China Agribusiness Report Q4 2009

In BMI's China Agribusiness Report for Q4 2009 we look at how the country's dairy industry is recovering after the devastating melamine adulteration scandal of 2008. Demand for dairy products was hit hard in the final quarter of 2008 following the hospitalisation of hundreds of thousands of infants from drinking adulterated milk. At the beginning of this year heavy sentences, including two death penalties, were handed down to those convicted of involvement in the scandal. The chairwoman of Sanlu Group, the company considered to have been most seriously at fault, was given a life sentence. Shortly after that, in February, Sanlu declared bankruptcy.

Sanlu, however, was not the only company to be hit by the scandal. The release of the major dairy companies' 2008 reports in the second quarter of 2009 showed that healthy profits of the previous years had been turned into large losses by the year's events. Market leader Mengniu, which made a profit of CNY935.8mn in 2007, reported losses of CNY948.6mn. The second biggest player, Yili, did even worse, revealing losses of CNY1.69bn. The only major player to stay in the black was Sanyuan Food which made a profit of CNY40.76mn. Sanyuan was also the only major dairy company whose products were not found to contain melamine.

Sanyuan has made the most of its rivals' difficulties. In March, the company snapped up bankrupt Sanlu's core assets for CNY616.5mn. The other major players were banned from taking part in the bidding for the assets owing to their involvement in the scandal. In April, Sanyuan rolled out new brands of powdered milk produced at what were previously Sanlu's factory. The products were well received with strong sales in May.

The other dairy companies, despite the disgrace of 2008, also reported improving sales in the first half of 2009. Yili reported profits in Q108 of double the level seen in Q108. In April. the company said that demand for dairy products had recovered to 90% of its pre-scandal level. Mengniu said that demand for its products had fully recovered in the North of the country but was still at only around 60% of prescandal level in the South.

Assuming that the new measures put in place to ensure food safety are effective and there are no new fears over the safety of dairy products, then we expect demand to resume its upward trend. Rising incomes will allow Chinese consumers to spend more on dairy products. We expect demand for both staples such as fluid milk and more exotic foods such as imported European cheeses to increase.

Elsewhere, grain production in 2009 looks set to be well above last year's level. Early estimates show increases in production of rice, wheat and corn. Production of key staples wheat and rice has been increasing steadily over the last few years after falling rapidly in the first half of the decade. The government has been making an effort to stem the fall in land area planted to grain crops with some success. Despite this, in the longer term beyond our forecast period, we believe that pressure on land for industrial and residential uses will once again see the area given to grain fall.