Can China’s "Milky-ways" Continue?

By Dawn McGregor, Woody Chan, Ken Li 19 October, 2016

China's been dairy hungry but can this continue & how much are leading companies disclosing? CWR reviews

Consumption of dairy products in China has notably increased over the last 16 years, particularly in urban areas.   Urban per capita consumption of milk & dairy products increased from 4.6kg in 1995 to 9.9kg in 2000 and 13.9kg in 2012. Latest data for 2014 shows a nationwide per capita consumption of 12.6kg. Comparatively, aquatic products recorded 10.8kg and pork 20.0kg.

Consumption of dairy products in China has notably increased over the last 16 years

Contributing factors for this are increasing disposable incomes and increased health awareness. Chinese consumers are increasingly aware of the health benefits of yoghurt in terms of digestion, according to Euromonitor.

However, most dairy products (cheese, milk, yoghurt) are water intensive. The global average water footprint of 1 kg of cheese is 3,178 litres or almost 16 bathtubs. A 250ml glass of milk has a water footprint of 255 litres or 1.3 bathtubs. A lot of this comes from the rearing of the animal, usually cattle.
 
 This thirstiness is a serious consideration for China, which has significant water stress challenges.
Going forward this article will mainly focus on milk products of the dairy industry.
3 out of China’s Top 5 milk producing provinces are in the Dry 11 provinces (provinces with annual renewable water resources below 1,000m³).  These three provinces, Hebei (#3), Henan (#4) and Shandong (#5), account for 30% of China’s total milk production.  These provinces are also significant industrial producers, meaning there are competing demands for water.

Dairy is thirsty…
…yet, 3 of the Top 5 milk producing provinces are in the Dry 11

There are also pollution and considerable methane emission considerations with large livestock.  Cattle (raised for beef, milk & others) are the animals responsible for the most emissions, representing about 65% of the livestock sector’s emissions. The Chinese government is aware of these issues and is taking action, as seen with regulations and changing dietary recommendations. Actions by some businesses show they too are aware and taking action.

How are China’s increasingly “milky-ways” being met?  

Both domestic production and imports have increased.

Since 1996 milk output has increased 5-fold from 7.4 million tonnes to 38.4 million tonnes in 2014, resulting in a 9.6% CAGR during this period. This large growth is clear on the chart below. However, from 2007 growth slowed, with a CAGR of <1%. Growth essentially stabilised after this, which could be linked to the melamine powdered milk scandal of 2008 in China, which by November 2008 more than 300,000 babies were sick from the contaminated milk. Following this Chinese companies may have decided to import more of their products to improve their safety image. This seems likely with the growth in imports as stated below.

Since 1996 milk output has increased 5-fold
But growth has essentially stabilised from 2007 onwards

As for imports, between 2010 and 2013, volume sales of imported drinking milk products increased from 15,000 tonnes to 195,000 tonnes, according to data from the Chinese dairy association.

Not all imports are strictly foreign as over the last several years Chinese dairy companies have been acquiring foreign companies, particularly Australian and New Zealand. According to media reports deals have ranged from RMB 100 million to RMB 1.4 billion for land plots ranging from 5,000 hectares to 476 million hectares.

Yili & Mengniu ranked #8 & #10 respectively in Top 20 Dairy Report 2016

In the 2016 Top 20 Dairy Companies report by Rabobank, Chinese companies Yili & Mengniu were ranked #8 and #10 respectively. With such significant impact on water and other natural resources we thought we would take a look at how major Chinese and foreign dairy companies are performing on sustainability.

Are dairy brands taking actions on sustainability?

We took a look at the sustainability reports of five market leading Chinese dairy companies and their international counterparts.

All brands are taking some action to reduce their overall environmental footprint

Our analysis shows that all brands are taking some degree of action to reduce their overall environmental footprint (see table below).  Three brands (highlighted in blue) are taking action across water, chemicals, emissions, energy & waste. Two of these, Mengniu and Sanyuan are Chinese, the other was Fonterra from New Zealand.

However, when we looked closely at the level of details being disclosed the picture changes quite drastically.

Disclosure on water related indicators was very limited for both Chinese & foreign brands

Disclosure on water related indicators was very limited for both Chinese and foreign brands, as seen by the many blank spaces below. Bright Dairy and Modern Dairy had no water data disclosed in their sustainability reports. All brands except Fonterra had a sustainability report, Fonterra’s data was in its Annual Report. (click on table to enlarge)

Additional to the limited disclosure is the wide array of data disclosed which is mostly incomparable. Only two companies (Danone & Nestle USA) disclose on “Total water withdrawn”. These two companies again are the only ones to disclose on “Water use per unit of production”. However, Sanyuan and Fonterra disclose “Water use” but we can’t be 100% sure these two measures are comparable.  Meanwhile, Mengniu & Sanyuan are the only two to disclose on  “Water recycled or reused”.

It essentially impossible to compare companies on their water performance & actions

On top of this mixed bag much of the data disclosed seems self-selected – annual vs daily capacity and metric tonne of product vs unit, etc.. All of these aspects make it essentially impossible to compare companies on their water performance and actions.

Interestingly disclosure by the dairy industry in China was the highest among F&B industries, according to the “Research Report on Corporate Social Responsibility of China Food & Beverage Industry 2015”, by the Chinese Academy of Social Sciences & China Food Safety Newspaper Agency . Moreover, it had the highest score for environmental responsibility (get the latest on China’s environmental law here). However, when ranked against other industries F&B was below the average.

For now it seems that China’s “milky-ways” are set to continue

More, comparable and reliable data is clearly needed, not an uncommon in global sustainability reporting. This data is also critical to the companies to track their environmental impact, which in a country like China where natural resources are more and more factoring in growth plans, is crucial. Innovative water sources and technologies could be used, such as recycling & unconventional sources. Despite global food & water risks, for now, it seems like China’s “milky-ways” are set to continue.

Further Reading

• Paris Agreement: Food & Water Still At Risk – Even if all pledges made at COP21 are carried out, global staple crops face increased failures and 1.5 billion more people are to face water stress by 2050. MIT’s Mark Dwortzan shares more findings & solutions from their report
• Environmental Law: 1 Year On – China’s amended Environmental Protection Law has been in effect more than 18 months now. How impactful has it been? Have there been more fines & violations? What about compensation? China Water Risk sat down with Liu Feiqin, from the China University of Political Science & Law, to get her thoughts on this & more
• Sustainable Cities Water Index 2016: The Asian perspective – Now more than ever, cities & their waterscapes face challenges. Arcadis’ inaugural water index of 50 cities has 9 out of 12 Asian cities ranked in the bottom half. Arcadis’ John Batten expands on the results & more

• China’s Soil Ten – With ~1/5 of China’s farmland polluted, the Soil Ten Plan could not come sooner. See impacts to the “Hateful Eight” polluting industries & get the distilled version of the 231 actions in our review
• Quantifying Water Risk: What’s My Number? – Industries are exposed to water risks but financial valuation of such risks remain elusive. China Water Risk’s Thieriot reviews existing quantification tools & methods and highlights gaps that need to be filled to put a number on water risks
• China’s New Era of ESG – China’s economy is slowing with challenges arising from ESG factors. MSCI’s Chew & Wang on pollution fines, anti-corruption crackdowns & more from their report. Investors need to be prepared
• Greg Koch of Coca-Cola on Water Use – Read how Coca-Cola manages its water use in China and globally in China Water Risk’s interview with Greg Koch, who heads up the company’s global water stewardship team.