Required Report - public distribution

**Date:** 11/13/2006

**GAIN Report Number:** CH6100

CH6100

**China, Peoples Republic of**

**Dairy and Products**

**Annual Report**

**2006**

**Approved by:**

![](media/image1.wmf)Maurice House

U.S. Embassy

**Prepared by:**

Casey Bean, Jianping Zhang and Hongyu Zhang (ATO Shanghai)

**Report Highlights:**

China\'s long-term dairy policies will encourage increased milk
production through better cow genetics, providing excellent market
opportunities for exported U.S. bovine genetic materials. Chinese
experts are even predicting that China will become the world's
third-largest dairy producer by 2020. China\'s cow milk production in
2007 is forecast to increase 16 percent to 38.1 MMT, non-fat dry and
whole fat milk powder production to increase 2 percent to 56,000 MT and
12 percent to 1.2 MMT respectively. Domestic production continues to lag
booming demand, and China\'s non-fat dry and whole fat milk powder
imports in 2007 are forecast to increase 23 percent to 80,000 MT and 18
percent to 100,000 MT respectively. Hong Kong and Macau absorb most of
China\'s limited dairy product exports.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Annual Report

Beijing \[CH1\]

\[CH\]

Table of Contents

[**Executive Summary 3**](#executive-summary)

[Production 3](#production)

[Both total milk and cow milk production in 2007 forecast to increase 16
percent to 39.3 MMT and 38.1 MMT respectively
3](#both-total-milk-and-cow-milk-production-in-2007-forecast-to-increase-16-percent-to-39.3-mmt-and-38.1-mmt-respectively)

[Resource limitations slow the pace of China's cow milk production
increase
4](#resource-limitations-slow-the-pace-of-chinas-cow-milk-production-increase)

[China's 11^th^ Five-Year-Plan (2006-2010) and long-term plan
(2011-2020) for dairy development
5](#chinas-11th-five-year-plan-2006-2010-and-long-term-plan-2011-2020-for-dairy-development)

[The World Bank project in Heilongjiang Province (2007-2011)
5](#the-world-bank-project-in-heilongjiang-province-2007-2011)

[Domestic genetic improvement subsidy program
5](#domestic-genetic-improvement-subsidy-program)

[NFDM production in 2007 forecast at 55,000 MT, no change from this
year, and WFMP production is forecast to increase 12 percent to 1.2 MMT
6](#nfdm-production-in-2007-forecast-at-55000-mt-no-change-from-this-year-and-wfmp-production-is-forecast-to-increase-12-percent-to-1.2-mmt)

[Consumption 6](#consumption)

[Fluid use consumption in 2007 forecast to increase 15 percent to 16.9
MMT and factory use consumption in 2007 forecast to increase to 17
percent to 19.2 MMT
7](#fluid-use-consumption-in-2007-forecast-to-increase-15-percent-to-16.9-mmt-and-factory-use-consumption-in-2007-forecast-to-increase-to-17-percent-to-19.2-mmt)

[NFDM consumption in 2007 forecast to increase 13 percent to 134,000 MT
and WFDM consumption in 2007 forecast to increase 12 percent to 1.2 MMT
7](#nfdm-consumption-in-2007-forecast-to-increase-13-percent-to-134000-mt-and-wfdm-consumption-in-2007-forecast-to-increase-12-percent-to-1.2-mmt)

[Marketing and Distribution 8](#marketing-and-distribution)

[Market Size 8](#market-size)

[Key distribution channels 9](#key-distribution-channels)

[UHT milk versus Pasteurized milk 9](#uht-milk-versus-pasteurized-milk)

[Niche market and new products 11](#niche-market-and-new-products)

[Key players: two manufacturing groups
12](#key-players-two-manufacturing-groups)

[Trade 12](#trade)

[NFDM imports in 2007 forecast to increase 23 percent to 80,000 MT and
WFDM imports forecast to increase 18 percent to 100,000 MT
13](#nfdm-imports-in-2007-forecast-to-increase-23-percent-to-80000-mt-and-wfdm-imports-forecast-to-increase-18-percent-to-100000-mt)

[Whey imports account for 52 percent of China's total dairy product
imports, the United States is the largest supplier accounting for 39
percent
13](#whey-imports-account-for-52-percent-of-chinas-total-dairy-product-imports-the-united-states-is-the-largest-supplier-accounting-for-39-percent)

[Selected China's national standards for dairy products, in reference to
U.S. trade
14](#selected-chinas-national-standards-for-dairy-products-in-reference-to-u.s.-trade)

[Fluid milk exports in 2007 forecast to increase 8 percent to 40,000 MT,
14](#fluid-milk-exports-in-2007-forecast-to-increase-8-percent-to-40000-mt)

[Whole fat milk powder exports in 2007 forecast to increase 6 percent to
36,000 MT
14](#whole-fat-milk-powder-exports-in-2007-forecast-to-increase-6-percent-to-36000-mt)

[Dairy PS&D tables and trade matrix
16](#dairy-psd-tables-and-trade-matrix)

#   {#section .unnumbered}

# Executive Summary

China's milk production continues to grow rapidly in response to
domestic demand, but the pace of increase is forecast to continue slowly
in 2007 because of fluid milk production constraints and rising domestic
production costs. China's long-term dairy policies to increase yields
and quality will favor genetic improvements over expanding cow numbers.
The sector will thus be the recipient of considerable domestic and
overseas investment. During 2007, the slow pace of growth in China's
dairy cow heard will be offset by yield increases. Nonetheless, the
lagging dairy cow numbers and milk production levels will result in
strong demand for U.S. bovine genetic materials and dairy products to
China in 2007.

Post forecasts China's raw cow milk production in 2007 to increase 16
percent to 38.1 MMT, non-fat dry milk (NFDM) production to remain flat
at 55,000 MT, and whole fat dry milk (WFDM) production to increase 12
percent to 1.2 MMT. Domestic NFDM and WFDM productions lag demand, which
will most likely drive large imports in 2007.

China's fluid milk imports are almost nil due to cost, transportation
and storage limitations. Post forecasts China's NFDM imports in 2007 to
increase 23 percent to 80,000 MT and WFDM imports in 2007 to increase 18
percent to 100,000 MT. Although China's whey demand is strong due to
limited domestic production, global supply capacity normally impacts
China's imports.

China exports two kinds of dairy products, fluid milk and WFDM. Post
forecasts China's fluid milk exports to increase 8 percent to 40,000 MT
and WFDM exports to increase 6 percent to 36,000 MT due to the demand
increase in the traditional markets in East and Southeast Asia. China's
fluid milk exports to Hong Kong and Macau account for 96 percent of
China's total fluid milk exports and WFDM exports to Taiwan, Hong Kong
and Myanmar account for 75 percent of China's total WFDM exports.

# Production

## Both total milk and cow milk production in 2007 forecast to increase 16 percent to 39.3 MMT and 38.1 MMT respectively

FAS Beijing adjusted China's 2006 total milk production 2 percent down
to 34 MMT and cow milk production 3 percent down to 32.8 MMT from the
previous estimation (CH5075) due to the slower pace of heifer size
increase due to production constraints. The production numbers for 2005
were also adjusted slightly down based on the China Statistic Yearbook
2006 published by the National Statistics Bureau (NSB).

China's cow milk production accounts for 96 percent of the country's
total milk production. The top five producing provinces or autonomous
regions are Inner Mongolia, Heilongjiang, Hebei, Xinjiang and Shandong,
accounting for two-third of China's total cow milk production.

China's cow milk production has mostly risen due to expansion in cow
numbers rather than average yield increases. The annual yield per cow is
only about 4 MT, which is about half the level of the United States.
Following 5 years of rapid expansion in dairy cow numbers (e.g., 4.9
million head in 2000 to 12 million head in 2005), production now faces
limits to domestic milk resources and inputs such as feed. Although
production costs have gone up considerably for dairy farmers, processing
plants have not raised commensurately their milk purchase prices because
of efforts to maintain their market share. As a result of this price
stagnation to the farmer, their profits have fallen. In turn, China has
started shifting efforts from fast expansion in cow numbers to yield
increases through genetic improvements. This focus on improving dairy
genetics will provide an opportunity for U.S. companies to export bovine
genetic materials.

During 2006, China announced its 11th Five-Year-Plan (11^th^ FYP)
including a long-term plan for milk development (see the 11^th^ FYP
sector). The plan will slow the pace of China's increase in both dairy
cow numbers and cow milk production. In the long run, the slow pace of
increase in cow herd size will be offset by yield increases, but in a
short term the strong domestic demand coupled with smaller pace of
increase in cow number and milk production will most likely drive larges
dairy product imports in the next couple of years---and market
opportunities for U.S. companies exporting dairy products to China in
2007.

