Adapting key to dairy dominance

New Zealand dairy needs to adapt to needs and requirements of future markets.

New Zealand's ability to retain its dominant market share position in China in the future will largely depend on how well it can adapt to changes in the Chinese market, a visiting dairy expert says.

The Chinese market was undergoing a structural change in consumer preferences with consumers increasingly looking for healthy, safe premium-end products, Rabobank Shanghai-based senior dairy analyst Sandy Chen said.

There were also big changes in the way products were purchased with e-commerce becoming a much more significant channel.

To maximise sales, New Zealand dairy processors would need to execute value-add strategies that demonstrated food safety, product innovation and category expansion, as well as staying on top of new retail formats for improving distribution, Mr Chen said in a statement.

China's appetite for dairy commodity imports was starting to revive after a two-year hiatus from the global dairy market. That would create opportunities for New Zealand, particularly at the higher end of the market.

Dairy consumption growth had plummeted from an annual growth rate of close to 19% for the most part of the past decade, to a growth rate of under 2% since 2012.

Looking to the medium term, the bank was not expecting to see a return to the type of growth seen from 2000 to 2008 but it expected growth to stabilise at around 2%-2.5% out to 2022.

China started 2017 with below-average inventories, and even with slow consumption growth, it would be looking for imports in coming months.

Longer term, Mr Chen said China's import gap was set to widen with Rabobank forecasting a 24% gap between domestic supply and demand in 2020, up from 20% in 2016.

Given China's relatively slow consumption growth prospects, much of the gap would be due to the constraints hindering expansion in local production.

The Chinese dairy sector had been undergoing significant structural change in recent years as smaller producers had been exiting the industry and there had been the emergence of ''mega'' farms.

In 2007, about 78% of China's dairy farms had fewer than 100 cows, with most of those operations having one to 100 cows.

Now, dairy farms with fewer than 100 cows make up 50% of total dairy farms, with the majority of those operations having 50 to 100 cows.

Despite the EU taking a greater share of imports in recent years, New Zealand was still the chief player in terms of dairy commodity imports into China and was in a strong position to take advantage of increased demand.

In the past five or six years, the EU had significantly increased its dairy exports to China and that had seen New Zealand's overall market share of imports come back a little.

However, New Zealand still accounted for more than half of all dairy products imported into the country.

New Zealand's 2016-17 season production ended down 0.6% on the previous season, making it two consecutive seasons of falling production.

ASB's latest Commodities Weekly said two seasons of back-to-back production falls was unique, with data on record dating back to 1981 showing it was the first time it had happened.

A more average season was expected over 2017-18 with a 4% production lift compared with last season.