Source: Shanghai Daily

CHINA'S fast expanding dairy industry will continue to see mergers and acquisitions by foreign giants in the next five years, industry officials said.

"Overseas dairy manufacturers are building international operations for sales and production," said Jim Begg, president of the International Dairy Federation at the 27th World Dairy Congress in Shanghai over the weekend.

Instead of building facilities that require large-scale investment, mergers and acquisitions help foreign counterparts attain market penetration faster, Radobank said in a newly released industry report.

"Acquiring existing local processors is a cost efficient strategy for big dairy processors to establish a presence in out-of-home markets due to less organized retail channels and scattered consumer markets in the less-developed areas," the report said.

The country's dairy demand is expected to increase at a compound annual growth rate of 12.8 percent in 2010 to hit about 38 million tons.

China, the second-biggest dairy market in Asia after Japan, is expected to see more demand in rural markets.

China's total retail market value of dairy products, including cheese and yogurt, was estimated at 89.1 billion yuan (US$11.1 billion) last year with a compound annual growth rate of more than 20 percent.

Half of the world's growth in dairy production was contributed by China. Livestock breeding grew 27 percent in the first half of this year compared with a two percent worldwide average.

Inner Mongolia-based firms Mengniu Dairy Co Ltd and Yili Dairy Co Ltd, as well as Shanghai-based Bright Dairy & Food Co Ltd are the three biggest milk companies in China. Together they hold 33 percent of the total market in China.

Song Kungang, chairman of CDIA said China's dairy industry still lagged behind overseas countries in consumption and product diversity. The participation of foreign firms would help improve this fully opened industry, Song said.

In August, Denmark's Arla Foods Ingredients, European's biggest dairy company, signed a 540-million-yuan joint venture deal with Mengniu to make high-end milk powder.

Abbott Laboratories, the world's leading medical and powered milk producer, has also been reported to be in talks to buy Qingdao-based Syrutra Dairy Co Ltd for 200 million yuan.

Last year, US-based Rich Keen Co Ltd and Unites jointly spent 1 billion yuan to buy 50 percent of Wandashan Dairy Co Ltd.