China Agribusiness Report Q4 2009
In BMI's China Agribusiness Report for Q4 2009 we look at how the country's dairy industry is
recovering after the devastating melamine adulteration scandal of 2008. Demand for dairy products was
hit hard in the final quarter of 2008 following the hospitalisation of hundreds of thousands of infants from
drinking adulterated milk. At the beginning of this year heavy sentences, including two death penalties,
were handed down to those convicted of involvement in the scandal. The chairwoman of Sanlu Group,
the company considered to have been most seriously at fault, was given a life sentence. Shortly after that,
in February, Sanlu declared bankruptcy.
Sanlu, however, was not the only company to be hit by the scandal. The release of the major dairy
companies' 2008 reports in the second quarter of 2009 showed that healthy profits of the previous years
had been turned into large losses by the year's events. Market leader Mengniu, which made a profit of
CNY935.8mn in 2007, reported losses of CNY948.6mn. The second biggest player, Yili, did even worse,
revealing losses of CNY1.69bn. The only major player to stay in the black was Sanyuan Food which
made a profit of CNY40.76mn. Sanyuan was also the only major dairy company whose products were not
found to contain melamine.
Sanyuan has made the most of its rivals' difficulties. In March, the company snapped up bankrupt Sanlu's
core assets for CNY616.5mn. The other major players were banned from taking part in the bidding for the
assets owing to their involvement in the scandal. In April, Sanyuan rolled out new brands of powdered
milk produced at what were previously Sanlu's factory. The products were well received with strong sales
in May.
The other dairy companies, despite the disgrace of 2008, also reported improving sales in the first half of
2009. Yili reported profits in Q108 of double the level seen in Q108. In April. the company said that
demand for dairy products had recovered to 90% of its pre-scandal level. Mengniu said that demand for
its products had fully recovered in the North of the country but was still at only around 60% of prescandal
level in the South.
Assuming that the new measures put in place to ensure food safety are effective and there are no new
fears over the safety of dairy products, then we expect demand to resume its upward trend. Rising
incomes will allow Chinese consumers to spend more on dairy products. We expect demand for both
staples such as fluid milk and more exotic foods such as imported European cheeses to increase.
Elsewhere, grain production in 2009 looks set to be well above last year's level. Early estimates show
increases in production of rice, wheat and corn. Production of key staples wheat and rice has been
increasing steadily over the last few years after falling rapidly in the first half of the decade. The
government has been making an effort to stem the fall in land area planted to grain crops with some
success. Despite this, in the longer term beyond our forecast period, we believe that pressure on land for
industrial and residential uses will once again see the area given to grain fall.