## Resource limitations slow the pace of China's cow milk production increase 

Limited land, water, feed and energy resources remain considerable
challenges to China's dairy sector. According to the Ministry of
Agriculture (MOA), domestic feed corn prices have increased 7 percent,
and alfalfa and corn stem prices have increased 25 percent on average
since the beginning of 2006. As a result, the profit margin per cow
dropped 50 percent from \$385 per head in 2002 to \$192 per head in
2006. Hand milking still accounts for 65 percent of China's output, and
unstable milk quality sometimes lead to processing plants' refusal to
collect milk from dairy farmers. The policy of forbidding over-herding
in domestic grasslands will continue for the foreseeable time. China's
the 11^th^ FYP for grain (2006-2010) for grain is set to increase grain
production only about 0.7 percent due to land limitation. Water price
increases are already under discussion by the Government. These issues
will remain huge hurtles for China.

A new concern to the industry is foot and mouth disease (FMD). From
January 2005 to August 2006, China had 22 FMD outbreaks. Nearly 1,000
cattle were infected and over 5,000 were culled, mostly dairy cows. With
80 percent of China's cows raised by backyard farmers, coupled with
insufficient veterinary services, disease control remains a challenge
for China.

Another factor impacting milk output is that Inner Mongolia, one of
China's top milk producers, has slaughtered 100,000 head low yield dairy
cows. In the next 2-3 years, the region will slaughter or improve
another 400,000 head, according to the dairy industry. New placements
will take a couple of years for commercial production. This has also
contributed to the slow pace in cowherd size.

China lacks a national standard and test method to distinguish drinking
milk processed with fresh raw milk, or reconstituted from milk powder.
The State Council's "Notice of Strengthening Management on Fluid Milk
Production and Marketing", issued on September 18, 2005 (see CH5075)
only allows fresh raw milk for pasteurized processing. Other products
the industry uses, such as UHT that includes reconstituted milk as a raw
material, must be labeled as "reconstituted" and include the milk powder
percentage.

However, after one year of implementation, the industry reports that few
plants abide by the regulation, and there appears to be minimal
government enforcement. China's milk powder imports increased 34 percent
to 101,844 MT (equivalent to 814,752 MT of raw milk) in the first 8
months in 2006, resulting in a price war between raw milk and
reconstituted milk products and even led some small scale dairy farmers
to cull their dairy cows.

China announced another new labeling national standard, "The General
Rule on Labeling of Pre-packed Food -- GB7718, on October 1, 2005 (see
CH5057). However, the government postponed 3 times the labeling
requirement for pasteurized and UHT milk (now the date is January 1,
2007) due to strong opposition from the domestic raw milk producers and
processors. "The Guidance of Implementing GB7718-2004" forbids
processors to label pasteurized milk as "fresh milk" instead of
"pasteurized". Given that freshness is a competitive market edge, the
translation of "pasteurized" on the label will confuse most consumers.
As a result, cheaper UHT milk---largely reconstituted from imported milk
powder---will likely increase gain market share and consequently lead to
larger imports and impact domestic milk production.

## China's 11^th^ Five-Year-Plan (2006-2010) and long-term plan (2011-2020) for dairy development

  --------------------- ----------- ----------- ------------- -------------
  China's 11^th^                                              
  Five-Year-Plan                                              
  (2006-2010) and the                                         
  Long-Term Plan                                              
  (2011-2020) for Dairy                                       
  Development                                                 

                        2006-2010   2011-2020   \% Change     \% Change
                                                2006-2010 (on 2011-2020 (on
                                                Average)      Average)

  Total Dairy animal    (1,000      （1,000                   
  inventory             Head)       Head）                    

  Dairy Cow             15,350      18,200      5.6           1.7

  Dairy Goat            8,000       11,000      8.1           3.2

  Dairy Water Buffalo   66          200         22            11.7

                        (1,000 MT)  （1,000                   
                                    MT）                      

  Total Milk Production 38,000      60,000      8.2           4.7

  Cow Milk              36,200      57,300      6.3           5.8

  Goat Milk             1,700       2,400       n/a           4.1

  Water Buffalo Milk    100         300         n/a           20

  Source: China Dairy                                         
  Statistic Yearbook                                          
  2006                                                        
  --------------------- ----------- ----------- ------------- -------------

MOA announced the above dairy development plan during mid-2006. China's
new target is to focus on dairy genetic improvement instead of expansion
in cow numbers. MOA forecasts that the yield per cow will reach 4.3 MT
by 2010 and 5.7 MT by 2020. Since China's purebred Holstein cows only
account for one-third of total dairy cows, this genetic improvement
effort will take years. Several projects already started in China (see
below section) will provide market opportunities for U.S. companies in
this market.

Chinese experts forecast that China's milk production will rank third in
the world after the United States and India by 2020, though FAS Beijing
forecasts a gradual slowing in China's pace of cow milk production.
Nonetheless, continued huge investments and China's crop pattern change
from 2-way plantings (grain-oilseeds) to 3-way planting
(grain-oilseeds-feed grain) may help exceed the targeted pace, aided by
the Government's subsidizing corn silage production during the 11^th^
FYP period.

## The World Bank project in Heilongjiang Province (2007-2011)

This project is reported to include funding of about RMB 1.48 billion
(\$189.7 million). The World Bank approved the loan in January 2006, and
the provincial government will also provide \$100 million. The project
includes, first, "Dairy Cow Production" for the construction of 7 dairy
farms each raising 1,000 cows, and building 125 cow farm "gardens" for
demonstration purposes. A total of 40,000 head will be bought, and 40
percent will be imported from abroad. Second, a "Service System" will
focus on dairy herd improvement (DHI) with the construction of 1 lab and
1 data processing center. At least 800,000 straws of frozen bovine semen
will be imported from abroad within 5 years. Third, "Environmental
Protection" will mainly use an Italian Government's grant valued at RMB
5.5 million (\$705,000) to improve crop stem production and cow waste
treatment. This massive World Bank project is open to all bidders and
will provide further market opportunities for U.S. companies to export
bovine genetic materials to China. Please refer to the website
[www.worldbank.org/projects](http://www.worldbank.org/projects) for
information.

## Domestic genetic improvement subsidy program

During 2006, the Chinese Central Government announced it will implement
a financial subsidy program for dairy cow genetic improvement valued at
RMB 100 million (\$12.7 million) a year in 22 provinces. Twenty percent
of the subsidy will be used for importing dairy cattle frozen semen or
embryos. Some local provincial governments have similar programs. This
will also provide a market opportunity for U.S. companies exporting
bovine genetic materials to China. FAS Beijing recommends contacting the
MOA for more information.

## NFDM production in 2007 forecast at 55,000 MT, no change from this year, and WFMP production is forecast to increase 12 percent to 1.2 MMT 

NFDM production only accounts for 5 percent of China's total milk powder
production, and the balance must be met by imports. NFDM production in
2005 decreased 12 percent due to several domestic milk powder safety
incidents during 2004- 2005 that impacted consumption. Post forecasts
China's 2006 NFDM production to decrease 8 percent mainly due to
domestic production cost increases and cheap imports. Strong domestic
demand combined with limited domestic production appears most likely to
drive large imports in 2007. This will provide a good opportunity for
U.S. companies to export to China. The United States already surpassed
Australia to become the second largest supplier to China in the first 9
months in 2006.

Post forecasts China's WFMP (whole fat milk powder) production in 2007
to increase at the same pace as in 2006 driven by strong domestic demand
for food processing, infant formula milk powder, functional milk powder
and reconstitution. Our forecast for WFMP production during 2006 is 3
percent higher than the previous estimation (see CH5075). More milk was
used for WFMP production to make yogurt and UHT milk because most
China's milk resources are located in remote areas, and transportation
distances are long. It is more convenient to transport milk powder, and
milk powder can be stored longer.

Of total milk powder production, NFDM accounts for about 5 percent. For
WFMP, ordinary products account for 21 percent, sugar-added products
account for 14 percent, infant formula products account for 38 percent
and the rest are other functional or formula products. The biggest
changes in the last few years are that infant formula increased from 20
percent in 2000 to 38 percent in 2005 due to more bottle-feeding, and
sugar-added milk powder decreased from 30 percent in 2000 to 14 percent
in 2005 because more consumers reduced sugar intake due to diabetes.
This trend is expected to continue in 2007.

