Required Report - public distribution

**Date:** 2004/10/20

**GAIN Report Number:** TW4047

TW4047

**Taiwan**

**Dairy and Products**

**Annual**

**2004**

**Approved by:**

![](media/image1.wmf)Scott Sindelar, Chief, Agricultural Affairs

American Institute in Taiwan

**Prepared by:**

Jeff Miller, Reports and Marketing Officer

**Report Highlights:**

Stable consumer demand for fluid milk, private sector unfamiliarity with
handling fluid milk, and consumer preference for fresh vs. UHT milk are
likely to continue holding fluid milk imports below the TRQ allowed
level of 21,298mt. Cheese promises to be the rising star in the dairy
category for the coming several years as mild flavored products continue
to be introduced into a wide range of foodservice applications and
specialty cheeses gain niche audiences through producer country and
retailer promotions. The United States remains a minor player in all
dairy segments -- with the important exception of whey and high value
isolates. With increasingly competitive prices and more coordinated
marketing and education, U.S. suppliers should have increasing
mid-to-long term opportunities to expand their share of Taiwan's
approximately 535 thousand metric ton annual demand for milk and dairy
products.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Annual Report

Taipei \[TW1\]

\[TW\]

**Executive Summary**

The Taiwan dairy industry was established more than four decades ago,
during an era when Taiwan emphasized food self-sufficiency and diet
diversification. To support production, authorities subsidized it and
erected high barriers to imports. Taiwan commitments to liberalize the
market and permit imports in all dairy categories will continue to
define market trends for the coming several years.

Cooler weather in dairy production areas allowed Taiwan to produce
roughly the same amount of milk in 2002 and 2003, even with a slightly
smaller herd then in prior years. Production is expected to resume
shrinking by an average 2 \~ 4 percent annually over the coming several
years, reflecting increased TRQ import volumes and variations in
consumer and food processing needs.

Despite annual fluctuations in various categories, such as new to market
products like whey and ingredient fungibles such as powdered milk, the
future continues to be positive for continued slow and steady growth in
per capita dairy consumption. Dairy product consumption will continue to
expand, with consumers becoming more selective, particularly with regard
to liquid milk products and growth opportunities in specialty dairy
items (such as whey and whey protein concentration (WPC)) that add
value/differentiation to processed food products already in the market.

The United States remains a minor player in Taiwan's overall dairy
market, with most commodity products arriving from Australia and New
Zealand, while higher-end and branded products are sourced globally. The
United States, however, is the major supplier of whey due to competitive
pricing and successful promotion efforts into
hotel/restaurant/institutional (HRI) and processed food channels by U.S.
exporters and the U.S. Dairy Export Council.

**Production**

Taiwan dairy producers continue to cut back gradually on dairy herd
numbers (est. an average 3% decrease annually over the coming 5 year
period). Good weather in producing areas during 2003 permitted a slight
(1%) increase in output even with a smaller herd. The high comparative
costs of production (roughly twice that of the U.S.) make it likely that
local production will drop to a natural base of 330 thousand metric tons
in the near future as imports expand to full tariff rate quota (TRQ)
volumes. Taiwan's Council of Agriculture promotes locally produced milk
through advertisements and quality marking.

Increased productivity continues to be realized largely through industry
consolidation and better production management practices. Dairy
producers receive few government subsidies and are under growing
pressure from milk processors to improve business practices and lower
costs.

Due to the semi-tropical climate in Taiwan's dairy regions, output tends
to be highest during the cooler winter months (October through March). A
20 percent variation is production between winter and summer months is
normal. Unfortunately for local fresh milk producers, consumption
patterns for fresh milk run in reverse, with the annual consumption
cycle peaking during the hot summer months (see \"Marketing & Prices\"
section below).

Taiwan has 750 registered dairy farms, concentrated principally in the
southeast of the island.

The half-dozen or so main processors of consumer-ready fresh milk and
liquid milk products (household names such as Uni-President, Kuang
Chuan, and Wei Chuan) outsource nearly all of their raw milk production
to independent contract farms. Dairy farms directly owned and operated
by processors are justified principally by public relations and
marketing objectives.

