Discussing China with Jeroen Lemmens


T3, Josh and Tristan sat down with Jeroen Lemmens, who joined Cefetra Dairy in Singapore after spending multiple years trading dairy in China.

We’d spent months looking for the right person to talk to about China’s dairy buying habits past, present and future. The conversation gave some color to the disappearance of Chinese demand for American milk and some backbone to the hope that some of that demand will return in 2024.

Discussion ranged from trade agreements with New Zealand and the state of the hog market to domestic macroeconomic factors like China’s property market and industrial challenges.

Give it a listen, and let us know what you think.

Ted: Our special guest today is Jeroen Lemmens from Cefetra. Jeroen lives in Singapore and handles the Asian operations for Cefetra. Jeroen, why don’t we start by telling us a little bit about yourself?

Jeroen: I’m glad to be here. Thank you for the invitation. My name is Jeroen Lemmens. I have now been in dairy for, I think, close to 24 years. I worked in various trading firms in Holland, dealing mostly in Middle East, Eastern Europe, and Russia.

Then, about seven years ago, I went to China. I was active in the China operation, importer-distributor dealing in dairy commodities, dealing with the biggest dairy companies in China, both in food and feed. I think that was a very valuable experience. China has a dynamic all of its own. I think that’s also showing in the market at this moment.

Also, during the dark times, the last few years during COVID, that was actually a very trying time. Then, early this year, I decided to leave the company I was working for and join Cefetra. For Cefetra now, setting up the operation in Singapore for Asia with, again, also a focus on China again.

Ted: Wonderful. China for the United States is a key dairy trade partner. Really, so much of what happens in China, all of Southeast Asia tends to follow that lead. A lot of times the dynamics tend to be very similar.

It’s especially an important trade partner for the US when it comes to nonfat dry milk, and whey powder and whey derivatives. There’s been a lot of talk lately about … The import volumes in China are dropping, and, of course, in the US, our questions are always, “What does that mean for dairy prices in the US?”

I want to start with a very simple question, which is, from a dairy perspective, what is going on in China? What is driving the decrease in imports of dairy products? Is it across the whole spectrum of dairy products, or is it just certain dairy products? What are your expectations, going forward?

Jeroen: I think at the moment there’s a lot of different things happening at the same time, all affecting the markets. I think a lot of buyers actually have been expecting that, with the reopening of China after COVID, there would be a boom in consumption. People were trying to take positions to be ready for this.

Actually the import values this year so far have been bigger than last year, year to date, whereas the consumption dropped away by a variety of reasons. One is local consumption took a hit, especially the consumption of, let’s say, higher grade, fresh products. That consumption reduced a lot, so that’s less consumption, more imports. That’s one reason early in the year.

Second one is that the local production of milk powder in China actually continues to be strong. It has been very, very strong last few years, but it’s still growing. You have growing local raw milk availability coupled with reasonable stocks and lowered amount, and I think that’s dragging the market down now to a certain extent.

Then, looking at nonfat for US, you have the other situation that’s starting this year. There will be no duty for New Zealand milk farmers, full year. Normally, there would only be a period in early Jan that the first 100,000 tons of product would be low duty. Now it’s no duty, full year.

That means that the incentive for buyers to go to New Zealand over US is a 10% duty advantage. That will at this moment limit interest in US products, because New Zealand is the cheapest source available by normal price, and then, after duty advantage, is the lowest cost by far.

Josh: Jeroen, I got tons of question. I want to jump on that last one for a moment. You would maybe know a bit more about this than I.

There’s very seasonal production, but they’re a large importer of these products. We know that their internal milk production is increasing, and that might have some impact on their overall demand for these products.

Where is the product stored? Because historically I had the impression like there’s a duty advantage that lines up with the peak season out of New Zealand. These products then flow into China, would maybe go into the traders’ hands and users’ hands to be distributed throughout the year.

Is there going to be a significant change in the net importation from a volume standpoint as a result of this duty change, or is it really just shifting when the product moves? Give me some thoughts on that, if you would.

