Liquid milk sales are under pressure, accelerating the transformation of China's dairy sector. Currently, the country exhibits high import dependency for deep-processed solid dairy products. Cheese, butter, and similar value-added items account for only 7.3% of the market, less than one-quarter of the average level in developed nations. The industry also relies on imports for processing technology and key equipment. Presently, demand from the business sector is growing rapidly, while consumer-side demand continues to develop. The scaling up of upstream farming operations serves as a foundation for industrial chain growth, indicating significant potential for deep processing of dairy products. Leading dairy enterprises are favored for their comprehensive R&D capabilities and industrial chain development prospects. In the medium to long term, deep processing is expected to boost demand for upstream raw milk.
The liquid milk industry faces pressure, declining at an average compound annual growth rate of -2.8% from 2022 to 2025, which accelerates sector transformation. However, solid dairy products have grown rapidly since 2022, supporting a slight overall increase in dairy output. From a consumption structure perspective, China's solid dairy market still holds considerable potential. The domestic deep-processing supply chain is lengthy and complex, with early-stage development, lagging technology, and reliance on imported key materials and equipment. Nevertheless, China's upstream farming sector ranks among the top five globally in scale, leads in efficiency, and has reduced milk prices and costs to globally low levels. Upstream operations are highly scaled and deeply integrated with downstream processors. By 2025, leading dairy companies are projected to control 55% of their milk sources. Supported by structural transformation and a solid industrial foundation, deep processing of dairy products in China holds great promise.
In the short term, business-driven demand spurs growth, while long-term consumption upgrade potential remains promising. Business sector demand serves as a key support: China's baking, Western fast-food, coffee beverage, and tea beverage industries maintain rapid growth, with 2020-2025 compound annual growth rates of 3.9%, 8.5%, 22.6%, and 10.5%, respectively. Downstream demand growth has driven mid-to-high single-digit compound growth for business-side cheese, butter, and cream categories since 2022. Projections indicate respective industry scales of 16.8 billion, 11 billion, and 11.6 billion yuan by 2025, with high growth expected to continue. Additionally, specialized deep-processed dairy products for business clients show small-scale but high growth rates. The medical food sector grew at a 24.9% compound annual rate from 2020-2025, while whey protein powder, lactoferrin, and pharmaceutical lactose industries have maintained double-digit growth in recent years.
Consumer-side consumption continues to develop with substantial potential. Since 2022, consumer deep-processed dairy products have faced varying degrees of pressure. The current market size remains small, with consumer butter and cream sectors projected at 1.7 billion and 400 million yuan respectively by 2025. However, potential exists in consumer demographics and usage scenarios, as 60% of people still do not consider dairy products daily dietary necessities. Localized innovative products are expected to support future consumption upgrades.
International examples offer insights: innovation drives consumer-side development, while full industrial chain布局 enhances business-side refinement. Japan's deep-processing dairy industry began post-World War II, with policy guidance and product localization driving per capita cheese consumption from 0.12kg in 1964 to 2.45kg by 2025. Comparing China and Japan, Japan achieves higher per capita cheese consumption on the consumer side, with total consumption exceeding China's despite a smaller population. Medium to long term, cheese consumption requires ongoing consumer education and product taste localization. For business sectors, Fonterra leverages full industrial chain布局 to lead globally in deep-processed dairy, deeply integrating with premium global foodservice clients while maintaining low leverage, low expense ratios, and high profitability. China's deep-processing dairy sector represents a large, high-growth arena with upstream support. Future development requires exploring business expansion models suitable for domestic conditions to achieve breakthrough competitiveness against foreign rivals.
Industry outlook favors dominance by full-chain leaders, with small-medium enterprises achieving category breakthroughs. Leading dairy enterprises are categorized as: full industrial chain leaders with comprehensive布局 and R&D advantages; vertical leaders excelling in cheese, dairy fats, milk powder and related chains with leading single-category deep-processing capabilities; and regional dairy companies leveraging business clients for growth, ranking nationally advanced in cheese sector布局. Looking forward, deep processing is expected to remain dominated by full-chain leaders, though small-medium enterprises may achieve breakthroughs in their specialized categories.
Risk factors include: upstream milk supply surplus risks; significant raw milk price increases; substantial feed cost rises; industry demand declines exceeding expectations; intensified competition; logistics disruptions; sharp declines in newborn populations; industry food safety issues; and new product launches underperforming expectations.
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