A combination of economics, policies and consumer preference channels
nearly all dairy output (nearly 90%) into consumer-ready fresh milk
(including flavored milks and yogurt drinks). Of the remainder, local
ice cream producers consume approximately 10% of raw milk supplies and
producers of milk powder use less than 1%. Dairy products manufactured
with local production are consumed domestically. Taiwan produces no
other dairy products (cheese, whey, etc.) in commercially meaningful
quantities.

**Consumption**

Dairy products are now firmly entrenched in the local diet. While the
weak economy cut dairy consumption by just under 2 percent in 2002,
total fluid milk consumption returned to its "normal" consumption level
just above 380 thousand mt in 2003. Mild growth can be expected to
continue over the coming several years. While some (\<10%) milk powder
is used in the local production of \"fresh\" milk (principally flavored
/ yogurt drinks, but also in certain \"enhanced\" fluid milks) the
market is expected to continue shifting away from reconstituted milk
powder in favor of fresh fluid milk.

Associated with a healthy and comfortable life-style, dairy products
have gained significant market acceptance over the past decade. While
the late 1980s saw fresh milk complete its transition from niche food
product to standard grocery item, the 1990s saw an unprecedented
proliferation in the availability of value-added dairy items including
cheeses, yogurt products, dairy spreads, whipped cream, and dairy
desserts. The first decade of the 21^st^ century should see increasing
acceptance of dairy products in local foods as flavoring atop steamed
vegetables, baked with seafood, added to soups, served up in sandwiches,
and dolloped over iced coffee.

While liquid white milk retail sales are holding steady or growing
slightly, sales of flavored milk drinks and drinking yogurt should
continue declining over the coming years. The increasing preference for
fresh milk and overall negative growth in demand for HRI ingredients has
cut demand for powdered milk. These trends are expected to continue into
2005. Rising whey demand continues to make this the most promising
sector for near term growth, although supply problems (limited supply,
higher costs) dented sales in 2003 and are expected to continue causing
problems in 2004. Whey is currently viewed as a supplement or
replacement for milk and other ingredients. As such, the price of whey
vis a vis alternatives impact strongly on sales in any given year.
Growing awareness and interest in whey and isolates are largely a result
of successful promotion efforts for them as ingredient substitutes and
additives.

Cheese continues to make headway as a \"new\" product into the
traditional prepared food market. Cheese sales are expected to continue
to grow at more than 10% growth per year. Between 2003 and 2005 alone,
cheese demand is expected to increase 33%. Cheese promises to continue
increasing market volume through growing direct consumption and through
innovative applications. It has gradually worked its way from an early
position as a \"foreign\" flavor into a welcome flavor additive for a
broad range of processed and fresh-served products. While processed
cheeses are still most prevalent, mild-flavored fresh cheeses such as
mozzarella, Gouda, and even Parmesan are now increasingly used as
flavoring for many traditional and fusion dishes. Whey, also a newcomer
to Taiwan's food processing industry, seems to be earning acceptance as
a cost competitive replacement for other ingredients in processed food
applications. The relatively low per capita consumption of cheese and
whey has helped insulate these products from negative economic pressures
while encouraging continued expanded use in new products.

Baked cheese dishes, both Western (e.g., lasagna) and Asian/Western
fusion (e.g., creamy seafood concoctions), represent an important
foodservice trend that continues to remain highly popular. This trend on
its own is expected to account for approximately one half of the
increase in Taiwan's consumption of cheese (mozzarella, mild cheddar,
gouda, processed) this year.

# 

# Market Profile

Despite increasing product diversity, dairy consumption in Taiwan still
lags behind other high income Asian economies \-- where dairy products
already enjoy broad acceptance in local diets. Using benchmark research
conducted in 1998, it is estimated that Taiwanese (in 2002) spent
US\$240 (NT\$8,200) per capita on dairy items -- representing some 11 kg
per person. Japan, a market to which Taiwan frequently looks for
consumer and food trends, still consumes more than 3 times this amount
per capita of dairy products. This highlights both the relatively
shallow level of dairy product penetration in Taiwan and the substantial
potential for growth.