Jeroen: I think, let’s say, overall, I would say my expectation for coming in, let’s say 2024, I think that the overall import volumes will be slightly better than ’23 for many products. Not specifically skim milk, but for many products. I think it’ll not be as good as 2022, so it’ll be less than ’22, more than ’23. I think there will be import requirements.

However, in line with what you’re mentioning, that’s quite interesting to see because then it will no longer be this perfect fit on the main season of New Zealand. Normally, New Zealand, you’ll have the peak production month, and that peak production month will fit very, very nicely into the peak demand in China. This year, that will not be the case.

Listening to people in Oceania, they claim to be very well sold. I think the O’Neill term has recently … They have helped them clear some of those stocks that normally would have gone to China. I think that will be an interesting thing to watch into Q1, whether that demand from China will kick in and whether, at that moment, New Zealand will actually have those volumes available or not.

Josh: Maybe to avoid making this purely about the components, there’s two areas that I’d love to talk about. Let’s start with the consumption side. It’s been discussed amongst our group at Jacobi multiple times that, over most of my professional career, most of the career of, say, some of the older Millennials, really, we’ve been balancing supply.

Demand for a lot of the dairy-related products has been somewhat predictable. It moves slightly above trend one year, slightly below trend the other, but very much, on a multi-year pattern, is falling within a very predictable trend line. For the first time in our professional career, as someone around my age, we’re now questioning demand across the board.

A big disruption historically to those price trends is Chinese buying. It’s my opinion, or at least I’d be curious to get yours, that we’ve gone through multiple periods in the past where China has stocked or destocked, but I don’t know that their consumption pattern has been so volatile year over year. I believe, just from what I’m reading, that they’ve accelerated their per capita consumption of dairy products quite a bit over the past 10 to 15 years, but it isn’t so volatile year over year.

Whereas, now, for the first time, I think we’re questioning whether or not the per capita consumption rate is growing at the same rate it has for the past decade. Do you have an opinion on that?

Jeroen: I do agree that you have seen a strong increase in per capita consumption in China over the last few years until 2021, but in the last two years we expect that there was no consumption growth, perhaps even a consumption reduction. Like you mentioned, the entire market, including stakeholders in China itself … Everybody was banking on this continued growth.

I think that didn’t really materialize. That, combined with a strong focus on growth of raw milk, they started producing more local full cream, but they were also starting using, for instance, local raw milk to replace imported skim milk powder, and so on. They were also supplementing.

I think that’s at this moment happening to some extent. I’m hearing stories from multiple sides that, actually, a lot of industries are facing a strong reduction in consumption at this moment. That’s sometimes even, let’s say, higher than 10% reduction in consumption over their finished goods.

Ted: Another way to describe what you’re saying is we have started to see a fundamental trend shift in consumption of dairy in China. After 20 years of significant per capita growth in dairy consumption, it’s starting to plateau and flat.

Jeroen: I expect that it will start growing again, because I think the authorities also are invested in growing a stronger local industry. At some point, I think they will start supporting the local industry again by either promotional activities like before, where they advertise the health benefits, or just by spread out promotions. I think that will start happening.

I think at this moment what we’re seeing is just the effect of a very, very bad economic situation on multiple levels, stock market, housing markets, industry. At this moment, China’s going through a tough time, which I think they will get through.

People were thinking that the worst was over when China reopened. Everybody was expecting this reopening and a bounce back to normal, and what they found was actually that a lot of problems now start surfacing which they thought were already passed.

To highlight, again, a little bit on that is that also a lot of Chinese dairy consumption is still out of house consumption. As soon as people are less going around, there will be less dairy consumption. You and me, we consume readily at home, like sandwiches, and pizzas, and so on. Those are, for most Chinese people, still more items they consume out of house, like food service.

Josh: Can we talk a minute about the scale of Chinese milk production? I went down a rabbit hole earlier on YouTube, and everyone knows everything on YouTube is very quality information.

