Required Report - public distribution

**Date:** 2006/10/27

**GAIN Report Number:** TW6040

TW0000

**Taiwan**

**Dairy and Products**

**Annual**

**2006**

**Approved by:**

![](media/image1.wmf)Alan Hallman

American Institute in Taiwan

**Prepared by:**

Jeff Miller, Reports and Marketing Officer

**Report Highlights:**

U.S. suppliers should see increasing opportunities over the mid-to-long
term to expand their share of Taiwan's dairy market, especially in
cheese, whey and other niche products. The United States remains a minor
player in all dairy segments -- with the important exception of whey and
high value isolates - but has become a more attractive supplier due to
increasingly competitive prices and better coordinated marketing and
education. Cheese should remain the rising star in the dairy category
for several years as mild flavored cheeses continue to be introduced
into a wide range of foodservice applications and specialty cheeses gain
niche audiences through producer country and retailer promotions. Taiwan
consumes approximately 540 thousand metric tons of dairy products, and
imports 32% of its supply. Fluid milk imports are expected to remain
below the TRQ allowance of 21,298mt.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Annual Report

Taipei ATO \[TW2\]

\[TW\]

**Executive Summary**

The U.S. 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 U.S. is,
however, 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.

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

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's commitment to liberalize the
market and permit imports in all dairy categories has defined market
trends in recent years. Fluid milk imports are expected to remain below
the Tariff Rate Quota (TRQ) allowance of 21,298mt.

Warmer weather in central and southern dairy production regions
suppressed milk production in 2005 (by 8.6%) despite a relatively stable
herd size. The regular reductions in local production, driven by
shrinking dairy cattle numbers due to increasing import pressures
following Taiwan's 2002 WTO accession, is beginning to ease as domestic
demand for "fresh" milk is coming into relative parity with domestic
production capacity. Future growth in fluid milk imports, and
corresponding declines in domestic fluid milk production, will
increasingly reflect consumer willingness to substitute UHT /
reconstituted milk for fresh (domestic) produce.

**Production**

Taiwan dairy production bottomed out in 2005, with industry expecting to
maintain or slightly increase herd numbers during 2006 and 2007. This
reflects the increasing success domestic fluid milk retailers have had
in "branding" and promoting domestic milk and in creating fluid milk
sub-segments by introducing health-focused additives and promoting
certain dairy production areas. The 2005 drop in production of nearly
9%, unlike previous years, is largely attributable to abnormally warm
temperatures in production areas. Herd numbers were only slightly
smaller. The high comparative costs of production (still estimated as
roughly twice that of the US) have already given imported UHT and fluid
milk and milk powder a significant share (industry estimates range from
40\~60% of production) of the flavored and value-added milk drinks
market. Local production is now some eight percent below a previously
quoted "natural base" of local production (330K mt), which supports
industry comments anticipating that production will hold steady or
recover some through the near term.

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 650 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 commercial quantities.

**Consumption**

Dairy is now firmly entrenched in the local diet and mild growth can be
expected over the coming several years. Fluid milk consumption is
forecast to rebound off mild declines seen in recent years and should
see 2\~4% annual growth during 2006 and 2007. A similarly moderate
growth track into the foreseeable future is expected - barring potential
negative news related to domestically produced dairy products. This has
occurred in the past, with concerns focused on the environmental
soundness of domestic dairy production operations and the use of
hormones and other non-natural production enhancement measures.

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.

Over the long term, liquid white milk retail sales are expected to hold
steady or grow slightly, while of flavored milk drink and drinking
yogurt sales should show declines. The increasing preference for fresh
milk and overall decrease in demand for HRI ingredients cut demand for
powdered milk. These trends are expected to continue into 2006 and
beyond.

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. Whey's previously strong
growth track has been derailed over the past two years due to supply
factors that have limited supply availability and raised costs
significantly. The dip in sales during 2004 has turned into a full
retreat. Improved supply situation hopes for 2008 should help rekindle
interest in whey. Whey is currently viewed as a supplement or
replacement for milk and other ingredients. Growing awareness and
interest in whey and isolates are largely a result of successful
promotion efforts for them as ingredient substitutes and additives. 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.

