For yogurt, besides sluggish supermarket sales, special channels for high-end yogurt, such as restaurants and cinemas, have seen almost zero sales. Inner Mongolia Lan'gege Dairy Company, facing a large backlog of yogurt, posted an urgent appeal online and opened sales channels through home delivery and community group buying to clear inventory.

"Dairy companies in the province are almost at full capacity in terms of inventory, but cows are still producing milk," said Tong Yan, secretary-general of the Liaoning Dairy Association. Before the pandemic, Liaoning produced 200-300 tons of milk powder per day; now it has increased to 1,500 tons, meaning nearly 40% of raw milk in the province needs to be spray-dried. "But the province's spray-drying capacity is only 500 tons, so companies have to find ways to send the remaining 1,000 tons to other provinces for spray-drying."

As the only company in Fujian Province with spray-drying capability, Fuzhou Mingyi Dairy Company has recently received many spray-drying requests from farms in other provinces. Lin Qiang, chairman of Mingyi, said: "Spray-drying requests have tripled, but we haven't sprayed a single drop because we can't digest the powder ourselves either."

To reduce losses for upstream farms, large dairy companies such as Yili, Mengniu, and Changfu have promised not to reject raw milk and have taken spray-drying measures to maintain milk collection, but the cost is high. "At current prices, each ton of spray-dried milk powder results in a loss of nearly 13,000 yuan," said the general manager of a large dairy company in Shenyang, Liaoning. The factory spray-dries over 70 tons per day, meaning daily losses of 800,000 to 900,000 yuan.

Xu Ke, secretary-general of the Inner Mongolia Dairy Association, said that due to movement restrictions, some employees cannot return to work, and the resumption rate for suppliers, distributors, and retailers in the dairy supply chain is generally low, severely affecting the supply of materials needed for production. "The entire dairy product production, sales, and distribution system is almost at a standstill. From late January to early February, the daily capacity utilization of several large dairy companies was less than half."

According to information released by the China Dairy Association, as of February 7, 13 provinces had reported milk dumping. Tong Yan said: "If this situation continues, companies may not collect milk according to contracts, and then more farmers will slaughter cows and dump milk."

-02- Future Supply-Demand Imbalance May Intensify

Describing the impact of the pandemic on China's dairy industry, experts said it was like "a plane just taking off and encountering a thunderstorm."

Some surveyed farming companies are optimistic about the future, believing that as the pandemic eases, dairy consumption will gradually recover, and demand for milk from upstream farms will return to normal levels. In addition, since 2019, national milk production has been in short supply, so raw milk prices will return to high levels, and farming companies can quickly resume normal operations.

However, Song Liang believes that with increased imports of dairy cows and improved farm profitability, the cow inventory only began to recover in 2018 and is still weak. "Newly imported cows will take about a year to produce milk normally. If the pandemic causes some small and medium-sized farms to slaughter cows and exit, there will be a gap in milk supply."

"After the pandemic, milk prices will first fall and then rise," Song Liang analyzed. After the pandemic, dairy companies will digest spray-dried powder inventory through promotions and increased use of reconstituted milk, leading to a short-term oversupply and falling milk prices; in the long term, as some milk sources exit during the pandemic and consumption gradually recovers, there will be a temporary supply shortage in the second half of the year.

Rapidly rising milk prices are not good for China's dairy industry as a whole. Xu Ke believes that if too many dairy farmers exit due to the pandemic, milk prices will rise and remain high, increasing operational pressure on dairy companies. "Some small and medium-sized dairy companies may face cash flow disruptions, leading to forced production halts or even closures, which in turn will impact upstream dairy farming and create a vicious cycle."

Song Liang analyzed that the ongoing locust plague will cause grain production declines in Africa and even South Asia, raising global grain prices, which will also drive up prices for alfalfa, corn, and other 'staple foods' for dairy cows, increasing farming costs and adding uncertainty to China's dairy revitalization.

Entrepreneurs like Lin Qiang worry that after the pandemic impact, the market share temporarily vacated by domestic dairy farmers and companies will be taken over by imported products. Statistics show that in 2019, China imported 2.973 million tons of dairy products, a year-on-year increase of 12.8%, including 924,300 tons of liquid milk, up 31.3%.

"In 2020, except for infant formula, imports of finished liquid milk will increase across the board," Song Liang said. The rapid growth in domestic demand for imported dairy products, coupled with the depreciation of the Australian dollar and New Zealand dollar, will pose a severe challenge to China's dairy industry after the pandemic.

-03- Dairy Farmers and Companies Unite; New Business Models May Accelerate 'Breaking Out'

Experts believe that China's dairy industry should reflect on two points from this pandemic: first, deepening the interest linkage mechanism; second, forcing changes in consumption channels.

"Most of those dumping milk and slaughtering cows are small and medium-sized farms that have not formed stable interest linkages with dairy companies," Song Liang said. During the fight against the pandemic, the interest linkage mechanism that the industry has called for for years has begun to play a key role: major dairy companies not only 'grit their teeth' to collect all excess milk but also launched various measures to help dairy farmers and farms weather the crisis.

Among them, Mengniu Group announced increased financial support for partner farms, including a 2-3 month interest rate reduction and deferred deductions on support funds, and will also initiate measures such as early payment for milk and expanded credit lines. Yili Group opened a green financing channel and has provided 670 million yuan to support farms since the outbreak.

Experts generally believe that upstream and downstream 'huddling together for warmth' has greatly reduced the impact of the pandemic and will accelerate the deepening and implementation of interest linkage mechanisms. Zhang Jianqiu, executive president of Yili Group, suggested that this opportunity should be used to promote long-term stable cooperation between small and medium-sized farming enterprises and large dairy companies with strong risk resistance, and to crack down on or legally ban illegal milk brokers or middlemen to regulate the milk source market.

In addition, the industry believes that the pandemic will also drive changes in dairy sales channels, with innovative sales models such as e-commerce and new retail ushering in a spring.

After the outbreak, Mengniu cooperated closely with e-commerce platforms such as JD.com, Tmall, and Hema to meet consumers' 'contactless' delivery needs. In addition, the 'Tianxianpei' smart milk ordering platform, established by Mengniu and Alibaba, which uses a new model of 'ordering milk online and picking it up from a downstairs freezer,' also ensured the daily supply of fresh milk in some cities during the pandemic.

Lu Minfang, president of Mengniu Group, believes that this pandemic is forcing domestic dairy companies to innovate their sales channels with greater intensity and at a higher level, promoting comprehensive upgrades in milk ordering channels, supply chains, and delivery methods. "In this critical period, dairy companies need to continuously integrate and innovate, using the mindset of turning crises into opportunities and new technological measures to develop new business models."

Source: Economic Information Daily, Authors: Lin Chao, An Lumeng, Zhu Wenzhe, Zou Mingzhong