Dairy China: Raw milk price to cool down, but other threats may put pressure on profit for food producers

Implications: - Media have focused a lot on inflation due to raw material cost increase - But other key areas such as new regulations in food industry may impact on cost and profit to the benefit of international players

Analysis: Until early this year, raw milk price increase has been a hot topic among dairy producers and most of them have already aggressively increased consumer price from 10% up to 20% on some items and plan further increase this year. Central government reacted just before Chinese New Year to control inflation by freezing any price increase. However key manufacturers have finally been allowed to increase milk and yoghurts prices.
Outlooks regarding further raw milk increase are good, as the output of milk will increase this year to catch up with the strong domestic demand. Producers may expect good surprises and substantial savings this year.
However two new threats may increase operational costs for food manufacturers in the coming months:

First the new labor laws which have been enforced early this year may push overheads costs. Measures include more protection for employees and workers and less flexibility for companies to recruit part-time staff and to layoff low performing staff. And better comply with it because strikes for better compensation are not uncommon in China, as for instance pilots from China Eastern went on strike last month asking for better working conditions. Inflation will push also salaries this year as employees will ask for better compensation.

Second, the new Food safety law, that will be finalized later this year may certainly change the rules of the game for local food manufacturers who may not be able to invest and comply with highly expected and strict regulations. The new law cover many areas such as higher hygiene standards, food inspection and food importation and production. So far regulations have been far behind international standards or simply not followed by local companies with large support of local authorities.  Fake allegations or false production date on fresh products are common practices.

For multinational companies it is pretty good news as they always have been more controlled than local ones, so international firms are a step ahead in both working conditions and food safety. These new regulations will accelerate the ongoing process of acquisition as many local SMEs will not be able to adapt. It will also close the gap in terms of cost between multinational and local companies. Low-cost culture has been a key competitive advantage for local brands but it may not be the same in the coming years.