The milk industry in China has undergone remarkable growth over the past few decades. From being a relatively small sector in the 20th century, China’s dairy market has developed into one of the world’s largest milk producers and consumers. The rapid rise of urbanization, increased disposable incomes, and a growing focus on health and nutrition have been the driving forces behind the milk industry’s development.

China’s dairy consumption has been climbing steadily. With an ever-expanding middle class and a population increasingly concerned about health, the demand for dairy products such as milk, yogurt, cheese, and powdered milk has surged. The country’s total milk production in 2022 reached approximately 38.6 million metric tons, positioning China as the 6th largest milk producer globally. However, despite this growth, China still faces a gap between domestic production and demand, relying heavily on imports, particularly powdered milk.

This growing demand, combined with consumer preferences shifting towards healthier, fortified products, presents both opportunities and challenges within the industry.

Market Overview

Milk Consumption in China

Milk consumption in China has been on a consistent upward trajectory, especially in urban areas where the middle class is rapidly expanding. The overall dairy consumption per capita in China remains lower than in developed countries, such as the United States and Europe. As of 2020, the per capita consumption of milk in China was estimated at around 14.2 kg, which is significantly lower than the 100+ kg seen in Western countries. This gap indicates an enormous potential for growth in the milk sector, particularly as more Chinese consumers embrace dairy as part of their daily diets.

The Role of Dairy Products

Several dairy products are gaining popularity in China, contributing to the overall growth of the milk market. Among them, liquid milk holds the largest share, with UHT (ultra-high-temperature) milk being a preferred option due to its convenience and longer shelf life. In addition to liquid milk, powdered milk also commands a significant market share, driven largely by consumer concerns about product safety and a preference for imported milk powders. Yogurt, especially in probiotic and low-sugar forms, has become increasingly popular, and cheese consumption is on the rise, particularly in urban regions among the younger demographic.

In 2022, the market for milk in China was valued at over USD 40 billion, with the demand for powdered milk alone contributing more than USD 16 billion. Yogurt, with a 15% annual growth rate, is expected to reach a market size of USD 20 billion by 2025. Despite these promising figures, the consumption of dairy products per person is still low in comparison to global averages, indicating that the industry holds significant growth potential.

Key Drivers of Growth

Urbanization and Growing Disposable Income

Urbanization in China is happening at an unprecedented pace. The percentage of the Chinese population living in urban areas is expected to exceed 60% by 2030, with millions of people moving from rural to urban regions each year. This demographic shift is crucial for the milk industry as urban areas have better access to modern grocery stores, supermarkets, and e-commerce platforms, all of which make dairy products more readily available to consumers.

Additionally, the rise in disposable income has made milk and dairy products more affordable for a broader segment of the population. As more people experience economic mobility and improved standards of living, the consumption of dairy products, especially premium items, has increased significantly.

Health Consciousness and Nutritional Awareness

There has been a notable rise in health and wellness trends among Chinese consumers. With increasing awareness about nutrition and the importance of maintaining a balanced diet, milk is seen as a valuable source of essential nutrients, including protein, calcium, and vitamins. The focus on physical health and wellness has led to higher demand for dairy products that offer additional benefits, such as low-fat, organic, or fortified varieties.

The growing popularity of fitness and health-related activities, combined with an increased interest in organic foods, has led to more interest in dairy products as consumers look for nutrient-dense options. The rise of the “health food” category in China’s supermarkets and online retail platforms has helped drive the adoption of dairy products among the middle and upper classes, especially younger generations.

Government Policies and Regulations

The Chinese government has played a critical role in shaping the milk industry. To ensure food safety and address past concerns about contamination, especially the 2008 melamine scandal, China has implemented stringent regulations governing milk production and processing. These regulations are intended to ensure the safety of dairy products, build consumer trust, and ensure consistent quality within the supply chain.

Food Safety and Quality Assurance

China’s milk industry is heavily regulated, with the government setting high standards for raw milk production and dairy product manufacturing. These regulations are enforced by agencies like the State Administration for Market Regulation (SAMR), which ensures that milk and dairy products meet the necessary quality and safety standards. Furthermore, in an effort to reassure consumers about the safety of domestic milk, the government has encouraged domestic producers to adopt modern technologies and improve their production practices.

The introduction of the Food Safety Law in 2009 was a landmark in China’s dairy sector, as it aimed to address the food safety issues that plagued the country’s dairy industry for years. In response to food safety scandals, the government has increased penalties for non-compliance, and regular inspections are conducted to monitor the quality of dairy products available in the market.

Support for Domestic Milk Production

To reduce the country’s dependence on imported milk and strengthen the domestic milk sector, the Chinese government offers various forms of support to local dairy farmers. These incentives include subsidies for milk production, tax breaks for dairy processors, and financial assistance for the development of infrastructure in rural areas. Additionally, the government has invested heavily in promoting the modernization of China’s dairy farms, encouraging the adoption of advanced farming techniques and improving milk yields.

In 2022, the government allocated over USD 2 billion in subsidies to the dairy sector, aiming to improve efficiency in milk production and meet the rising demand. These efforts have helped to create a more stable and productive domestic dairy industry, although the reliance on imports remains substantial, particularly for powdered milk.