# Customer Segmentation

The dairy products market is segmented into two major consumer groups.
The first group buys and consumes dairy products such as milk, cheese,
and yogurt both for nutritional and health reasons. The second buys
dairy products based on quality perceptions, status considerations,
and/or curiosity. These two groups have different expectations regarding
dairy products and may best be approached differently in terms of
marketing and sales work.

· The Nutrition-Focused Consumer

Taiwan consumers appreciate the nutritional benefits of consuming dairy
products. The relatively limited product expectations, beyond nutrition,
of nutrition-focused consumers make this group highly influenced by
price and convenience when making purchase decisions. Children are the
largest nutrition-focused consumer segment for dairy items such as
processed cheese, yogurt drinks, fresh milk, powdered milk, and
puddings. The elderly are prime consumers of nutritionally enhanced milk
powders.

· The Quality Buyer

With a large (often Western-educated) middle class, high average income
level, and a desire to become more cosmopolitan, urban Taiwan has
increasingly embraced Western cuisine and food trends. Dairy products
are an important component of this trend. Middle and upper class
consumers tend to make food (including dairy product) purchase decisions
based upon factors beyond cost and convenience. These include product
and packaging appearance, quality and taste perceptions, recommendations
from others, features or recipe write-ups in the news media, and so on.
Also, a significant percentage of chefs now in the better Western
restaurants and hotels are trained abroad -- often in Europe. They
specify high-quality ingredients and brand names with which they are
familiar when preparing food. Some of the better bakery chains as well
also employ master bakers trained abroad.

####### Trade

Highly competitive prices and long-running coordinated promotion by
dairy suppliers from major exporting nations such as New Zealand and
Australia have generally made the going tough for U.S. suppliers who are
often able to get better prices (particularly for commodity dairy
products) in their home market. This intense competition runs from
commodity categories where the antipodes have the largest market share
to high-end dairy products where Europe dominates. U.S. suppliers are
not expected to gain significant ground in the general dairy market
given these conditions. However, given recent reported instability in
supply from Europe, rising overall prices, and changing conditions in
the United States with respect to dairy prices, U.S. suppliers should
experience some opportunities in particular product areas, such as
cheese and whey.

The current structure of trade for major commodity categories, such as
fluid and powdered milk, should be little affected by lower
dollar-denominated prices stemming from the weaker U.S. dollar.
Importers are, however, giving greater attention to U.S. cheese
suppliers (and other important niche categories, such as ice cream,
whey, and dairy ingredients) because of increasingly attractive U.S.
supplier prices.

![](media/image2.wmf){width="6.33125in" height="3.7368055555555557in"}

> \* Due to chart space restrictions, three categories which experienced
> exceptionally high growth during the survey period, sweetened
> condensed / evaporated milk (72.9x), ice cream powder (7.5x) and fluid
> milk (4.6x), have not been included.

**Tariff Rate Quota (TRQ) Administration**: Taiwan's 21,298mt TRQ for
fluid milk in 2004 represented the final increase in that TRQ required
by Taiwan's World Trade Organization (WTO) accession agreement. Taiwan
administers TRQs under "System 2" rules, under which import rights are
auctioned once a year. All importers and exporters registered with
Taiwan's Board of Foreign Trade (BOFT) are eligible to bid on quota
rights. There are no performance bonds and quota rights go to the
highest bidder. For liquid milk, the minimum lot size is 250 mt, with a
maximum of 4,259. The liquid milk quota in 2003 reached 5,400mt,
approximately 1/3 of that available. While subscriptions to the TRQ are
up more than 50% this year, the full TRQ volume of 21,298mt will not
likely be reached by year's end.