# Consumption

According to Chinese academic research, China's per capita dairy
consumption increases 0.94 percent when China's GDP increases 1 percent,
and dairy demand increases 0.64 percent when incomes increase 1 percent.
China's GDP growth was 10.5 percent in 2005 and 11 percent in the first
half of 2006. NSB data shows that during the first 9 months of 2006, per
capita disposable incomes for Chinese urban residents were RMB8,799
(\$1,128), up 10 percent, and farmers' per capita cash incomes were RMB
2,762 (\$354), up 11.1% over the same period of 2005. Chinese experts
forecast that China's GDP will reach RMB 3,200 billion (\$410 billion)
and per capital GDP reach \$2,400 respectively by 2010. These economic
indicators support strong growth in China's dairy consumption for the
foreseeable future.

China's per capita milk consumption was 21.7 KG during 2005, only 20
percent of the world average level, although it tripled from 2000. MOA
forecasts that China's per capital milk will reach 28 KG by the end of
2010 and reach 42 KG by the end of 2020.

China's total dairy product production was 13 MMT by the end of 2005,
increased 28 percent from 2004. The China Dairy Industry Association
(processed) forecasts that China's dairy product production will reach
42 MMT by the end of 2010. Post believes that as China's economy grows,
highway and railway transportation develops and supermarkets reach
further to rural areas, dairy consumption will grow steadily.

## Fluid use consumption in 2007 forecast to increase 15 percent to 16.9 MMT and factory use consumption in 2007 forecast to increase to 17 percent to 19.2 MMT

FAS Beijing's current forecast for China's fluid use consumption in 2006
is 7 percent smaller (14.8 MMT), while fluid use consumption is 4
percent down to 12.5 MMT from the previous forecast (see CH5075) due to
the slow pace of increase in China's raw milk production during both
2005 and 2006.

Both the NSB and the Chinese dairy industry count pasteurized milk, UHT
milk and yogurt as fluid milk. Pasteurized accounted for 18 percent, UHT
accounted for 66 percent and yogurt accounted for 16 percent by the end
of 2005. The pasteurized share has dropped from 60 percent in 2000 to 18
percent in 2005 due to inconvenient storage and transportation
constraints, while the UHT share increased from 21 percent in 2000 to 67
percent in 2005 due to the same factors and partly due to cheaper
prices.

China's School Milk Program has contributed greatly to UHT milk
consumption. China started the "School-Milk Program" in 2000. Up to now,
the program has covered 28 provinces, autonomous regions and
municipalities directly under the Central Government. About 10,000
schools in more than 60 large-medium sized cities benefit from the
program. Milk supplies have reached 2.43 million boxes, a 26 percent up
from 1.93 million boxes in 2004. This trend will continue as more
schools are included in the program and UHT milk is the supplied
product.

Yogurt consumption has been growing fast due to the development of
retail selling sector with better cold storage conditions (see
"marketing" below). Asian people's lactose-intolerance for fresh milk
has provided an opportunity for yogurt. Per capital yogurt consumption
for urban residents increased from 1.36 KG in 2001 to 3.23 KG in 2005.
Post forecasts that China's per capita yogurt consumption will increase
at a pace of 10-15 percent during the next couple of years.

See the Marketing and Distribution section for more discussion of dairy
product consumption.

## NFDM consumption in 2007 forecast to increase 13 percent to 134,000 MT and WFDM consumption in 2007 forecast to increase 12 percent to 1.2 MMT

FAS Beijing forecasts China's NFDM consumption in 2007 to increase to
134,000 MT due to strong domestic demand. FAS Beijing revised the NFDM
PS&D table by increasing consumption in 2006 18 percent to 119,000 MT
due to increased imports. NFDM has minimal substitutes because it is
mainly for consumers who have health problems such as high cholesterol
and obesity. Strong domestic demand coupled with limited production will
most likely drive large imports in 2007, thus providing good market
opportunities for U.S. exports.

Post forecasts China's WFDM consumption in 2007 to increase 12 percent
to 1.2 MMT from an estimated 1.1 MMT in 2006. The current forecast for
WFDM consumption in 2006 is 5 percent higher than the previous
estimation (see CH5075) due to domestic WFDM production and import
increases. Infant formula milk consumption is growing the fastest
because most busy young mothers have no time to breast-feed, and many
choose bottle-feeding in order to regain their fitness after childbirth.
Wealthier Chinese prefer imported infant formula products, especially
after several infant death cases in 2004 due to poor quality domestic
formula products. China's sampling of infant formula milk powder in the
first half of 2006 shows 70.4 percent was qualified, still not a
satisfactory. This will drive enfant formula milk powder imports in
2007.

# Marketing and Distribution

# 

## Market Size

The dairy industry in China has maintained a high rate of growth over
the past ten years. Total dairy sales reached \$10.9 billion in 2005.

![](media/image2.wmf){width="5.135433070866141in"
height="3.145669291338583in"}

In 2005, the per capita consumption of dairy products reached 21.7 kg.
While the overall consumption level is skyrocketing, fluid milk has been
the fastest-growing segment during the past five years. In 2005, retail
sales of fluid milk reached nearly \$4.1 billion. Although cheese and
yogurt retail sales grew by 18% and 19% respectively last year, they are
still small markets.

In addition to the rise in disposable incomes driving dairy consumption,
Chinese consumers are also becoming more health conscious, and they
value milk as an excellent source of protein and calcium; besides, many
female consumes believe that drinking milk is beneficial for their skin.
Elderly Chinese view milk as a cure for insomnia with no side effects.
The positive attributes of dairy products are also recognized by the
Chinese government, which in turn greatly supported the sales of dairy
products, especially fluid milk in the China market.

The introduction of shelf-stable UHT milk facilitated the transportation
of fluid milk from the raw milk production areas in the north to the
south where the population is more intensive and consumers are more
affluent, and greatly improved the availability of fluid milk for
consumers in urban areas. Fluid milk has become a feature of the middle
class' daily diet.

For domestic manufacturers, the fluid milk market has lower entry
requirements compared with other highly processed dairy product, while
the infant formula milk powder market is nearly monopolized by
multinational giants such as Nestle, Wyeth and Mead Johnson. The sales
of cheese and yogurt, restricted by cold chain infrastructure
limitations in China, consumption habits and disposal income, are still
at low levels. As a result, domestic manufacturers have been forced to
compete fiercely on fluid milk and the mid and low-end milk powder
business for market share.

## Key distribution channels 

In China, more than 80% of dairy products reach consumers via retailers,
which have significantly consolidated since 2000.
Supermarkets/hypermarkets are now the major outlets for all varieties of
dairy products. For cheese products, yogurt and take-home ice cream, the
supermarkets' role is even more important due to consumer's confidence
in their overall quality and safety vis a vis cold chain facilities.
Greater numbers of supermarkets and convenience stores in rural areas
has also contributed to their increasing share of the distribution
channel, while independent food stores, which used to be the main retail
force in rural areas, have become less important.

Dairy Products Distribution Channel % breakdown in 2006

  ------------------ ---------------- ------------- ------------- ------------
  Dairy product      Supermarkets/    Independent   Convenience   Others
  categories         hypermarkets     food stores   stores        

  Milk               28.0             35.0          13.0          24.0

  Cheese             92.0             5.0           \-            3.0

  Yogurt/sour milk   76.0             4.0           14.0          6.0
  drinks                                                          

  Other dairy        28.0             35.0          13.0          24.0
  products                                                        

  Take-home ice      78.0             6.5           15.0          0.5
  cream                                                           

  Simple-serve ice   11.0             65.0          18.0          6.0
  cream                                                           
  ------------------ ---------------- ------------- ------------- ------------

Source: Euromonitor

Television advertising is the most common way manufacturers target dairy
products in the retail sector. Fluid milk, milk powder infant formula
with fortified minerals, yogurt, ice cream and dairy drinks are
frequently advertised. Lifestyle magazine advertising also educates
consumers to drink more pasteurized milk for better nutrition, or more
UHT milk for packaged safety. Some manufacturers also sponsor
entertainment shows. For example, one company sponsored the Shengzhou-5
space project and successfully ranked its products as the "exclusive
milk supplied to Chinese astronauts", and the Super Lady Singer
competition (the Chinese version of American Idol) also successfully
made its milk drinks widely recognized by younger consumers in China.

However, fierce competition among retail markets and shrinking profits
is forcing the major players to explore the food service segment as
another way to expand sales. One company has already started intensive
promotions in the food service sector in northern China and plans to
cover the market in the south as well. Current consumption of dairy
products in the food service channel is only about 10% of the total,
however, the profit is double or even triple the profit achieved from
retail channels, for the time being.

## UHT milk versus Pasteurized milk 

The fiercest competition in China's dairy product market is between UHT
milk and pasteurized milk. China's "cow belt" is located in northern
China, although the major consumption market is mainly in the coastal
provinces in eastern and southern China, where consumers are more
affluent. Consumers in the big cities in the eastern and southern
regions traditionally drink pasteurized milk, produced by dairy farms in
suburban areas. The new phenomenon of UHT milk has quickly come to the
fore and has gained a larger market share during the past four years.