One of the things that I was exploring is the size of some of the Chinese dairy farms. I was blown away by a couple of these, multiple farms of a 100,000 milking cows. The geographical area they covered, I think, was 65 million acres equivalent, like the size of Portugal. If I understood it correctly, the largest one in the northeast part of China, ultimately built in conjunction with Russia after Russia banned imports out of the EU … I just didn’t realize that connection. I did know that there was large scale there, but nothing like what I was beginning to research.

That growth over the course of the last decade has been enormous. Is that trend to continue, or is this economic environment that they’re in today really going to suppress that continued growth?

Jeroen: If you’re looking at the ROB milk price, that’s now more or less reported … It’s always a little bit of a mixed picture. Let’s say the milk price that’s now generally accepted as most likely the average milk price, that should not cover all the cost of a normal farmer.

However, I think in China, a lot of the farms are owned by the processor, who also owns the retail brand. The entire chain is in the hands of some big market players.

I think, on many, many levels, you see big local producer, but also smaller regional producers. Everybody has been investing in local farms. This is done by companies, but also either partly saying no to regional stakeholders or state shareholders.

I think these incentives is there. Those investments are made. This will continue to go. The only thing you see happening is that a number of the smaller private farms are not surviving in this situation.

Our expectation is that the grow of milk growth will slow down, but it will still grow. Our assumption is … Let’s say normally the last few years, you saw perhaps a growth of about 7%. This may come down to a growth of about 4%, give or take, but the growth will, in our opinion, still be there. They’re building this big industry up north, but the cost of getting dairy from the north to the south is actually not so much more economic than getting products from, let’s say, the US to the south, because it’s not a balanced geographic area.

Ted: I will say that I believe that, very much so, because we actually see the same thing in the US. It’s more expensive to ship dairy products from California to Wisconsin than it is to ship them from California to China. It’s just the logistics of putting it on a big ship is just cheaper than the logistics of having it in an 18 wheeler.

Josh: It’s a pretty good back hauling, also. It’s quite a bit of stuff coming here.

I want to be clear, too. I would love someone to debunk or fact check these stats I was hearing, because, in terms of their daily production per cow, it was enormous. They said in one of these articles I read the top 25 dairies represent 29% of the milk.

These are economies of scale that we have here today in the US. I imagine that they very well could have it in China, but I’m curious how factual that particular source was.

Jeroen: I think that’s one of the biggest challenges for almost everybody I’ve been speaking to in China the time I was there, or even now, at getting the correct figures.

Looking a little bit broader, I think at this moment there’s a lot of issues facing the Chinese markets on imports and consumption, but I do feel, like you mentioned before, that China was known for stockholding. I think at this moment they are chewing through stocks, so I do feel that, in the coming year, that situation will start changing and imports will be resuming again.

Then, looking at, if you, let’s say, set the time ahead for a few months and the situation start changing, then I think the US is actually quite well lined up to benefit from a possible revival of demand. Looking at the way, let’s say, New Zealand, then, will be going out of season, and Europe is actually struggling at the moment.

Josh: Jeroen, help us understand. China is a very important trade partner to the United States, particularly for our whey products, and growing across some other products. As we find, at different moments in time, when the US is competitive on price, we have opportunities to do a fair amount of business into the highly competitive region in Southeast Asia across many different products, help us understand the relationship between Chinese buying patterns and their influence on the rest of Southeast Asia, if you would.

Jeroen: At this moment, the biggest influence China has on the rest of Southeast Asia is, I think, that the rest of Southeast Asia has been waiting for Chinese tourism, for one, to get back to more normal. Because, yes, there’s a lot of, let’s say, Europeans and Americans going on holiday here, but that’s not the majority group. It’s the Chinese tourist which is the backbone for tourism is the region. I think that’s one thing they’re missing.

Secondly, a slow economy in China will affect the rest of this region as well because they are supplying raw materials, they’re supplying our finished goods. A slow China is affecting them in that sense as well.

On the purchasing side of things, I think Southeast Asia to a certain extent, and the Middle East now, definitely are actually benefiting from the fact that China is not there to do the bulk buying. They are able to step in and get their buying done at reasonable prices.