**Special Safeguard (SSG) Protection:** WTO rules also allow Taiwan to
impose an additional SSG assessment, above and beyond any tariff
bindings on imports of most fluid dairy products. This can occur either
when either the CIF price of an item falls below a benchmark floor price
(based on a 1990-1992 historical domestic \"farm gate\" price) or when
total import volumes exceed a certain trigger level (based on recent
import volumes). Taiwan has already notified the WTO of its intention to
impose SSG's although it has not said when it may act. The SSG would add
33 percent to tariff bindings (e.g., a 10 percent duty would rise to 13
percent). Imports under TRQ are not subject to special safeguards.

Products Affected by SSGs (by HS Code)

  ----------- -----------------------------------------------------------
  **HS Code** **Description**

  04011000 /  Fresh and Longlife Milk (excluding that of goats & sheep)
  2000 / 3000 

  04029910    Fresh milk containing sugar or other sweeteners

  04029920    Evaporated or sterilized milk, containing sugar or other
              sweeteners

  04029990    Other milk, containing sugar or other sweeteners

  04039090    Other buttermilk (not fresh, not condensed, not dry) \*

  04039090    Various minor categories of modified, flavored, or
              fermented milk and cream \*

  040390901   Curdled milk
  ----------- -----------------------------------------------------------

\* note: Yogurt; fresh, dried, & condensed buttermilk; sour cream;
fermented sour milk; and yeast / fermented milk powders are *not*
eligible for SSG protection.

The U.S. is a major producer and exporter of whey and whey protein
concentrate and other extracts and so enjoys a competitive advantage in
these niches. The success of initial promotion efforts targeting food
processors indicates strong potential for whey as an ingredient in
Taiwan's large food processing industry. Strong demand growth is
projected through the foreseeable future.

At present, Taiwan permits most value-added milk products onto the
island subject to payment of tariffs and compliance with sanitary
requirements. Infant milk formulas, however must be approved by the
Department of Health.

Projecting forward, Taiwan's fluid milk import volumes are likely to
remain in the 10\~15,000mt range for the next several years.

**Dairy and the WTO**

Taiwan acceded to the World Trade Organization (WTO) on January 1, 2002.
In addition to reduction in tariffs for most dairy products, Taiwan now
operates a process to allocate import quotas for products entering under
TRQs.

In general, the bulk of gains from tariff reductions and greater market
access for imports should be passed directly to consumers through lower
prices and increased product selection.

## Import Tariffs for Dairy Products

  --------------- ---------------------------------------------- ------------
  **Tariff        **Description**                                **Tariff**
  Schedule**                                                     

  various (under  Fresh & longlife cow milk & cream, unsweetened 15 / TRQ
  0401)           w/ fat \<6%                                    

  various (under  Fresh & longlife cow milk & cream, unsweetened 15 / TRQ
  0401)           w/ fat \>6%                                    

  various (under  Fresh & longlife goat / sheep milk & cream,    20
  0401)           unsweetened                                    

  various (under  Cow/goat/sheep milk in powder, granule, or     12
  0402)           block form for human consumption               

  04029110        Condensed milk, unsweetened                    20

  04029120        Evaporated or sterilized milk, unsweetened     20

  04029190        \"other\" milk or cream, unsweetened           20

  04029910        fresh or condensed milk, sweetened             50 / TRQ

  04029920        evaporated or sterilized milk, sweetened       15 / TRQ

  04029990        milk or cream, neither concentrated nor        24
                  condensed, sweetened                           

  04039010        buttermilk, dry powder                         12

  04031000        yoghurt                                        15

  04039090        buttermilk, sour milk, fermented milk          20

  04039090924     buttermilk, n.e.s. (liquid, concentrated,      15 / TRQ
                  evaporated)                                    

  04039090942     curdled milk or cream, kephir, other fermented 15 / TRQ
                  or oracified milk or cream n.e.s.              