![](media/image3.png){width="6.333464566929134in"
height="2.7590551181102363in"}Chinese consumers attach great importance
to the "freshness" of food ingredients. The pasteurized milk industry
has been using the "freshness" of pasteurized milk as the biggest
selling point and educating consumers that pasteurized "fresh" milk is
more nutritious than UHT milk. However, the scandals of reprocessing
expired milk, pre-dating milk and adding water to milk in certain major
pasteurized milk brands has brought the safety of pasteurized milk into
question. Besides, the higher raw milk cost and logistics cost of
pasteurized milk have resulted in a 20% higher retail price than UHT
milk, and in a price-sensitive market, this makes difference.

In addition, two advantages that UHT milk enjoys in distribution explain
its current success in the market. First, pasteurized milk has a shorter
shelf life (up to 7 days), which makes its distribution channels limited
and short, while UHT milk's longer shelf life (3 --12 months) make
market development possible at all levels of distribution. Second, sales
of pasteurized milk rely heavily on cold chain logistics, which requires
huge investment in infrastructure and human resources. As a result, UHT
milk will likely continue to have a leading role in new market
development in rural areas with comparatively low average milk
consumption and limited cold chain infrastructure.

Dairy companies are facing increasing price competition in China, and
they must adopt strategies to deal with high production costs driven by
the dramatic rise in sugar prices and packaging costs. Competition is
especially fierce in the fluid milk sector, because the entry costs to
the fluid milk business is comparatively low, and in recent years the
production of fluid milk has grown faster than consumption. Continuously
cutting prices has become an effective way for players to maintain their
market share.

Milk industry price wars have helped dairy products become more
affordable to mass consumers, but have hindered the quality improvement
of manufacturers. Less efficient local companies have phased out of the
market, and several multinationals were also forced to retreat from
China not long after their entry into the market.

## Niche market and new products

Dairy manufacturers are exploring new markets in second and third tier
cities and even rural areas, and they are looking for innovation in
products, branding and marketing. The milk tablet is a good example of
the niche market that experienced explosive growth during 2004-2005. As
a derivative product from fluid milk, the milk tablet makes
"convenience" its biggest selling point, and sales soon spread to
convenience stores. Within a year, hundreds of companies launched their
milk tablet production line.

The driving force behind this product is higher profitability -- the
cost of milk tablets is just about 50% of the cost of ordinary milk
powders, although their retail prices are similar. While the milk tablet
is quickly bringing returns to investors, some in the industry are not
optimistic about its long-term profitability. While the product has
enjoyed a niche market among shelf-stable milk and "fresh" milk the last
couple of years, the rush to the market may lead to declining profits
and fewer brands in the future.

Cheese and yogurt are the two emerging stars in the dairy market in
China. Last year the sales of cheese and yogurt jumped 18% and 19%.
Annual production of cheese in China is around 10,000 MT, and cheese
imports are around 8,000 MT. These products are not a traditional food
in the Chinese diet, but the growth potential is tremendous.

Because of the higher processing technology requirement, competition in
this market is mainly among the foreign brands from Australia, New
Zealand and U.S., and the high prices of most imported cheese makes it a
luxury food item for mass consumers in China. However, attracted by
higher profitability and less fierce competition in this sector, some
leading dairy companies have already launched their cheese production
line, and started a consumer education program. The concept that cheese
is a good source of protein and calcium for lactose-intolerant Asian
people has found its way into the middle-class consumers' mind.

Yogurt is another fast growing dairy product in China averaging an
annual rate of 23% since 2000; sales in 2005 totaled \$582 million.
Compared with fluid milk, the yogurt market is more difficult to enter
due to the higher production technologies required. Consequently,
reduced competition has resulted in higher profitability. The new Biyou
yogurt launched in 2005 has been growing at a double-digit rate, while
the growth rate in the Shanghai area was as high as 70%.

**The battle at the two ends of the industry chain**

China's dairy manufacturers report that the key to success in China lies
at the two ends of the supply chain: raw milk resources and distribution
channels. The company that can secure a stable supply of fresh raw milk
to the processing sector and deliver the dairy products to the consumer
will be the winner. There is a widely recognized business rule in
China's dairy industry that "the one who controls the milk resources
controls the market". To this end, the major players in the industry
have been adjusting and planning their new production bases according to
their analysis of the market and the availability of raw milk resources
in the past five years.

![](media/image4.wmf){width="5.86875in" height="3.079861111111111in"}

Since 2000, the shortage of raw milk resources has become more and more
severe. The six provinces in northern China\--Heilongjiang, Inner
Mongolia, Hebei, Shandong, Beijing and Shanxi\--produce more than half
of the total raw milk in China. This overwhelming proportion continues
to grow.

The competitiveness of China's dairy manufacturers is based on
nation-wide distribution channels. While continuing to increase the
supply of milk, they are also trying to penetrate into the pasteurized
milk market via acquisition of or merger with other dairy businesses in
the major consumption markets.

## Key players: two manufacturing groups

There are a total of about 1,600 milk processors in China, and the
domestic major players can be roughly divided into two groups:
resource-oriented manufacturers and market-oriented manufacturers. The
representatives of the former are Yili and Mengniu from Inner Mongolia,
Wandashan from Heilongjiang, Sanlu from Hebei, and Yinqiao from Shan'xi,
while Bright Dairy from Shanghai, Sanyuan from Beijing, Nanjing Dairy
Group from Nanjing and VV Group from Jiangsu are the major players in
the latter group. Geographically, the resource-oriented manufacturers
are located in the north, and urban dairy manufacturers are close to the
major markets in the more populated east and south.

Competition in the marketplace has resulted in industry consolidation.
Yili, Mengniu and Bright Dairy rank among the top three manufacturers in
terms of annual output, and the three together have more than 50% market
share countrywide.

Major foreign dairy brands competing in the marketplace are Nestle,
Wyeth, Dumex and Mead Johnson. However, their portfolio is focused on
high value-added milk powder products such as infant formula and vitamin
and mineral fortified products. These multinationals normally do not
have their own raw milk resources in China and rely on imported milk
powders.

# Trade

## NFDM imports in 2007 forecast to increase 23 percent to 80,000 MT and WFDM imports forecast to increase 18 percent to 100,000 MT 

Post's forecast for China's 2007 NFDM imports is based on strong
domestic demand and little domestic production. Post adjusted current
forecast for China's 2006 NFSM imports 25 percent up to 65,000 MT from
the previous forecast of 52,000 MT in the last dairy annual report
CH5075. The major reason for this change is that imports for the first
time will surpass domestic production due to cheaper international
prices. The average unit price for imported NFDM from January to
September 2006 was \$2,150/MT, a 2.3 percent decrease over the same
period in 2005. China's policy change on pasteurized and UHT production
and labeling will also not impact imports in 2006 since it was postponed
to January 1, 2007. This trade pattern may continue into 2007 because
substitutes for NFDM don't exist in China.

The United States already surpassed Australia to become the second
largest supplier to China in the first 9 months in 2006 due to
competitive prices generated by a favorable U.S. dollar exchange rate.
China's import unit prices for DFDM from New Zealand and Australia were
\$2,260/MT and \$2,060/MT respectively during Jan-Sep 2006, while it was
\$1,990/MT from the United States.

Post forecasts China's WFDM imports to increase 18 percent to 100,000 MT
from an estimated 80,000 MT in 2006. Post's adjusted China's 2006 WFDM
imports 8 percent up. This forecast is based on the impact of China's
implementation of the new regulation on production and labeling for
pasteurized and UHT milk on January 1, 2007. The policy change, combined
with lagging domestic production, may drive imports in 2007. New Zealand
and Australia dominate supplies of China's WFDM imports, accounting for
97 percent of china's total imports. U.S. WFDM exports to China are very
small, only accounting for over 1 percent of China's total imports from
January to September 2006. However, U.S. export volume increased from 34
MT in 2005 to 777 MT valued at \$1.7 million, a 287 times increase in
value over the same period in 2005. A devalued U.S. dollar will continue
to encourage exports to China.

## Whey imports account for 52 percent of China's total dairy product imports, the United States is the largest supplier accounting for 39 percent 

![](media/image5.wmf){width="2.8125in"
height="1.8854166666666667in"}China's rapidly developing livestock, food
and dairy processing industry has driven large whey imports. The whey
import tariff is also among the lowest among all dairy product import
tariffs.

The U.S. is the largest whey supplier to China accounting for 39 percent
of China's total whey imports from January to September 2006. U.S.
export volume to China decreased 9 percent, but export value increased
16 percent during the same period.

