This report presents a panoramic view of China’s diary industry in 2009, including raw milk and diary production, diary products consumption, diary products trade, raw milk and dairy products price trends, the running of China’s diary industry, competition situation of China’s diary market, operating performance, investment of diary companies, the world diary market trends, the production, consumption and trade of main diary producing and trading countries, the impact of the world diary market on China’s diary industry, and predict of the development trend of China’s diary industry in 2010. The report especially conducted a comprehensive analysis on the impact of the melamine incident on China’s diary industry.

Research Background
2009 is one of the most unusual years of China’s diary industry in nearly 10 years. The melamine incident in 2008 and the negative impact of the world financial crisis are still in continuity, although at a somewhat reduced level. The online quote price of the natural whole milk powder, the “barometer” in the world diary market, sustained downturn, which brought a major impact on China’s milk powder and even the entire diary industry. Facing tough market conditions, under the impact of various support and regulate policies, China’s diary industry is struggling to pick up, at a recovery speed faster than the expectations of internal and external expectations.

Viewing from the international market environment, the international financial crisis is still exerting a negative impact on global diary market in 2009. Due to insufficient demand for diary products, diary industry in developed countries, especially the EU and the USA, raw milk prices continued to slump, leading to decline in diary herds and reduction in aggregate supply. Bulk diary products like skim milk, cheese, butter, whey power in the world market fall into the valley of recent years in the first quarter of 2009, although slowly began to rebound in the second quarter, the price had a significant decline compared with the second half of 2007.

For example, in the US, food-grade nonfat dry milk bottom-price is USD 1795/mt (factory price), down 60.6% compared with the peak price of USD 4559/mt. The bottom price of butter is USD 2358/mt, down 60.69% compared with the peak time price of USD 3789/mt. The bottom price of dry whey is USD 338/mt, down 80.56% compared with the peak time price of USD 1739/mt. 40-pound block of cheddar cheese bottom price is USD 2461/mt, down 49.51% compared with the peak time price of USD 4874/mt. Since natural whole milk powder quotation system online started in August 2008, a total of 13 rounds of trading are transacted. In the first three quarters of 2009, full cream milk powder factory prices are roughly around USD 2200. Even though in the first half of 2010 the online transaction prices had risen considerably, the average CIF price of full-fat light milk powder imported by China from New Zealand in 2009 is at approximately USD 2200-2500/mt, roughly half the price of the peak time in recent years. Low price seriously blew the world cattle breeding industry and diary product prices.

From domestic market environment, China’s diary industry faces a very severe environment. Domestic diary industry is under a major impact and challenges of the world market. As diary prices in the international market are low, especially full-cream light milk powder and whey products that have a greater impact on China’s market prices are low, full-cream light milk powder and whey products imported by China from the world market soared. According to China Customs data, from 1-10 months in 2009, China has imported 136,189 tons of full-cream light milk powder from abroad, 484.42% up compared with the same period of last year. Imported whey products reached 241,530 tons, an increase of 42.08%. In addition, due to the melamine incident impact as well as the lack of cost advantage, China’s milk powder export shrunk dramatically. Exports volume in the first 10 months of 2009 dropped by nearly 80% compared with the same period of last year. Blocked exports and soared imports brought great impact on the production of China’s raw milk powder and raw milk. Milk stock once reached 300,000 tons. The lowest price of raw milk powder had reached RMB 15000/mt, much lower than the cost of RMB 28,000/mt. In the first three quarters of 2009, the average price of China’s raw milk showed a downward trend, fell about 15% year on year, resulting in decline of diary cattle herds and raw milk production. Facing the severe market conditions, the Chinese government issued a series of supporting policies for diary industry development, such as the extension of central government loans for the acquisition of raw milk on the discount, the central budget subsidies for seed cows, milk station machinery and development, the expansion of state purchasing and storage size and so forth. Diary processing enterprises, especially the major enterprises, have more investment in the quality of raw milk and diary products, the consumer confidence in milk consumption significantly increased, these factors promote China’s diary market gradually pick up, the recovery is faster than expected. According to the data provided by the National Bureau of Statistics, in the first 10 months of 2009, China’s diary production increased by 10.2%, more than the same period of last year, in which liquid milk output rose by 10.6%; per capita diary consumption of urban residents in the first three quarters respectively increased 15.84% and 4.07% compared with the fourth quarter of 2008 and the first quarter of 2009, broadly in line with the second quarter. From the point of market competition and industry consolidation, the trend of the private turning to the state is strengthened. Formula milk, especially infant formula milk powder industry became the most competitive sub-sector in 2009. Many brands compete for market space left over by Sanlu. Meanwhile domestic brands launched new impact to the high-end market.