Ted: I want to digress for just one quick second. One of the reasons that the Chinese are not traveling at the moment is, in the beginning of 2023, they basically had a second COVID outbreak. They still today haven’t gotten back to normal and are traveling again. Is that what happened? Is that a fair way to put it?

Jeroen: Yeah.

Ted: What are your expectations? When will that international travel get back to normal out of China?

Jeroen: My personal feeling is that will be strongly correlated to the economic situation in China. I think, from people I speak to, a lot of people have just become more careful just in spending, in consumption in general, even traveling in China itself or consumption in China itself. It has just reduced a lot while people look for more direction of where things are going.

Property market is down considerably, just even in tier one cities, which is actually quite a shock. Stock market is not performing. Unemployment was bigger. There were pay cuts for all from … Overall, the entire spectrum is not that great. People are just taking a slight wait-and-see approach, I think.

Ted: It’s not like there’s going to be a moment where suddenly everything’s back to normal. It sounds like it’s just going to take a while for them to slowly evolve back to the way things were, let’s say, a few years ago.

Jeroen: Yeah. Saving in China is speeding up a lot. The money is there, but, just, people are not spending it. I think they are accumulating wealth, how you call it. I think as soon as they see that they’ve passed the worst moment, people will start investing and spending again, because that’s the moment when they see opportunities.

Ted: You and I, I think, are going the same place.

Josh: Sounds real familiar to what we experience.

Ted: In the US, everybody stayed home in 2021. Their savings accounts got really, really good, and then 2022 and even 2023, they were spending that money and going out of style with it. It almost feels like 2024 in China is going to be a little bit like 2022 in the US, where, by the time you get to the middle to the end of this year, things are going to be going strong there if they’ve got the money to spend.

Jeroen: I think China could be the accelerator when things start going better, let’s say not only in China, but more in the world. For instance, if US and Europe become little bit more positive, start consuming more, more orders going to China. As soon as that start happening, that things start going well, I think at that moment they could kick in with, let’s say, a more optimistic view and start spending as well. That could be, then, the accelerator of everything.

We have to go through this phase. We haven’t even touched on other things, because there’s more problems than only consumption on dairy. For instance, you highlighted earlier on the whey, and especially going into feed, whey, and permeates. The pork market in China actually is going through a tough time as well. Also, again, less consumption, which means lower pricing. AFS is still a strong problem in China.

All these things combined as well are not the most optimal conditions for the sector there as well. They have been losing money for a long time now because pork prices have always been lower than the feed cost, and that has drained liquidity from that sector.

Again, this sector will survive because it’s an important sector. It’s a sector with a lot of state or regional influence, but it’s a troubling sector at this moment.

Ted: Interesting.

Josh: I think the important takeaway for me was you don’t feel like this is a consumption trend change, this is an economic-driven or a disposable-income-driven slowdown that we’re seeing right now. That, in a healthy economy, the Chinese consumption per capita may continue to grow fairly rapidly.

Jeroen: I do feel. I think, talking to a lot of people in China, as far as I know dairy is still considered a valuable nutrition. It’s different than some parts of the Western world where people are looking at dairy as … Perhaps the trend to vegan, or whatever. In China, there’s still a strong focus on that dairy ingredients are a valuable nutrition.

Josh: One final question. Within the EU, we talk about environmental pressures on dairy production, and that’s impacted one of the variables that impacts the EU’s ability to scale production like we’ve seen in other parts of the world. I mentioned China earlier. We’re certainly seeing much more larger farms in the US.

We, here in the US, have less pressure than perhaps across the pond, but we still have pressures as well. We have the impression, I think, generically that there’s far less environmental driven pressure on production out of China. Is that an accurate statement?

Jeroen: That’s what we hear as well. Yeah. The incentive is to grow the self-sufficiency. The incentive is to be less dependent on the world.

Also, there’s a strong push within China to increase dairy as an ingredient for nutrition. I don’t see any, let’s say, hurdles to grow the local industry.

