Despite all the concern about the current state of China’s economy, Fonterra’s man in Shanghai, Teh-han Chow, says it remains the dairy giant’s biggest opportunity.
China’s latest GDP growth came in at 5.4% in the fourth quarter of 2024, quite a bit better than market expectations of around 5% and the strongest annual growth rate in one-and-a-half years.
Chow, who oversees Fonterra’s business in the Greater China region, told the Herald his personal experience was that conditions in the world’s second-biggest economy were not as mixed as they were perceived as being in the West.
“It’s anecdotal, but when you walk around and when you travel around China, you don’t get a sense that there is a slowdown in the economy - the trains are full, the airplanes are full, and the hotels are full,” he said.
On a recent business trip to Beijing, he turned up at his hotel in the afternoon only to be informed that there was no room for him.
Chow notes that the GDP numbers are well short of where they were a decade or so ago.
“Certainly, it’s not the heydays of double-digit, or anywhere close to double-digit growth, but it’s off a much larger base than it was before,” he says.
“When you say 5% growth and you call it whatever, 4.9, 4.8, or 4.7%, it’s still the size of one Switzerland a year.
“A country that is growing by the size of one Switzerland per year is still unprecedented growth, phenomenal growth, and much larger than anywhere else in the world.
“Five per cent is a lower number than before, but it’s still a great number from that perspective, and the Government continues to make economic development one of their key priorities.”
For Fonterra, that means the opportunity remains in the PRC. “It’s the single largest opportunity of growth around the world, right?”
Chow agrees the view from abroad on China’s prospects was mixed.
“I think obviously there is the political tension, which will drive rhetoric, and then rhetoric drives sentiment.
“So, I think that may be one of the clouds hanging over it if you want to describe it that way.”
The depressed property sector had fed into consumer sentiment.
“China has never lived through a boom-and-bust cycle, so that’s why this first bust cycle has been so more pronounced in terms of its impact or its effect.”
Fonterra said in an update last December that there had been a recovery of demand in Greater China as domestic milk production rebalanced after a dip. Demand from Southeast Asia continued to be strong.
Chow said the co-op’s food service and ingredients businesses were strong in the region.
“We shouldn’t forget that Fonterra has been in China for over 40 years in both the ingredients side and the food service side, and these two remain very strong for us.
“We continue to see growth across the beverage sector, both in terms of ready-to-drink beverages, which, again, our ingredients business supplies to so there’s very strong resilience across that.”
Demand for “functional ingredients” - products aimed at the likes of tea shops such as that popularised by milk tea-type products or tea macchiato products - continued to grow.
On the subject close to New Zealand dairy farmer’s hearts - whole milk powder - Chow says demand looked to be strong.
Whole milk powder prices - which have the biggest impact on Fonterra’s farmgate milk price - jumped by 5.0%, to an average of US$3988/tonne at the latest Global Dairy Trade (GDT) auction, following a 2.1% drop at the previous event.
China has in recent years increased its domestic milk production at its large-scale farms - more than ever before.
While demand, post-Covid, had slowed, production still grew, which resulted in a surplus of local milk.
That surplus resulted in the local processors making more whole milk powder, which then meant a reduction in the amount of whole milk powder China needed to import.
That’s why, post-2022 and into 2023, there was a reduction in whole milk powder prices on the GDT platform.
Local milk in China continues to show signs of rebalancing with a 2.8% year-on-year decline for 2024, according to the National Statistics Bureau.
While spray drying of milk continued through China’s seasonal peak it remained materially lower than the same period in the previous year.
“So that then gives positive signals in terms of our imported whole milk powder demand - that’s why I think we see fairly strong buying or back to normal level buying by China on GDT,” Chow said.
China’s dairy producers are losing money at today’s fresh milk price, so the supply/demand equation is still unbalanced.
“I don’t think we’re going to see a big boom in demand.
“But at the same time, I don’t think demand is going to fall either, so I think we’re steady around, somewhere between where we are at the last GDT auction and the previous auction.”
Chow says the trends in dairy consumption in China remained positive.
“Dairy is perceived very positively in China, and it’s perceived as being very premium.”
Products containing dairy are gifted at Spring Festival - about this time of year - and the upcoming Chinese New Year.
Typically for Fonterra the first half of the financial year is stronger than the second due to the high number of festivals and holidays in China, which often include gifting occasions.
“So, we do see a lot of products that contain dairy being gifted, whether they’re bakery products or they’re packaged products.
“These products are really good signals that business is good, and that people want to consume dairy.”
While China’s birth rate is declining, the size of the ageing population continues to increase apace, with the number of people turning 60 reaching 10 million a year.
The size of the middle class is also increasing, and those factors contribute to greater demand for nutritional products.
The Government’s “Healthy China 2030″ promotes the consumption of milk 300 to 500 grams per person per day.
Chow says if that is multiplied by the 1.3 or 1.4 billion people, that’s potentially 700,000 tonnes of dairy - equivalent to more than 30,000 full Fonterra tanker loads a day.
“Between China and New Zealand and the rest of the world that supplies, China won’t be able to meet that 300g per day demand, so I think that it still says that there’s a significant room to grow in that marketplace and we’re seeing it.”
Fonterra has a leading position in China across most of the categories that it participates in. “And so, we continue to see growth across there.”
Chow says China continues to be a huge opportunity and it’s probably the single biggest one for Fonterra.
Post-Covid, and amid geopolitical tensions, is it back to business as usual?
“I think that there’s no ‘normal’ year, ever.
“Every year is going to be different, and I think the world is such that, I don’t know that ‘business as usual’ exists anymore.
“But I think that we will continue to plough ahead in China, I think we’ll continue to seek growth and strong performance, again our products and what we do is very well recognised in China and again over 40 years that we’ve built.
“China has really been testament to consumers and customers recognising the benefits that New Zealand dairy brings.
“I think the other thing is that the New Zealand - China relationship remains quite strong, and so that helps us as well in terms of being able to have free market access, being able to promote our goods, you know, all our dairy products are duty-free into New Zealand.
“That’s unlike any other country around the world so I think, again, that’s testament to the people who set that up many, many, many years ago.
“But that’s an unprecedented position, so we’ve got to make sure that we take advantage of that.”
- Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
Japanese food group Meiji is listed on the Nikkei 225.