Whey exports from European countries to China, especially France, have
increased rapidly, but the United States and France are supplying the
same product to China's market. The United States mainly exports sweet
whey to China. Half of it is used for feed, and the other half is used
for food processing. France mainly exports de-mineralized whey to China,
which is mainly used for infant formula milk powder. The global short
supply in whey has diverted U.S. whey to other higher priced markets.
China's fast increase in infant formula powder production (up 38 percent
in 2005) has provided a chance for French whey. Post forecasts China's
whey imports will continue strong in 2007 due to strong domestic demand
and little production, as well as narrow substitute. However, global
whey availability impacts China's imports.

China's cheese imports are on the rise because domestic production is
only about 10,000 MT, according to the Chinese industry. Prosperous
tourist development, and the strong influence of western food culture,
combined with limited domestic production, has fueled imports. China's
cheese imports in from January to September increased 37 percent to
7,496 MT over the same period in 2005. Although New Zealand and
Australia dominate China's cheese imports, U.S. exports to China have
cut into their share with an increase to 669 MT during the same period.
Post believes U.S. exports will continue rising due to a favorable U.S.
dollar exchange rate and the U.S. Dairy Export Federation's successful
market promotions.

## Selected China's national standards for dairy products, in reference to U.S. trade 

GB 19644---2005 Hygienic standard for milk powders

GB 11674---2005 Hygienic standard for whey powders

GB 5420---2003 Hygienic standard for cheese

GB 19646---2005 Hygienic standard for cream and butter

All of the standards became effective on October 1, 2005. Quarantine
inspection problems for imported U.S. milk powder occasionally occur
with nitrite detections at Chinese entry ports. China's maximum
tolerance for nitrite is 2 (NaNO2)/(mg/kg), for lead is 0.5
(Pb)/(mg/kg), for inorganic arsenic is 0.25 (mg/kg) and for aflatoxin M1
is 0.5 (fresh milk conversion)/(μg/kg). Additionally, China requests "0"
tolerance for E.sakazakii in finished products, especially for infant
formula products. Whey powder is not subjected to these standards
because it is for processing. Please see the following for microbiology
requirements.

  --------------------------------------------------- -------------------
  Item                                                Index

  Total number of colony, cfu/g ≤                     5×10^4^

  Coli-group MPN/100g ≤                               90

  Pathogenic bacteria, Salmonella, Staphylococcus     0 tolerance
  aureus,                                             
  --------------------------------------------------- -------------------

## Fluid milk exports in 2007 forecast to increase 8 percent to 40,000 MT, 

Hong Kong and Macau markets account for 96 percent of China's fluid milk
exports. This pattern has not changed in the last few years due to
transportation factors. China's exports to Hong Kong, from January to
September 2006, increased 25 percent due to 26,591 MT. Hong Kong's
market increase has offset Macau market decreases. This trade pattern
will continue during the next few years.

## Whole fat milk powder exports in 2007 forecast to increase 6 percent to 36,000 MT 

Post forecasts China's NFDM exports in 2007 no change at 1,000 MT. Post
current forecast adjusted China's NFDM exports in 2006 down by 50
percent due to small domestic production and the export unit price
increase by 11 percent to \$3,030 per MT.

China is not a big player in the world WFDM market. Its exports are
estimated only account for 3 percent of total WFDM production. Post
forecasts China's WFDM exports in 2007 to increase 6 percent to 36,000
MT from estimated 34,000 MT in 2006 due to increased demand in East and
Southeast Asia. China's WFDM export volume increased 15 percent to
25,404 MT from January to September 2006, while its export value
increased 57 percent to \$50 million. Its export markets are narrow.
Taiwan, Hong Kong and Myanmar are the top 3 markets accounting for 75
percent of China's total WFDM exports. China's increased exports to
Taiwan have offset decreased exports to Hong Kong over the past year.
China will continue to sell in the East and South East Asian markets
because its competitiveness is weak in other export markets.

# Dairy PS&D tables and trade matrix 

<table>
<colgroup>
<col style="width: 23%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 9%" />
<col style="width: 8%" />
<col style="width: 6%" />
<col style="width: 8%" />
<col style="width: 8%" />
</colgroup>
<tbody>
<tr class="odd">
<td><strong>PSD Table</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td><strong>Country</strong></td>
<td colspan="3"><strong>China, Peoples Republic of</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td><strong>Commodity</strong></td>
<td colspan="2"><strong>Dairy, Milk, Fluid</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td colspan="3">(1000 HEAD)(1000 MT)</td>
</tr>
<tr class="even">
<td></td>
<td>2005</td>
<td>Revised</td>
<td></td>
<td>2006</td>
<td>Estimate</td>
<td></td>
<td>2007</td>
<td>Forecast</td>
<td></td>
</tr>
<tr class="odd">
<td></td>
<td><p>USDA</p>
<p>Official</p></td>
<td><p>Post</p>
<p>Estimate</p></td>
<td><p>Post</p>
<p>Estimate</p>
<p>New</p></td>
<td><p>USDA</p>
<p>Official</p></td>
<td><p>Post</p>
<p>Estimate</p></td>
<td><p>Post</p>
<p>Estimate</p>
<p>New</p></td>
<td><p>USDA</p>
<p>Official</p></td>
<td><p>Post</p>
<p>Estimate</p></td>
<td><p>Post</p>
<p>Estimate</p>
<p>New</p></td>
</tr>
<tr class="even">
<td><strong>Market Year Begin</strong></td>
<td></td>
<td>01/2005</td>
<td>01/2005</td>
<td></td>
<td>01/2006</td>
<td>01/2006</td>
<td></td>
<td>01/2007</td>
<td>01/2007</td>
</tr>
<tr class="odd">
<td>Cows In Milk</td>
<td>6700</td>
<td>6900</td>
<td>6800</td>
<td>8100</td>
<td>8350</td>
<td>8100</td>
<td>0</td>
<td>0</td>
<td>9300</td>
</tr>
<tr class="even">
<td>Cows Milk Production</td>
<td>28000</td>
<td>28000</td>
<td>27534</td>
<td>33800</td>
<td>33800</td>
<td>32800</td>
<td>0</td>
<td>0</td>
<td>38100</td>
</tr>
<tr class="odd">
<td>Other Milk Production</td>
<td>1110</td>
<td>1110</td>
<td>1114</td>
<td>1140</td>
<td>1140</td>
<td>1165</td>
<td>0</td>
<td>0</td>
<td>1220</td>
</tr>
<tr class="even">
<td>Total Production</td>
<td>29110</td>
<td>29110</td>
<td>28648</td>
<td>34940</td>
<td>34940</td>
<td>33965</td>
<td>0</td>
<td>0</td>
<td>39320</td>
</tr>
<tr class="odd">
<td>Other Imports</td>
<td>4</td>
<td>4</td>
<td>4</td>
<td>5</td>
<td>5</td>
<td>5</td>
<td>0</td>
<td>0</td>
<td>5</td>
</tr>
<tr class="even">
<td>Total Imports</td>
<td>4</td>
<td>4</td>
<td>4</td>
<td>5</td>
<td>5</td>
<td>5</td>
<td>0</td>
<td>0</td>
<td>5</td>
</tr>
<tr class="odd">
<td>Total Supply</td>
<td>29114</td>
<td>29114</td>
<td>28652</td>
<td>34945</td>
<td>34945</td>
<td>33970</td>
<td>0</td>
<td>0</td>
<td>39325</td>
</tr>
<tr class="even">
<td>Other Exports</td>
<td>31</td>
<td>31</td>
<td>34</td>
<td>31</td>
<td>31</td>
<td>37</td>
<td>0</td>
<td>0</td>
<td>40</td>
</tr>
<tr class="odd">
<td>Total Exports</td>
<td>31</td>
<td>31</td>
<td>34</td>
<td>31</td>
<td>31</td>
<td>37</td>
<td>0</td>
<td>0</td>
<td>40</td>
</tr>
<tr class="even">
<td>Fluid Use Dom. Consum.</td>
<td>13000</td>
<td>13000</td>
<td>12500</td>
<td>15800</td>
<td>15800</td>
<td>14750</td>
<td>0</td>
<td>0</td>
<td>16900</td>
</tr>
<tr class="odd">
<td>Factory Use Consum.</td>
<td>16083</td>
<td>16083</td>
<td>16118</td>
<td>19114</td>
<td>19114</td>
<td>19183</td>
<td>0</td>
<td>0</td>
<td>22385</td>
</tr>
<tr class="even">
<td>Feed Use Dom. Consum.</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
</tr>
<tr class="odd">
<td>Total Dom. Consumption</td>
<td>29083</td>
<td>29083</td>
<td>28618</td>
<td>34914</td>
<td>34914</td>
<td>33933</td>
<td>0</td>
<td>0</td>
<td>39285</td>
</tr>
<tr class="even">
<td>Total Distribution</td>
<td>29114</td>
<td>29114</td>
<td>28652</td>
<td>34945</td>
<td>34945</td>
<td>33970</td>
<td>0</td>
<td>0</td>
<td>39325</td>
</tr>
<tr class="odd">
<td>CY Imp. from U.S.</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
</tr>
<tr class="even">
<td>CY. Exp. to U.S.</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
</tr>
</tbody>
</table>

