Dairy Sector Gets US$350 Investment From TH Milk Company
BMI believes that Vietnam's dairy sector should gain a strong boost following a US$350mn investment by TH Milk Joint Stock Company to enhance the country's cattle-raising and milk processing in Nghe An province. The project includes the construction of a 10,000 hectare pasture farm for up to 45,000 heads of cattle within two years, and US$100mn for a processing factory designed to produce up to 530mn litres of milk per year, which would make it the largest factory of its kind in Vietnam. All of this is great news for Vietnam's expanding dairy sector. Currently, the country requires substantial imports to meet domestic demand needs and with strong consumption growth expected over the long term, the investment should help meet this demand.
Since the opening up of the economy in 1986, there has been considerable change in the structure of the Vietnamese dairy industry. The contribution of state farms, which were previously responsible for almost all milk production, has fallen to only around 5% with the other 95% of milk production coming mainly from small- and medium-sized private farms. Doi Moi, as the restructuring of the economy is known, has also led to the emergence of a highly consolidated private milk collection and processing sector, of which TH Milk plays a dominant role.
Since the start of last decade, milk production in Vietnam has grown rapidly as small-scale dairy production has taken off. Between 2000 and 2008, fluid milk production shot up by more than 400% from 54,000 tonnes to 262,200 tonnes. This was achieved by a more than five-fold increase in the size of the dairy herd from 35,000 head of cattle to just over 159,000 head over that period. The growth in the dairy herd came mainly on small-scale farms which numbered 19,800 in 2006 with an average of just 5.3 cows per farm. BMI expects such increases to continue and contribute to our forecast for a 40% increase in Vietnamese production to 400mn tonnes of fluid milk by 2013.14.
However, Vietnam still has to import around three quarters of its dairy needs and poor output quality is still a substantial problem for producers in Vietnam. For example, the results of a test released by newspaper Thanh Nien in April 2009 showed that protein content in milk was often well below advertised levels. Another problem is that the sector suffers from low yields. In 2008, average milk yields on Vietnamese dairy farms were a mere 1,741kg per cow. This is little over half the level of Thailand and global dairy powerhouse New Zealand.
In spite of the current problems of low global milk prices and high input costs faced by farmers, rising demand on the back of per capita income growth and government support for the sector should ensure strong growth in dairy production. Over the forecast period, BMI forecasts domestic milk consumption to grow by 40% and the Vietnamese government has set a target to have 40% of this consumption met by domestic production. While this may be somewhat unrealistic in the short term - the country still needs to import roughly three quarters of its dairy needs - the government investment in the sector is another step towards helping Vietnam satisfy its dairy needs.