Global Dairy Price approaching five-year low Price War accelerates the reshuffle of domestic dairy enterprises

On July 15, the auction price of full-fat milk powder on Fonterra's global dairy trading platform ushered in nine consecutive falls. Coincidentally, recently, Mead Johnson, a well-known American milk powder company, also significantly lowered the 2015 sales growth rate, earnings per share and other indicators; the company expects that under a constant exchange rate, the sales growth range for this year will be lowered from the original 7% to 0% / 2%.

Industry insiders worry that in the case of falling international milk prices and overcapacity, the domestic dairy industry will also suffer in the price war for some time. In an interview with the Daily Business News on July 23, Song Liang, an expert in the dairy industry, said that more enterprises will lower their performance targets in the second half of the year. With milk powder prices entering the downward channel for a long time, Chinese infant milk powder has entered a low-profit era.

Mei Zanchen lowered his profit forecast

The auction price of full-fat milk powder on Fonterra's global dairy trading platform has been falling. Data show that 4750 tons of whole milk powder delivered in September failed to be auctioned, while whole milk powder delivered in December and arriving in Hong Kong in January 2016 fell from US $2054 / tonne to US $1895 / tonne, down 10.7 per cent from the transaction price on the 1st of this month.

The fall in raw material prices upstream of the dairy industry has affected the downstream industry, and Meadzansen has become the first company to publicly lower its performance forecast for this year; in its recently updated 2015 financial forecast, it said that after preliminary calculations, Mezansen's sales at a constant exchange rate fell 3 per cent in the second quarter of this year compared with the same period a year earlier, and if the foreign exchange impact is taken into account, this figure will fall by 7 per cent compared with the same period last year.

Mead Johnson also said that dairy prices are now close to a five-year low and that the impact of falling milk prices has been seen in several markets, including Latin America and Asia, with China being the most pronounced.

In response to an interview with the Daily Business News on the afternoon of July 23, Mead Johnson (China) said that as the company had not yet completed the completion process for the second quarter, the result was only a preliminary forecast. This year, the company's performance in the North American and European markets continues to be strong, and the transformation strategy implemented in China has also shown satisfactory initial results, with strong sales of newly launched all-imported products.

Meadzansen said that through a series of new initiatives and strengthening e-commerce channels, the Chinese market can record sustained sales growth by the end of this year.

There are more than 2000 dairy brands

The price war that began in June last year put Chinese milk powder through the most difficult period in its history, after the rigid demand for consumer goods, like real estate, held up for a decade.

Song Liang told reporters that the key word of the dairy industry in the first half of this year is a price war, with offline channels giving priority to promotion and price reduction, while online channels offer discounts or push low-priced products. "the prices of imported brands have been reduced across the board, while domestic brands have fallen by as much as 50%." Still, consumers don't seem to buy it. In terms of sales, as prices fall, the growth rate of China's infant milk powder sales will slow significantly in the future, and the growth rate is expected to slow to 9% in 2015.

The marketing manager of a domestic dairy company told the Daily Economic News that although the company has not adjusted its sales target for this year, the first half of the year is indeed difficult. The head of the brand department of a listed company revealed that in the market downturn, the company is also reducing promotion costs in order to maintain the profit margin of the original products.

Song Liang pointed out that there are more than 2000 brands in China's dairy market, and there is serious overcapacity. On the one hand, the price war causes a large number of small brands to withdraw from the market, on the other hand, it reduces channel profits and forces the channel to upgrade to specialization.

Song Liang also said that the price war has moved down the overall price system of domestic milk powder, accelerated the merger and reorganization of the industry, and can also curb excessive capital investment and the entry of overseas new milk powder operators, and the competition of Chinese infant milk powder has entered the Red Sea stage ahead of schedule.