Modified One-Child Policy To Boost Milk Demand

Recent news that China will relax its decades-old one-child policy will very likely lead to an increase in demand for milk formula within the country.

On November 15, the Communist Party announced that it would allow married couples to have a second child if one of the parents is an only child. As a result, our Country Risk team is currently in the process of revising its demographic forecast for China, which will, in turn, affect demand for varieties of infant milk. Prior to the adoption of China's one-child policy, the fertility rate stood at 2.63 in 1980, having already fallen from a high of 5.91 in the mid-1960s. Currently, the fertility rate in China stands at just under 1.6, as some exceptions to the rule already exist. As the policy is further relaxed, the birth rate within China is expected to jump, fuelling demand for infant milk products.

We are bullish on the Chinese dairy sector, as it remains one of the fastest growing sub-sectors in China's food industry. Production of dairy products, especially milk and whole milk powder, has increased rapidly in recent years, fuelled by rising disposable incomes, increased urbanisation, improved affordability of domestic cold storage facilities and improved awareness of the health benefits of dairy products. However, the domestic preference for safe, reliable products is also supporting strong imports.

News Well Received
Rebased Share Price Of Selected Companies (1/11/2013=100)

Modified One-Child Policy To Boost Milk Demand

Recent news that China will relax its decades-old one-child policy will very likely lead to an increase in demand for milk formula within the country.

On November 15, the Communist Party announced that it would allow married couples to have a second child if one of the parents is an only child. As a result, our Country Risk team is currently in the process of revising its demographic forecast for China, which will, in turn, affect demand for varieties of infant milk. Prior to the adoption of China's one-child policy, the fertility rate stood at 2.63 in 1980, having already fallen from a high of 5.91 in the mid-1960s. Currently, the fertility rate in China stands at just under 1.6, as some exceptions to the rule already exist. As the policy is further relaxed, the birth rate within China is expected to jump, fuelling demand for infant milk products.

We are bullish on the Chinese dairy sector, as it remains one of the fastest growing sub-sectors in China's food industry. Production of dairy products, especially milk and whole milk powder, has increased rapidly in recent years, fuelled by rising disposable incomes, increased urbanisation, improved affordability of domestic cold storage facilities and improved awareness of the health benefits of dairy products. However, the domestic preference for safe, reliable products is also supporting strong imports.

We expect milk powder production to outperform that of processed dairy products. Dairy products with a longer shelf life are generally more favoured by Asian consumers owing to safety concerns, which have been an ongoing issue for consumers following the 2008 melamine scandal. Despite the consistent growth, however, the dairy sector is notoriously inefficient because of its fragmented nature: more than 70% of Chinese milk production comes from farms with fewer than 20 head of cattle. As such, we expect the production deficit for all dairy products (except milk) in China to continue widening over our forecast period - especially for whole milk powder - leading the country to be increasingly dependent on imports.

News Well Received
Rebased Share Price Of Selected Companies (1/11/2013=100)

News of the Communist Party's decision was well received by shareholders of companies with large exposure to the Chinese infant milk market. Multinational firms Mead Johnson, Néstle and Danone each have around a 10% share of China's infant milk formula market, and these companies' share prices rose on the day of the announcement. Hong Kong-listed dairy group Yashili saw the biggest gains, with its share price rising almost 20% following the news. Though multinational firms hold strong positions within the Chinese infant milk sector, the top four players in the dairy sector are all domestically based. The government is also keen to consolidate domestic control of its dairy sector, with Inner Mongolia Yili and China Mengniu Dairy, two of the leading players in the market, being given CNY30bn (US$4.9bn) in state support in September 2013.

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