China's planned economy clashes with dairy market

The large Chinese state-owned dairy companies, including Yili and Mengniu, have done their job well. These companies - there are about twelve of them - have set up series of mega-dairy farms modeled on the Fonterra farms, which the New Zealand company has since sold, and the Chinese imitators have kept them running at full speed. Yili subsidiary Youran Dairy, for example, has 78 mega-farms, Mengniu subsidiary China Modern Dairy 41.

The result is that these large dairy companies provide the largest share of Chinese milk production (growth) in a few years. Often with the help of imported roughage (especially alfalfa from the US), but that is not so important. The result is there. But at the expense of many hundreds of thousands of smaller Chinese farmers and processors. They could not keep up with the leaps in scale that the (subsidized) dairy giants made. Their production is now largely surplus and too expensive. In a short time, these entrepreneurs are forced out of the business, resulting in a large, but little-noticed economic waste and deforestation.

The surplus milk that was created was partly converted into milk powder, but there is also too much of that on the domestic market. China is now making frantic attempts to export this product, but is still reaping the bitter fruits of the baby food scandal of 2008. Foreign buyers do not have much confidence in the Chinese product, because they do not trust the Chinese supervision system either. At least, when it comes to export.

The economic difficulties that China has been experiencing since the corona pandemic do the rest. In 2021, Chinese dairy consumption was still 14,4 kilos per capita, in 2022 it had fallen to 12,4 kilos per capita due to the drop in purchasing power. The still falling birth rate also contributes to the problems. This applies in any case to the sale of regular baby food. The super-exclusive product, which FrieslandCampina sells, among others, seems immune to this. 

Despite the large dairy surpluses, it does not yet appear that the large dairy companies in China are slowing down much. However, the import of alfalfa from the US is decreasing and large Chinese dairy companies are looking for cheaper alternatives, in their own country or in Mongolia, for example. The disadvantage of this is that the quality of these roughages is also much lower. The game remains the same: that of the state and the planned economy against the smaller entrepreneurs. Many 'friction losses' occur in this.

It is not just in the dairy farming and dairy sector. It is also plaguing the Chinese pig farming industry, and the automotive industry, which has a target to achieve for the production of electric cars. The plan sets a target and it has to be achieved, even if the market demands something different.

That China, against the background of its own hybrid plan and market economy, is launching investigations into anti-competitive practices in Europe and the US, among others, feels like a bad joke. However, the international economic game is not a well-regulated affair either. Trade is also, and perhaps above all, a test of strength between global players.