The only perhaps would be their access to breeding stock. There’s some countries now who are limiting the export of cows to China. That could, to a certain extent perhaps, take some limitation on their growth. But the incentive is there and their industry is there, so I don’t see that slowing down.

But, at the same time, I also feel that, once the consumption starts growing again, they will still be struggling to have that industry grow at the same time as their consumption is growing, because their per capita consumption is still quite small. As soon as they start consuming more dairy again, I think they’ll still be struggling to have their industry grow as fast as their consumption.

Ted: It almost feels to me like the first half of the year we could almost expect a little bit of a game of chicken, where the demand is not quite going to be there. The Chinese are going to play their cards close to the vest, buy what they need to, but not much more than that until prices come down to a place where they really feel confident building their inventories. Once they get there, they could be building those inventories from wherever they can grab product, whether it’s New Zealand, the US, Europe, wherever.

Jeroen: When I was there and the crisis started, I was expecting purchasing to go down. Because normally, as far as I always knew, in time of crisis, buyers would like to keep as much cash around as possible. In that instance, Chinese buyers did the complete opposite. They started buying a lot of product, because they would rather have product in time of crisis than cash. That was actually quite interesting.

Ted: That is interesting.

Jeroen: At this moment, I think they don’t have any fear that there will be no product. I think as soon as they fear that perhaps the product will run out, they will start buying. At this moment, they don’t feel that people are worrying about the availability of products.

You see some message coming from New Zealand that perhaps Q1 will be affected by El Nino, leading to less product available. I don’t think this fear has kicked into China. They don’t have that same fear.

Josh: Ted, maybe to say what you mentioned slightly differently, is … I’m not so sure that the price needs to go lower before the Chinese market will begin buying and stocking, it may be that they need to see the activity in their own consumption recover a bit. Regardless of where that price is, they’ll start to buy more aggressively. One would assume, without China, that prices will be relatively affordable at that time.

Jeroen: If more consumption, or a fear of missing out product in the coming Q1, Q2 … I think that could trigger buying. At this moment, the incentive is not there. At the same time, also in China, liquidity is also still an issue. If you don’t feel this fear of missing out, keep your liquidity with you.

Ted: I think that liquidity comment’s a big one. That makes a lot of sense to me.

Tristan: Production is increasing in China. Would you say that it’s more at the farm level, or would you say it’s just more about getting more cows at the farm and buying more land?

Jeroen: I think both. I think you see the shift from, let’s say, small farms to more professional, bigger farms. In that shift, you see more production per cow coming, and, at the same time, you see more cows coming as well. It’s a double.

Normally there’s two numbers of milk production you can see in China. There’s two different agencies reporting. I forgot the names, but there’s two different agencies. The number of one is always a lot higher than the other one, and the reason is they are tracking big farms. They only track big farms, and the growth of big farms is a lot bigger than total market.

Ted: Do you think more milk comes from big farms or small farms in a totality, Jeroen?

Jeroen: Tricky one. I think, by now, it’s switching to big farms. I think that a Yili, Mengniu together, some of the other bigger ones, they now control most of the milk, if not the vast majority of the milk.

Whether that’s only in big farms of their own, or also they have farms operating, they supply the milk to the … That’s possible, but I think that the big farms are not taking them.

Ted: Makes sense. Jeroen, really appreciate it. I am going to ask one last question. It’s a predicting question.

Where you sit in Singapore, seeing prices from Oceania, Europe, and the US, are you expecting to see higher prices at the end of 2024 than you’re seeing right now, or lower prices?

Jeroen: End of ’24? That’s a big prediction. I think that New Zealand will go up. I think that’s too low. I think that US now, what I’m hearing, is prices coming to Asia is quite reasonable for now. I think Europe is a little bit too optimistic. Especially looking into future’s Europe, I think that’s quite optimistic. At that moment, I start fearing demands. End of next year, I would say up.

Ted: I think the dairy farmers here in the US are going to like your answer.

Jeroen, thank you very much. Really appreciate it. Thanks for taking the time. This was a great conversation, and we really appreciate you joining us today. Thank you.

Jeroen: Thank you guys for your invitation. Happy to be here.

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