Key Players in the Milk Industry

China’s milk industry is dominated by a few large players who control the bulk of production, processing, and distribution. The largest domestic dairy companies, such as Yili Group, Mengniu Dairy, and Bright Dairy, are responsible for a significant portion of China’s dairy market share. Additionally, international companies like Nestlé, Danone, and FrieslandCampina have established strong footholds in the country’s milk sector.

Yili Group

Yili Group is the largest dairy company in China and ranks among the top 10 global dairy companies. In 2023, Yili reported a revenue exceeding USD 12 billion. Known for its diverse product portfolio, Yili offers liquid milk, yogurt, ice cream, cheese, and nutritional products. Yili has also expanded into international markets, including Australia, New Zealand, and the United States. The company is committed to sustainability and innovation, with significant investments in research and development to improve its product offerings and production processes.

Yili’s flagship brands, such as “Yili,” “Anchor,” and “Fuyuan,” are popular across China. The company’s success can be attributed to its focus on quality, consumer trust, and strategic expansions both domestically and internationally. Furthermore, Yili is focused on reducing its carbon footprint, with a target to cut emissions by 25% by 2030.

Mengniu Dairy

Mengniu Dairy is another major player in China’s milk industry, with revenues surpassing USD 10 billion in 2022. Mengniu is known for its range of products, including UHT milk, yogurt, and cheese. The company has gained significant market share in the dairy sector and is a direct competitor to Yili. Mengniu is also heavily involved in product innovation and has formed strategic partnerships with international brands like Danone to enhance its product offerings.

Mengniu is one of China’s largest dairy brands, and like Yili, it has made a concerted effort to improve its milk sourcing and production methods. The company employs advanced technologies to improve the efficiency of its processing plants and ensure high-quality milk production.

Bright Dairy

Bright Dairy, owned by Bright Food Group, is another key player in China’s dairy market. Although its market share is smaller compared to Yili and Mengniu, Bright Dairy has a strong presence in the yogurt and UHT milk markets. Bright Dairy is known for producing premium products and has expanded its product range to include organic and low-fat dairy options.

Bright Dairy’s commitment to product quality and sustainability has helped it carve out a niche in the competitive Chinese dairy market. The company is also focused on technological innovations to streamline its operations and expand its consumer base.

International Players

Alongside domestic companies, international dairy giants such as Nestlé, Danone, and FrieslandCampina have a strong presence in China. These companies have capitalized on the growing demand for high-quality milk and dairy products, and they have earned the trust of Chinese consumers with their focus on food safety and product innovation. International companies have a competitive edge due to their expertise in producing a wide range of dairy products and their ability to introduce premium products to the Chinese market.

Dairy Supply Chain in China

The dairy supply chain in China is complex and involves multiple stages, from milk production to processing, distribution, and retail. The supply chain is still evolving as the government and industry players work to improve efficiency, reduce waste, and ensure high-quality products.

Milk Production

Milk production in China is dominated by small-scale farmers. While there are some large-scale operations, small farms still account for a substantial portion of the country’s milk output. The lack of advanced farming techniques and infrastructure in rural areas presents challenges for increasing productivity. However, large dairy companies such as Yili and Mengniu are working to modernize the supply chain by investing in technology and providing training to local farmers.

Despite these efforts, the reliance on small farms remains a significant challenge for China’s dairy industry. In 2020, it was estimated that there were over 200,000 dairy farms in China, but only around 10% of them were large-scale operations capable of producing significant amounts of milk.

Processing and Distribution

After milk is produced, it undergoes various processing stages, including pasteurization, homogenization, and packaging. Processing plants are typically owned by large dairy companies, such as Yili and Mengniu, which control the majority of processing facilities in China. These companies utilize cutting-edge technologies to ensure that dairy products are safe and of high quality.

The distribution of dairy products in China has become increasingly sophisticated, with supermarkets, convenience stores, and e-commerce platforms playing a critical role in reaching consumers. Online shopping, in particular, has surged in popularity, and dairy products are readily available through platforms like Alibaba’s Tmall and JD.com.

Challenges Facing the Milk Industry

Food Safety and Quality Control

Food safety remains a pressing issue for the Chinese milk industry. The melamine scandal of 2008, where milk products were adulterated with harmful chemicals, caused widespread panic and damaged the reputation of domestic dairy products. Although the government has since introduced stricter regulations and oversight, concerns about milk quality continue to persist, especially among consumers who prefer imported dairy products.

Supply Chain Fragmentation

China’s dairy supply chain is still fragmented, with many small farms struggling to meet the demand of large-scale processors. The lack of proper infrastructure in rural areas also contributes to inefficiencies in milk production and transportation, making it difficult to ensure a steady and reliable supply of milk.

Price Volatility and Market Instability

The milk industry in China is also affected by price volatility. Factors such as fluctuations in feed prices, labor costs, and international market conditions can lead to price hikes for consumers and reduced profit margins for producers. The government’s policy interventions often aim to stabilize milk prices, but market forces can still result in significant price fluctuations.

Environmental Sustainability

The environmental impact of dairy farming is becoming an increasingly important issue in China. Dairy production consumes significant resources, including water and energy. In response to global sustainability efforts, Chinese dairy companies are beginning to implement measures to reduce waste, cut emissions, and improve resource efficiency. However, these sustainability efforts are still in the early stages, and more widespread changes are needed across the industry.