Cheese continues to make headway as a \"new\" product into the broad
traditional prepared food market. Cheese sales are expected to continue
steaming along at better than 10% growth per year and, by 2008, cheese
demand is expected to reach around 23K mt. 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.

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 2004) spent
US\$260 (NT\$8,350) 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 based 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

Of the approximate total of 540,000 metric tons of dairy products
consumed on the island, 32% (175k mt) is imported. In the coming 5
years, imports may well reach a 40% or slightly higher share of the
market. However, growth prospects rely largely on the acceptance of
imported liquid milk in the market, which, by necessity, primarily
arrives in UHT format, considered by most Taiwan consumers to be of
lower quality and poorer taste than domestically produced fresh fluid
milk.

Highly competitive prices and long-running coordinated promotion by
dairy suppliers from major exporting nations such as New Zealand and
Australia in commodity categories and comparatively good prices and
terms offered by many suppliers of higher end dairy products from Europe
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. U.S. suppliers are not expected to gain significant
ground in the general dairy market given current supply conditions.
However, given recent reported instability in supply from Europe, rising
overall prices, and changing conditions in the U.S. with respect to
dairy prices, U.S. suppliers should experience growing opportunities in
particular product areas, such as cheese and whey.

![](media/image2.wmf){width="7.083333333333333in"
height="3.7916666666666665in"}

The current structure of trade for major commodity categories, such as
fluid and powdered milk, should be little affected by lower
dollar-denominated prices due to 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) due to increasingly attractive U.S. supplier prices.

**Tariff Rate Quota (TRQ) Administration**: Taiwan's 21,298mt annual TRQ
for fluid milk represents 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 4,259mt. With imported fresh milk still a "new to market"
product, selling either in less marketable UHT formats or (for fresh) at
around 20% premiums, Taiwan's fluid milk import volumes will likely
remain in the 10\~15,000mt range through the foreseeable future.

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 (volumes / price
do not yet justify). 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.

**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.

# 

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 opening of this category to importation provides
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 years. Initial imports of
sweetened condensed milk from China totaled 488mt (83% of total supply)
in 2004, which rose by 12% in 2005 to 551mt (84% of total supply). Due
to relatively stable year-to-year demand for products in this category,
further growth potential for Chinese imports is limited. The US does not
currently provide competing products in the sweetened condensed milk
category.

######## 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).

Mozzarella and mild cheddars have increasingly found a secure niche in
the rapidly growing market for hot-served baked pasta and rice meals.
Mild cheeses are increasingly being used and promoted as shredded
toppings on baked Italian and innovative fusion Asian dishes.

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

In Taiwan, processed cheese is widely accepted as a \"nutritional
supplement\" and is often consumed on 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="7.583333333333333in"
height="3.1819444444444445in"}

![](media/image6.wmf){width="6.916535433070866in"
height="3.2043307086614172in"}![](media/image7.wmf){width="3.62992125984252in"
height="3.7153543307086614in"}![](media/image8.wmf){width="3.695275590551181in"
height="3.7153543307086614in"}Whole, Powdered

![](media/image9.wmf){width="3.366535433070866in"
height="3.7153543307086614in"}![](media/image10.wmf){width="3.366535433070866in"
height="3.7153543307086614in"}![](media/image11.wmf){width="7.25in"
height="3.6255905511811024in"}Non-Fat, Powdered

![](media/image12.wmf){width="7.166535433070866in"
height="3.5838582677165354in"}![](media/image13.wmf){width="3.366535433070866in"
height="3.7153543307086614in"}![](media/image14.wmf){width="3.366535433070866in"
height="3.7153543307086614in"}Whey

![](media/image15.wmf){width="7.416535433070866in"
height="3.436220472440945in"}![](media/image16.wmf){width="3.366535433070866in"
height="3.7153543307086614in"}![](media/image17.wmf){width="3.366535433070866in"
height="3.7153543307086614in"}Cheese

![](media/image18.wmf){width="7.166535433070866in"
height="3.292913385826772in"}![](media/image19.wmf){width="3.366535433070866in"
height="3.7153543307086614in"}![](media/image20.wmf){width="3.366535433070866in"
height="3.7153543307086614in"}Butter