<table>
<colgroup>
<col style="width: 19%" />
<col style="width: 7%" />
<col style="width: 9%" />
<col style="width: 9%" />
<col style="width: 7%" />
<col style="width: 10%" />
<col style="width: 9%" />
<col style="width: 7%" />
<col style="width: 9%" />
<col style="width: 9%" />
</colgroup>
<tbody>
<tr class="odd">
<td><strong>PSD Table</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td><strong>Country</strong></td>
<td colspan="3"><strong>China, Peoples Republic of</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td><strong>Commodity</strong></td>
<td colspan="3"><strong>Dairy, Milk, Nonfat Dry</strong></td>
<td></td>
<td></td>
<td></td>
<td colspan="2">(1000 MT)</td>
<td></td>
</tr>
<tr class="even">
<td></td>
<td>2005</td>
<td>Revised</td>
<td></td>
<td>2006</td>
<td>Estimate</td>
<td></td>
<td>2007</td>
<td>Forecast</td>
<td></td>
</tr>
<tr class="odd">
<td></td>
<td><p>USDA</p>
<p>Official</p></td>
<td><p>Post</p>
<p>Estimate</p></td>
<td><p>Post</p>
<p>Estimate</p>
<p>New</p></td>
<td><p>USDA</p>
<p>Official</p></td>
<td><p>Post</p>
<p>Estimate</p></td>
<td><p>Post</p>
<p>Estimate</p>
<p>New</p></td>
<td><p>USDA</p>
<p>Official</p></td>
<td><p>Post</p>
<p>Estimate</p></td>
<td><p>Post</p>
<p>Estimate</p>
<p>New</p></td>
</tr>
<tr class="even">
<td><strong>Market Year Begin</strong></td>
<td></td>
<td>01/2005</td>
<td>01/2005</td>
<td></td>
<td>01/2006</td>
<td>01/2006</td>
<td></td>
<td>01/2007</td>
<td>01/2007</td>
</tr>
<tr class="odd">
<td>Beginning Stocks</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
</tr>
<tr class="even">
<td>Production</td>
<td>60</td>
<td>60</td>
<td>60</td>
<td>55</td>
<td>55</td>
<td>55</td>
<td>0</td>
<td>0</td>
<td>55</td>
</tr>
<tr class="odd">
<td>Other Imports</td>
<td>55</td>
<td>55</td>
<td>43</td>
<td>52</td>
<td>52</td>
<td>65</td>
<td>0</td>
<td>0</td>
<td>80</td>
</tr>
<tr class="even">
<td>Total Imports</td>
<td>55</td>
<td>55</td>
<td>43</td>
<td>52</td>
<td>52</td>
<td>65</td>
<td>0</td>
<td>0</td>
<td>80</td>
</tr>
<tr class="odd">
<td>Total Supply</td>
<td>115</td>
<td>115</td>
<td>103</td>
<td>107</td>
<td>107</td>
<td>120</td>
<td>0</td>
<td>0</td>
<td>135</td>
</tr>
<tr class="even">
<td>Other Exports</td>
<td>2</td>
<td>2</td>
<td>2</td>
<td>2</td>
<td>2</td>
<td>1</td>
<td>0</td>
<td>0</td>
<td>1</td>
</tr>
<tr class="odd">
<td>Total Exports</td>
<td>2</td>
<td>2</td>
<td>2</td>
<td>2</td>
<td>2</td>
<td>1</td>
<td>0</td>
<td>0</td>
<td>1</td>
</tr>
<tr class="even">
<td>Human Dom. Consumption</td>
<td>113</td>
<td>113</td>
<td>101</td>
<td>105</td>
<td>105</td>
<td>119</td>
<td>0</td>
<td>0</td>
<td>134</td>
</tr>
<tr class="odd">
<td>Other Use, Losses</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
</tr>
<tr class="even">
<td>Total Dom. Consumption</td>
<td>113</td>
<td>113</td>
<td>101</td>
<td>105</td>
<td>105</td>
<td>119</td>
<td>0</td>
<td>0</td>
<td>134</td>
</tr>
<tr class="odd">
<td>Total Use</td>
<td>115</td>
<td>115</td>
<td>103</td>
<td>107</td>
<td>107</td>
<td>120</td>
<td>0</td>
<td>0</td>
<td>135</td>
</tr>
<tr class="even">
<td>Ending Stocks</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
</tr>
<tr class="odd">
<td>Total Distribution</td>
<td>115</td>
<td>115</td>
<td>103</td>
<td>107</td>
<td>107</td>
<td>120</td>
<td>0</td>
<td>0</td>
<td>135</td>
</tr>
<tr class="even">
<td>CY Imp. from U.S.</td>
<td>7</td>
<td>7</td>
<td>6</td>
<td>7</td>
<td>7</td>
<td>14</td>
<td>0</td>
<td>0</td>
<td>18</td>
</tr>
<tr class="odd">
<td>CY. Exp. to U.S.</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
</tr>
</tbody>
</table>

<table>
<colgroup>
<col style="width: 18%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 9%" />
<col style="width: 9%" />
<col style="width: 9%" />
<col style="width: 8%" />
<col style="width: 7%" />
<col style="width: 9%" />
<col style="width: 9%" />
</colgroup>
<tbody>
<tr class="odd">
<td><strong>PSD Table</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td><strong>Country</strong></td>
<td colspan="3"><strong>China, Peoples Republic of</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td><strong>Commodity</strong></td>
<td colspan="3"><strong>Dairy, Dry Whole Milk Powder</strong></td>
<td></td>
<td></td>
<td></td>
<td colspan="2">(1000 MT)</td>
<td></td>
</tr>
<tr class="even">
<td></td>
<td>2005</td>
<td>Revised</td>
<td></td>
<td>2006</td>
<td>Estimate</td>
<td></td>
<td>2007</td>
<td>Forecast</td>
<td></td>
</tr>
<tr class="odd">
<td></td>
<td><p>USDA</p>
<p>Official</p></td>
<td><p>Post</p>
<p>Estimate</p></td>
<td><p>Post</p>
<p>Estimate</p>
<p>New</p></td>
<td><p>USDA</p>
<p>Official</p></td>
<td><p>Post</p>
<p>Estimate</p></td>
<td><p>Post</p>
<p>Estimate</p>
<p>New</p></td>
<td><p>USDA</p>
<p>Official</p></td>
<td><p>Post</p>
<p>Estimate</p></td>
<td><p>Post</p>
<p>Estimate</p>
<p>New</p></td>
</tr>
<tr class="even">
<td><strong>Market Year Begin</strong></td>
<td></td>
<td>01/2005</td>
<td>01/2005</td>
<td></td>
<td>01/2006</td>
<td>01/2006</td>
<td></td>
<td>01/2007</td>
<td>01/2007</td>
</tr>
<tr class="odd">
<td>Beginning Stocks</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
</tr>
<tr class="even">
<td>Production</td>
<td>918</td>
<td>918</td>
<td>918</td>
<td>1000</td>
<td>1000</td>
<td>1030</td>
<td>0</td>
<td>0</td>
<td>1150</td>
</tr>
<tr class="odd">
<td>Other Imports</td>
<td>67</td>
<td>67</td>
<td>65</td>
<td>60</td>
<td>60</td>
<td>85</td>
<td>0</td>
<td>0</td>
<td>100</td>
</tr>
<tr class="even">
<td>Total Imports</td>
<td>67</td>
<td>67</td>
<td>65</td>
<td>60</td>
<td>60</td>
<td>85</td>
<td>0</td>
<td>0</td>
<td>100</td>
</tr>
<tr class="odd">
<td>Total Supply</td>
<td>985</td>
<td>985</td>
<td>983</td>
<td>1060</td>
<td>1060</td>
<td>1115</td>
<td>0</td>
<td>0</td>
<td>1250</td>
</tr>
<tr class="even">
<td>Other Exports</td>
<td>29</td>
<td>29</td>
<td>32</td>
<td>34</td>
<td>34</td>
<td>34</td>
<td>0</td>
<td>0</td>
<td>36</td>
</tr>
<tr class="odd">
<td>Total Exports</td>
<td>29</td>
<td>29</td>
<td>32</td>
<td>34</td>
<td>34</td>
<td>34</td>
<td>0</td>
<td>0</td>
<td>36</td>
</tr>
<tr class="even">
<td>Human Dom. Consumption</td>
<td>956</td>
<td>956</td>
<td>951</td>
<td>1026</td>
<td>1026</td>
<td>1081</td>
<td>0</td>
<td>0</td>
<td>1214</td>
</tr>
<tr class="odd">
<td>Other Use, Losses</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
</tr>
<tr class="even">
<td>Total Dom. Consumption</td>
<td>956</td>
<td>956</td>
<td>951</td>
<td>1026</td>
<td>1026</td>
<td>1081</td>
<td>0</td>
<td>0</td>
<td>1214</td>
</tr>
<tr class="odd">
<td>Total Use</td>
<td>985</td>
<td>985</td>
<td>983</td>
<td>1060</td>
<td>1060</td>
<td>1115</td>
<td>0</td>
<td>0</td>
<td>1250</td>
</tr>
<tr class="even">
<td>Ending Stocks</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
</tr>
<tr class="odd">
<td>Total Distribution</td>
<td>985</td>
<td>985</td>
<td>983</td>
<td>1060</td>
<td>1060</td>
<td>1115</td>
<td>0</td>
<td>0</td>
<td>1250</td>
</tr>
<tr class="even">
<td>CY Imp. from U.S.</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>1</td>
<td>0</td>
<td>0</td>
<td>1</td>
</tr>
<tr class="odd">
<td>CY. Exp. to U.S.</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
</tr>
</tbody>
</table>