In 2009 the melamine incident has brought a profound lesson to the entire industry. The industry is having reflection and criticism. A growing number of diary companies are rethinking the way for survival and development, especially major diary companies are adjusting their corporate strategies and tactics in order to respond to new market and policy environment. In 2010 China’s diary industry will face a market environment very different form 2009. High raw milk price and milk products prices will be the most important market features. In addition, the issuance of the new diary safety and quality standards will bring an important impact on cattle breeding farmers, diary companies and government regulatory authorities.

This report presents a panoramic view of China’s diary industry in 2009, including raw milk and diary production, diary products consumption, diary products trade, raw milk and dairy products price trends, the running of China’s diary industry, competition situation of China’s diary market, operating performance, investment of diary companies, the world diary market trends, the production, consumption and trade of main diary producing and trading countries, the impact of the world diary market on China’s diary industry, and predict of the development trend of China’s diary industry in 2010. The report especially conducted a comprehensive analysis on the impact of the melamine incident on China’s diary industry.

This report is the result of collective wisdom of the diary research group of BOABC. The senior diary analysts of BOABC diary research group are members of relevant government sectors and association think tank, maintaining a good relationship with relevant government departments and a good relationship with national key diary companies, associated industries and enterprises. These resource ad

Chapter 1 Overview of China’s Dairy Industry in 2009 1
1.1 Raw Milk Production 1
1.1.1 Minor Decline of Dairy Cattle Inventory 1
1.1.2 Slim Decline of Raw Milk Production 1
1.2 Dairy Processing 1
1.2.1 Noticeable Rally of Liquid Milk Production 1
1.2.2 Better Rally of Solid Dairy Production than Forecast 1
1.3 Dairy Trade 1
1.3.1 Substantial Growth of Dairy Import 1
1.3.2 Dairy Export Lingered at Low Level 2
1.4 Dairy Consumption 2
1.4.1 Per Capita Milk Possession Amount Kept Steady 2
1.4.2 Minor Growth of Per Capita Dairy Consumption of Urban Residents 2
1.5 Dairy Price 2
1.6 Running of the Industry 3
1.7 Industrial Restructuring 3
1.8 Dairy Policies 3
Chapter 2 Policy Environment for China’s Dairy Industry in 2009 4
2.1 Overview of Relevant Laws, Policies and Standards 4
2.2 Legislation 4
2.2.1 Background for the “Food Safety Law” 4
2.2.2 Content of the Food Safety Law 4
2.2.3 Impacts on Dairy Industry from Food Safety Law 5
2.3 Policy 6
2.3.1 Contents of Dairy Industrial Policy (2009 edition) and Impacts on Dairy Industry 6
2.3.2 Content of “Interest Subsidy for Raw Milk Procurement Loans from Central Finance” and Impacts on Dairy Industrial Development 7
2.3.3 Content of “Interest Subsidy for Raw Milk Procurement Loans from Central Finance” and Impacts on Dairy Cattle Farming 8
2.3.4 Main Contents of the Policy of “Temporary National Reserve of Milk Powder” and Impact on Dairy Industry 9
2.3.5 Contents of “Regulations on Strengthening Management over Antibiotic Residue in Raw Fresh Dairy Products” and Impacts on Dairy Industrial Development 9
2.3.6 Contents of Policy for “Automatic Import Approval Management for Fresh Milk, Milk Powder and Whey” and Impact on Dairy Industry 10