  04041090        whey & modified whey, whether concentrated or  5
                  not                                            

  04049000        other products containing milk or milk         27.5
                  constituents                                   

  04050010        Butter                                         5

  04059010        de-watered milkfat                             8

  04061000        fresh cheese, including whey cheese and curd   5

  04062 / 3 /     grated / powdered cheese, processed cheese,    5
  4000            blue-veined cheese                             

  18069010        ice cream powder                               5

  19011000        infant milk powder, retail packaged            5

  19019023        evaporated or sterilized milk, prepared        25

  19019027        flavored milk                                  15 / TRQ

  21050010        ice cream                                      10

  35029000        Whey Protein Concentrate                       5
  --------------- ---------------------------------------------- ------------

· Tariff Rate Quota (TRQ) indicates that product is permitted under a
\"normal\" tariff up to a certain annual quota volume, at which point a
\"prohibitive\" tariff will be administered on any additional imported
quantities.

· All tariffs noted are \"final\" WTO tariffs.

####### Competition

At present, U.S. products and brands are relatively well represented
only in the ice cream and infant formula segments. Key European,
Australasian, and Japanese brands that have sold into the market for
many years have much higher brand recognition. To gain market share,
U.S. suppliers will need to increase consumer awareness.

# Key Dairy Product Segments and Principal Supplier Countries

  ------------------- ----------------- ------------ ------------ ------------
  Product             8/2003 \~ 7/2004  Country 1    Country 2    Country 3
                      imports (US\$)    (import      (import      (import
                                        share)       share)       share)

  milk & cream (0401) **11,481,347**    N.Zealand    France (33%) Australia
                                        (38%)                     (22%)

  milk & cream        **100,101,988**   N.Zealand    Australia    Denmark (4%)
  (powder, conc.)                       (50%)        (33%)        

  yogurt              **416,798**       Germany      France (16%) N.Zealand
                                        (51%)                     (12%)

  whey (04041090)     **9,630,856**     US (60%)     Australia    Germany (9%)
                                                     (10%)        

  butter              **19,658,295**    N.Zealand    Australia    France (7%)
                                        (58%)        (14%)        

  cheese & curd       **44,846,520**    N.Zealand    Australia    US (9%)
  (0406)                                (37%)        (36%)        

  processed cheese    **13,927,641**    N.Zealand    Australia    Japan (9%)
  (040630) -                            (48%)        (28%)        
  subcategory of                                                  
  cheese & curd                                                   

  infant formula milk **48,713,507**    Neth. (28%)  Ireland      N.Zealand
  powder                                             (16%)        (12%)

  ice cream           **8,106,184**     France (54%) Thailand     Japan (9%)
                                                     (9%)         
  ------------------- ----------------- ------------ ------------ ------------

The potential of China to supply competitive milk and dairy products
into the market is small through the foreseeable future. WTO terms
anticipate that member states permit all WTO members equal access,
subject to phytosanitary, safety, and other requirements. The political
freeze across the Taiwan Strait poses formidable problems for traders
seeking to resolve technical issues, which will seriously impede trade.
While unlikely to pose a threat to higher value-added product segments,
continuing investment flows into China from Taiwan may eventually help
develop the former as an effective exporter to Taiwan.

In May 2003, Taiwan announced the lifting of import restrictions for one
value-added dairy product from China, sweetened condensed milk (HS Code
0402-9940-008). The overall impact will be small (Taiwan imported 80mt
of sweetened condensed from China in 2003 and looks set to bring in
around 450mt in 2004), but the opening of this category to importation
is expected to provide Taiwanese suppliers an initial opportunity to
evaluate Mainland Chinese value-added dairy products, with the potential
for the opening of further value-added categories in the coming several
years.

######## MARKETING & PRICES

**Marketing**

Dairy has a limited history in Taiwan's diet. Therefore, market demand
for and perceptions regarding dairy products are grounded in marketing
messages and other information received from dairy producing countries
and suppliers.

Two elements that have proven successful for exporters of dairy products
to Taiwan include:

**· Actively Support Importer / Distributor Initiatives**

For Taiwan distributors of dairy products, effective public relations
and active consumer promotion are considered critical to marketing and
sales success. Therefore, U.S. suppliers are encouraged to develop a
responsive and supportive relationship with importers and distributors
to ensure product messages and information are delivered effectively to
target consumers.