  ---------------- ---------- ---------- ------------ ----------- -----------
  China Fluid Milk                                                
  Imports,                                                        
  2004-2006                                                       

  (Metric Tons)                                                   

                   Jan-Dec    Jan-Dec    Jan-Sep                  Jan - Sep

                   Quantity   Quantity   Quantity                 \% Change
                                         Comparison               

  Origin           2004       2005       2005         2006        2006/05

  World            3,006      3,829      3,079        3,064       -0.49

  New Zealand      990        1,798      1,481        1,105       -25.39

  Australia        1,152      1,086      874          954         9.15

  France           344        610        480          565         17.86

  Other            520        335        244          440         

  HS Code:                                                        
  0401.1000,                                                      
  0401.2000 and                                                   
  0401.3000                                                       

  Source: WTA                                                     
  China Statistics                                                
  ---------------- ---------- ---------- ------------ ----------- -----------

  ---------------- ---------- ---------- ------------ ----------- -----------
  China Non-Fat                                                   
  Dry Milk                                                        
  Imports,                                                        
  2004-2006                                                       
  (Metric Tons)                                                   

                   Jan-Dec    Jan-Dec    Jan-Sep                  Jan - Sep

                   Quantity   Quantity   Quantity                 \% Change
                                         Comparison               

  Origin           2004       2005       2005         2006        2006/05

  World            55,243     42,599     33,804       47,696      41.10

  New Zealand      26,974     22,313     17,006       26,354      54.97

  United States    4,565      5,910      5,268        10,777      104.57

  Australia        10,070     9,381      6,973        6,394       -8.30

  Ukraine          2,100      441        216          2,257       944.91

  India            0          1,603      1,070        1,180       10.27

  Other            11,534     2,951      3,271        734         -77.56

  HS Code:                                                        
  0402.1000                                                       

  Source: WTA                                                     
  China Custom                                                    
  Statistics                                                      
  ---------------- ---------- ---------- ------------ ----------- -----------

  ---------------- ---------- ---------- ------------ ----------- -----------
  China Whole Fat                                                 
  Dry Milk                                                        
  Imports,                                                        
  2004-2006                                                       
  (Metric Tons)                                                   

                   Jan-Dec    Jan-Dec    Jan-Sep                  Jan - Sep

                   Quantity   Quantity   Quantity                 \% Change
                                         Comparison               

  Origin           2004       2005       2005         2006        2006/05

  World            90,664     65,431     44,874       59,123      31.75

  New Zealand      82,133     60,265     41,809       54,978      31.50

  Australia        5,434      2,787      1,661        2,103       26.61

  United States    155        40         34           777         2156.16

  France           553        512        329          372         13.07

  Other            2,389      1,827      1,041        893         -14.18

  HS Code:                                                        
  0402.2100,                                                      
  0402.2900,                                                      
  0402.9100 and                                                   
  0402.9900                                                       

  Source: WTA                                                     
  China Custom                                                    
  Statistics                                                      
  ---------------- ---------- ---------- ------------ ----------- -----------

  ---------------- ---------- ---------- ------------ ----------- -----------
  China Yogurt                                                    
  Imports,                                                        
  2004-2006                                                       
  (Metric Tons)                                                   

                   Jan-Dec    Jan-Dec    Jan-Sep                  Jan - Sep

                   Quantity   Quantity   Quantity                 \% Change
                                         Comparison               

  Origin           2004       2005       2005         2006        2006/05

  World            492        497        359          528         46.94

  Japan            20         69         39           146         276.63

  Russia           7          14         8            171         2054.76

  Spain            113        108        73           80          9.71

  New Zealand      158        42         31           19          -39.50

  United States    41         7          5            7           48.48

  Other            153        257        204          105         -48.73

  HS Code:                                                        
  0403.1000 and                                                   
  0403.9000                                                       

  Source: WTA                                                     
  China Custom                                                    
  Statistics                                                      
  ---------------- ---------- ---------- ------------ ----------- -----------

  ---------------- ---------- ---------- ------------ ----------- -----------
  China Whey                                                      
  Imports,                                                        
  2004-2006                                                       
  (Metric Tons)                                                   

                   Jan-Dec    Jan-Dec    Jan-Sep                  Jan - Sep

                   Quantity   Quantity   Quantity                 \% Change
                                         Comparison               

  Origin           2004       2005       2005         2006        2006/05

  World            177,987    188,006    138,610      141,746     2.26

  United States    69,609     77,072     60,286       54,450      -9.68

  France           44,114     44,277     29,398       36,272      24.93

  Finland          9,610      8,881      7,937        8,285       4.38

  Australia        17,988     12,824     10,011       7,749       -22.60

  Ireland          8294       8,483      6,321        6,771       7.12

  Netherlands      14,909     13,861     10,536       6,529       -38.03

  Poland           2,476      3,684      1,692        5,338       215.48

  Canada           4980       8097       5,611        4,034       -28.11

  Germany          1531       1305       1,109        3,762       239.22

  Italy            192        246        24           2,043       8412.50

  New Zealand      1039       2845       2,245        1,466       -34.70

  Argentina        50         796        535          1,376       157.39

  India            0          1514       800          986         23.20

  Belgium          306        999        839          748         -10.85

  Other            2,889      3,122      1,266        1,937       52.98

  HS Code:                                                        
  0404.1000 and                                                   
  0404.9000                                                       
  ---------------- ---------- ---------- ------------ ----------- -----------

  ---------------- ---------- ---------- ------------ ----------- -----------
  China Butter and                                                
  Dairy Spread                                                    
  Imports,                                                        
  2004-2006                                                       
  (Metric Tons)                                                   

                   Jan-Dec    Jan-Dec    Jan-Sep                  Jan - Sep

                   Quantity   Quantity   Quantity                 \% Change
                                         Comparison               

  Origin           2004       2005       2005         2006        2006/05

  World            12,379     12,835     10,437       7,116       -31.82

  New Zealand      8,107      7,604      5,520        5,296       -4.05

  Australia        1,007      1,026      851          465         -45.30

  Finland          682        648        626          381         -39.03

  Netherlands      571        146        108          202         87.04

  France           429        939        910          182         -80.00

  Belgium          75         814        814          181         -77.81

  United States    0          0          9            117         1143.09

  Ireland          394        641        640          114         -82.11

  Other            1,114      1,017      959          177         -81.57

  HS Code:                                                        
  0405.1000,                                                      
  0405.2000 and                                                   
  0405.9000                                                       

  Source: WTA                                                     
  China Custom                                                    
  Statistics                                                      
  ---------------- ---------- ---------- ------------ ----------- -----------

  ---------------- ---------- ---------- ------------ ----------- -----------
  China Cheese                                                    
  Imports,                                                        
  2004-2006                                                       
  (Metric Tons)                                                   

                   Jan-Dec    Jan-Dec    Jan-Sep                  Jan - Sep

                   Quantity   Quantity   Quantity                 \% Change
                                         Comparison               

  Origin           2004       2005       2005         2006        2006/05

  World            7,244      7,178      5,467        7,496       37.11

  New Zealand      3,478      3,455      2,869        3,204       11.68

  Australia        2,645      2,312      1,650        2,500       51.56

  United States    190        307        179          669         273.70

  Germany          203        169        135          249         84.16

  Other            728        935        634          874         37.81

  HS Code:                                                        
  0406.1000,                                                      
  0406.2000,                                                      
  0406.3000,                                                      
  0406.4000 and                                                   
  0406.9000                                                       