2.3.7 Contents of “Sino-ASEAN Investment Agreement” and Impact on Dairy Industrial Development 12
2.4 Standards 12
2.4.1 Background for Amendment of Dairy Quality and Safety Standards 12
2.4.2 Contents of “Quality and Safety Standard of Dairy Products” (draft) 13
2.4.3 Impact from the New “Quality and Safety Standard of Dairy Products” on Dairy Industrial Development 17
Chapter 3 China’s Dairy Production in 2009 18
3.1 Raw Milk Production 18
3.1.1 Overall Situation 18
3.1.2 Dairy Cattle Inventory 18
3.1.3 Raw Milk Production 19
3.1.4 Regional Layout of Raw Milk Production 19
3.1.5 Dairy Farming Modes 20
3.1.6 Raw Milk Procurement Price 21
3.1.7 Feed Price 22
3.2 Processing of Dairy Products 24
3.2.1 Liquid Milk 24
3.2.2 Solid Dairy Products 28
3.2.3 Production of Milk Powder 30
3.2.4 Production of Other Solid Dairy Products 32
Chapter 4 China’s Dairy Trade in 2009 33
4.1 Import of Dairy Products 33
4.1.1 Overview 33
4.1.2 Import Structure 33
4.2 Milk Powder Import 34
4.2.1 Quantitative Analysis of Imports 34
4.2.2 Import Structure 35
4.2.3 Origins of Import 35
4.2.4 Import Flow 36
4.2.4 Importation Price 37
4.2.5 Online Quotation of Whole Milk Powder by Fonterra 37
4.3 Import of Whey Products 38
4.3.1 Quantitative Analysis of Whey Import 38
4.3.2 Origins of Import 38
4.3.3 Import Flows 39
4.3.4 Importation Price 39
4.4 Milk Fat Import 40
4.4.1 Quantitative Analysis of Import 40
4.4.2 Origins of Import 40
4.4.3 Importation Price 41
4.5 Cheese Import 42
4.5.1 Quantitative Analaysis of Imports 42
4.5.2 Origins of Import 43
4.5.3 Analaysis of Importation Price 43
4.6 Fresh Dairy Import 44
4.6.1 Quantitative Analaysis of Imports 44
4.6.2 Origins of Import 44
4.6.3 Analaysis of Importation Price 45
4.7 Yogurt Import 45
4.7.1 Quantitative Analaysis of Import 45
4.7.2 Origins of Import 45
4.7.3 Analaysis of Importation Price 46
4.8 Dairy Export 47
4.8.1 Overview 47
4.8.2 Structure of Dairy Export 47
4.8.3 Fresh Milk Export 48
4.8.4 Milk Powder Export 49
Chapter 5 Dairy Consumption in China in 2009 52
5.1 Overview 52
5.2 Structure of Dairy Consumption by Urban Residents 54
5.3 Dairy Consuming Regions of Urban Residents 56
5.4 Dairy Consumption by Rural Residents 60
5.5 Resumption of Dairy Consumption 60
5.6 Raw milk Powder Price 61
5.7 Retail Price of Dairy Products 64
5.7.1 Fresh Milk Price 64
5.6.2 Yogurt Price 65
5.7.3 Price of Small-pack Milk Powder 66
5.7.4 Lactose Price 66
5.7.5 White Sugar Price 67
Chapter 6 Competition of Dairy Market in China in 2009 68
6.1 Overview 68
6.2 Competition of Raw milk Market 68
6.3 Market Competition of Infant/young Child’s Formula Milk Powder 69
6.3.1 Market Environment 69
6.3.2 Market Share of Main Brands 69
6.4 Market Competition of Liquid Milk 70
6.4.1 UHT Milk 70
6.4.2 Yogurt 71
6.4.3 Pasteurized Milk 72
6.4.4 Acidified Drinks 73
Chapter 7 Main Dairy Companies in 2009 75