U.S. suppliers have expanded sales of ice cream, infant formula, and
processed cheese largely by supporting the development of product image
and customer loyalty. A major U.S. ice cream brand is promoted as a
premium product and maintains a strong public relations program by
targeting the media and retailers. One U.S. infant formula retailer
promotes a comprehensive \"mother care\" program for expecting and new
mothers and retains a consulting staff of doctors and nutritionists for
public relations and promotional work. U.S. suppliers of processed
cheeses have successfully plugged into Taiwan's fast food industry by
leveraging existing supplier relationships with parent franchises in the
United States (such as Pizza Hut, Dominos, Burger King, and McDonald's).

**· Tailor Product Offering to Customer Tastes and Preferences**

In Taiwan, processed cheese is widely accepted as a \"nutritional
supplement\" and is often consumed for perceived health benefits. To
service this important market segment, suppliers such as Cheesedale
(Australia) and Anchor (New Zealand) have introduced processed cheese
slices enhanced with garlic, pineapple, smoked, and other flavors.
Several Japanese brands go farther -- marketing delicately packaged and
highly priced processed cheese products in such flavors as seaweed,
fish, and green mustard (wasabi). While sales of such Japanese products
are relatively small, their attractive packaging and unique flavors
support retail prices (by weight) of 2\~5 times that of \"ordinary\"
processed cheese.

Smaller size packaging for products requiring refrigeration is still
preferred because of the limited capacity of home refrigerators.

Taiwan's relatively advanced food processing and baking industries
should be targeted for dairy ingredient sales, particularly in high
value categories such as whey, whey protein concentrate, and other milk
derivatives and neutraceuticals.

######### Prices

Milk's position as a \"warm weather\" beverage in the minds of many
consumers results in sharply high consumption during the summer months.
Discounting and promotions are heavily used both to maximize sales
volume during peak consumption months and spur slow winter sales. During
the winter, which runs from approximately November through April,
discounting can cut up to 50% off retail prices.

Grocery stores and hypermarkets frequently make special offers on dairy
products. Products are often bundled together and offered at a single,
often discounted, price. Such bundling may include two or more of the
same item (of equal or different sizes), two or more different products
(milk packaged together with soy milk), or a promotional item (e.g.,
stickers with processed cheese or plastic tumbler with powdered milk).

Convenience stores rarely offer bundled products and only infrequently
discount retail prices for their dairy products.

**Statistics**

###### Fluid Milk

![](media/image3.wmf){width="6.298611111111111in"
height="3.604861111111111in"}

![](media/image4.wmf){width="2.7562992125984254in"
height="1.9381889763779527in"}![](media/image5.wmf){width="2.952755905511811in"
height="2.793700787401575in"}

**Whole Milk Powder**

![](media/image6.wmf){width="6.304166666666666in"
height="3.4791666666666665in"}

![](media/image7.wmf){width="2.8279527559055118in"
height="1.9590551181102362in"}![](media/image8.wmf){width="2.8279527559055118in"
height="2.749212598425197in"}

**Nonfat Milk Powder**

![](media/image9.wmf){width="6.689583333333333in"
height="3.852777777777778in"}

![](media/image10.wmf){width="2.7562992125984254in"
height="1.7992125984251968in"}![](media/image11.wmf){width="2.7562992125984254in"
height="2.4874015748031497in"}

**Dried Whey**

![](media/image12.wmf){width="6.690277777777778in"
height="3.9145833333333333in"}

![](media/image13.wmf){width="3.089763779527559in"
height="2.151968503937008in"}![](media/image14.wmf){width="2.7562992125984254in"
height="3.0401574803149605in"}

**Cheese**

![](media/image15.wmf){width="6.695138888888889in"
height="3.8444444444444446in"}

![](media/image16.wmf){width="2.7562992125984254in"
height="2.0866141732283463in"}![](media/image17.wmf){width="2.9751968503937007in"
height="3.25in"}

**Butter**

![](media/image18.wmf){width="6.700694444444444in"
height="3.5722222222222224in"}

![](media/image19.wmf){width="3.149212598425197in"
height="3.3173228346456693in"}![](media/image20.wmf){width="3.149212598425197in"
height="2.2744094488188975in"}