  Source: WTA                                                     
  China Custom                                                    
  Statistics                                                      
  ---------------- ---------- ---------- ------------ ----------- -----------

  ---------------- ---------- ---------- ------------ ----------- -----------
  China Fluid Milk                                                
  Exports,                                                        
  2004-2006                                                       

  (Metric Tons)                                                   

                   Jan-Dec    Jan-Dec    Jan-Sep                  Jan - Sep

                   Quantity   Quantity   Quantity                 \% Change
                                         Comparison               

  Destination      2004       2005       2005         2006        2006/05

  World            30,640     33,590     23,209       28,636      23.38

  Hong Kong        28,284     30,602     21,309       26,591      24.79

  Macau            1,312      1,593      1,225        886         -27.67

  Singapore        289        249        190          599         214.46

  Other            755        1,147      485          560         15.46

  HS Code:                                                        
  0401.1000,                                                      
  0401.2000 and                                                   
  0401.3000                                                       

  Source: WTA                                                     
  China Statistics                                                
  ---------------- ---------- ---------- ------------ ----------- -----------

  ---------------- ---------- ---------- ------------ ----------- -----------
  China Non-Fat                                                   
  Milk Powder                                                     
  Exports,                                                        
  2004-2006                                                       
  (Metric Tons)                                                   

                   Jan-Dec    Jan-Dec    Jan-Sep                  Jan - Sep

                   Quantity   Quantity   Quantity                 \% Change
                                         Comparison               

  Destination      2004       2005       2005         2006        2006/05

  World            1,529      1,521      1,234        796         -35.49

  Hong Kong        927        765        616          368         -40.26

  Taiwan           601        705        598          351         -41.30

  Other            1          51         20           77          285.00

  HS Code:                                                        
  0402.1000                                                       

  Source: WTA                                                     
  China Custom                                                    
  Statistics                                                      
  ---------------- ---------- ---------- ------------ ----------- -----------

  ---------------- ---------- ---------- ------------ ----------- -----------
  China Whole Fat                                                 
  Milk Exports,                                                   
  2004-2006                                                       
  (Metric Tons)                                                   

                   Jan-Dec    Jan-Dec    Jan-Sep                  Jan - Sep

                   Quantity   Quantity   Quantity                 \% Change
                                         Comparison               

  Origin           2004       2005       2005         2006        2006/05

  World            25,164     32,324     22,175       25,404      14.56

  Taiwan           2,304      5,828      3,321        8,819       165.55

  Hong Kong        14,396     12,530     10,348       7,768       -24.93

  Maynmar          3,202      4,291      3,176        2,822       -11.15

  Angola           980        1,344      243          1,445       495.52

  Philippines      35         81         67           981         1371.80

  Iraq             0          1,360      0            835         0.00

  Japan            1,087      1,029      697          647         -7.17

  Other            3,160      5,861      4,324        2,088       -51.72

  HS Code:                                                        
  0402.2100,                                                      
  0402.2900,                                                      
  0402.9100 and                                                   
  0402.9900                                                       

  Source: WTA                                                     
  China Custom                                                    
  Statistics                                                      
  ---------------- ---------- ---------- ------------ ----------- -----------

  ---------------- ---------- ---------- ------------ ----------- -----------
  China Yogurt                                                    
  Exports,                                                        
  2004-2006                                                       
  (Metric Tons)                                                   

                   Jan-Dec    Jan-Dec    Jan-Sep                  Jan - Sep

                   Quantity   Quantity   Quantity                 \% Change
                                         Comparison               

  Destination      2004       2005       2005         2006        2006/05

  World            769        1,031      745          786         5.50

  Hong Kong        673        952        712          712         -0.01

  Macau            47         46         29           35          20.69

  Other            49         33         4            39          900.00

  HS Code:                                                        
  0403.1000 and                                                   
  0403.9000                                                       

  Source: WTA                                                     
  China Custom                                                    
  Statistics                                                      
  ---------------- ---------- ---------- ------------ ----------- -----------

  ---------------- ---------- ---------- ------------ ----------- -----------
  China Whey                                                      
  Exports,                                                        
  2004-2006                                                       
  (Metric Tons)                                                   

                   Jan-Dec    Jan-Dec    Jan-Sep                  Jan - Sep

                   Quantity   Quantity   Quantity                 \% Change
                                         Comparison               

  Destination      2004       2005       2005         2006        2006/05

  World            1,441      635        577          323         -43.89

  Singapore        101        125        92           103         11.35

  United States    0          155        155          97          -37.30

  Albania          80         76         61           40          -34.43

  Angola           1,006      104        114          0           0.00

  Other            254        175        155          84          -45.81

  HS Code:                                                        
  0404.1000 and                                                   
  0404.9000                                                       

  Source: WTA                                                     
  China Custom                                                    
  Statistics                                                      
  ---------------- ---------- ---------- ------------ ----------- -----------

  ---------------- ---------- ---------- ------------ ----------- -----------
  China Butter and                                                
  Dairy Spread                                                    
  Exports,                                                        
  2004-2006                                                       
  (Metric Tons)                                                   

                   Jan-Dec    Jan-Dec    Jan-Sep                  Jan - Sep

                   Quantity   Quantity   Quantity                 \% Change
                                         Comparison               

  Destination      2004       2005       2005         2006        2006/05

  World            24         65         19           120         517.13

  United Arab      0          0          0            37          0.00
  Emirates                                                        

  South Korea      0          0          0            48          0.00

  North Korea      10         44         19           19          -1.31

  Other            14         21         0            16          0.00

  HS Code:                                                        
  0405.1000,                                                      
  0405.2000 and                                                   
  0405.9000                                                       

  Source: WTA                                                     
  China Custom                                                    
  Statistics                                                      
  ---------------- ---------- ---------- ------------ ----------- -----------

  ---------------- ---------- ---------- ------------ ----------- -----------
  China Cheese                                                    
  Exports,                                                        
  2004-2006                                                       
  (Metric Tons)                                                   

                   Jan-Dec    Jan-Dec    Jan-Sep                  Jan - Sep

                   Quantity   Quantity   Quantity                 \% Change
                                         Comparison               

  Destination      2004       2005       2005         2006        2006/05

  World            552        658        504          424         -15.87

  Hong Kong        544        643        494          404         -18.22

  Macau            8          12         8            12          50.00

  Other            \-         3          2            8           

  HS Code:                                                        
  0406.1000,                                                      
  0406.2000,                                                      
  0406.3000,                                                      
  0406.4000 and                                                   
  0406.9000                                                       

  Source: WTA                                                     
  China Custom                                                    
  Statistics                                                      
  ---------------- ---------- ---------- ------------ ----------- -----------

  ------------------- ----------- -------- --------- -------- ---------------
  Tariffs on Dairy                                            
  Products, Effective                                         
  January 1, 2006                                             

                                                              Effective

                                  MFN      General   V.A.T    Rate

                                                              (MFN & VAT) 1/

                                                              

  Fluid Milk          0401.1000   15.0%    40.0%     17.0%    34.89%

                      0401.2000   15.0%    40.0%     17.0%    34.89%

                      0401.3000   15.0%    40.0%     17.0%    34.89%

  Powdered Milk       0402.1000   10.0%    40.0%     17.0%    29.89%

                      0402.2100   10.0%    40.0%     17.0%    29.89%

                      0402.2900   10.0%    40.0%     17.0%    29.89%

                      0402.9100   10.0%    90.0%     17.0%    29.89%

                      0402.9900   10.0%    90.0%     17.0%    29.89%

  Yogurt              0403.1000   10.0%    90.0%     17.0%    29.89%

                      0403.9000   20.0%    90.0%     17.0%    39.89%

  Whey                0404.1000   6.0%     30.0%     17.0%    25.89%

                      0404.9000   20.0%    90.0%     17.0%    39.89%

  Butter & Dairy      0405.1000   10.0%    90.0%     17.0%    29.89%
  Spreads                                                     

                      0405.2000   10.0%    90.0%     17.0%    29.89%

                      0405.9000   10.0%    90.0%     17.0%    29.89%

  Cheese              0406.1000   12.0%    90.0%     17.0%    31.89%

                      0406.2000   12.0%    90.0%     17.0%    31.89%

                      0406.3000   12.0%    90.0%     17.0%    31.89%

                      0404.4000   15.0%    90.0%     17.0%    34.89%

                      0404.9000   12.0%    90.0%     17.0%    31.89%

  Source: China                                               
  Customs                                                     
  ------------------- ----------- -------- --------- -------- ---------------

Note: The dairy import tariff remains the same as 2005.