7.1 Yili Group 75
7.1.1 Business Revenue 75
7.1.2 Status in Market Competition 78
7.1.3 Strategy Adjustment of Yili after Melamine Incident 79
7.1.4 Forecast of Market Prospect of Yili 81
7.2 Mengniu Group 81
7.2.1 Business Revenue 81
7.2.2 Market Competition Status 83
7.2.3 Background for COFCO’s Entry into Mengniu and Impact 83
7.2.4 Forecast of Business Revenue of Mengniu 84
7.3 Bright Dairy 85
7.3.1 Business Revenue 85
7.3.2 Market Competition Status 87
7.3.3 Strategy Adjustment after the Melamine Incident 87
7.3.4 Prospect of Bright Dairy 88
7.4 Sanyuan Food 89
7.4.1 Business Revenue 89
7.4.2 Market Competition Status 91
7.4.3 Business Revenue of Hebei Sanyuan 92
7.4.4 Prospect of Sanyuan Dairy 93
7.5 Wondersun Dairy 93
7.5.1 Business Revenue 93
7.5.2 Market Competition Status 94
7.5.3 Strategy Adjustment after Melamine Incident 94
7.5.4 Prospect of Wondersun Dairy 95
7.6 Yinqiao Dairy 96
7.6.1 Business Revenue 96
7.6.2 Market Competition Status 96
7.6.3 Prospect of Yinqiao Dairy 97
7.7 Firmus (Feihe) Dairy 97
7.7.1 Business Revenue 97
7.7.2 Market Competition Status 97
7.7.3 Strategy Adjustment after Melamine Incident 98
7.7.3 Valuation Adjustment Mechanism 98
7.7.5 Prospect of Firmus Dairy 98
7.8 New Hope Dairy 99
7.8.1 Business Revenue 99
7.8.2 Market Competition Status of New Hope Dairy 100
7.8.3 Restructuring of New Hope Dairy 100
7.8.4 Prospect of New Hope Dairy 102
7.9 Nestle 102
7.9.1 Business Revenue 102
7.9.2 Market Change after Melamine Incident 103
7.9.3 Prospect of Nestle 103
7.10 Dumex 103
7.10.1 Business Revenue 103
7.10.2 Market Change after Melamine Incident 104
7.10.3 Prospect of Dumex 104
Chapter 8 Companies Related to China’s Dairy Industry in 2009 105
8.1 Business and Other Activities of Tetra Pak in China 105
8.1.1 Business Activities in China 105
8.1.2 PR Activities 106
8.2 Prospect of Tetra Pak in China in 2010 107
Chapter 9 Dairy Industrial Development in China in 2009 108
9.1 Overview 108
9.2 Operational Capability of Dairy Industry 109
Chapter 10 World Dairy Market in 2009 110
10.1 Overview 110
10.1.1 Production of Milk and Dairy Products 110
10.1.2 Dairy Trade 110
10.1.3 Prices of Dairy Products 110
10.2 Dairy Market Status of Main Producing and Trading Countries in 2009 114
10.2.1 New Zealand 114
10.2.2 Australia 119
10.2.3 United States 123
10.2.4 European Union 128
10.2.5 India 134
Chapter 11 Outlook of China’s Dairy Industry in 2010 138
11.1 Overall Forecast 138
11.2 Forecast on Raw Milk Production 139
11.2.1 Dairy Cattle Inventory 139
11.2.2 Milk Production 140
11.2.3 Layout of Raw Milk Production 140
11.3 Prospect of Dairy Processing 141
11.3.1 Main Dairy Products 141
11.3.2 Other Dairy Products 142
11.3.3 Marginal Dairy Products 143
11.4 Forecast on Dairy Trade 144
1.4.1 Import 144
11.4.2 Export 144
11.5 Forecast on Price Trend of Raw Milk and Dairy Products 145