Vietnamese Dairy Industry: Opportunity and Challenge

In recent years, milk consumption in Vietnam has been significantly rising. According to statistics from the Vietnam Feed Association, the demand for fresh milk has increased by 61 percent from 500 million litres in 2010 to estimated 805 million litres in 2015.

 

As a populous country with a population growth rate of 1.2 percent a year, Vietnam has a huge potential for development of the dairy market. GDP growth rate of 6-8 percent /year, per capita income increase of 14.2 percent a year, as well as figure and health improvement trends enable the consumption of dairy products to remain high. In 2010, the average annual consumption of a Vietnamese person was about 15 litres. It is expected to double by 2020, to 28 litres/year/ person.

 

Characterised by its geography, tropical climate combined with temperate belt, Vietnam is endowed with cow farming. Meadows on the outskirts of Hanoi, in Moc Chau, Binh Duong provinces offer a variety of food, and good conditions for growth.

 

Investment in diary development not only creates conditions for business production with low labour cost but offers livelihood for local people, thus contributing to poverty reduction, social security, business and community benefits.

 

Cow raising requires high technique and investment. In fact, 95 percent of diary cows in the country have been scatterly raised by small and unskillful households. Farmers are not trained with livestock techniques, disease preventive measures. In addition, cow farmers are passively affected by other socio- economic impacts, which directly influence price of breed, food or output cost.

 

In 2009, raw milk production from the domestic herd met only around 20-30 percent of total dairy consumption. In Vietnam, only 5 percent of the total number of dairy cattle is raised on farms; the rest is raised by individual households. By the end of 2009, there were 19,639 dairy farmers with an average of 5.3 cows per farm, indicative of quality issues within Vietnam’s domestic herd. The consequence is Vietnam’s dairy products are among the most expensive in the world. The average cost of milk in Vietnam is US$1.40/litre, compared with US$1.30/litre in New Zealand and the Philippines, US$1.10-1.20/litre in Australia and China, and US$0.90/litre in the UK, Hungary and Brazil, according to Euromonitor International.

 

To set up a standard dairy farming system, businesses need a big amount of investment capital. Moreover, in order to meet the market’s demand, businesses in the dairy industry must import technology, materials and equipment overseas due to the limit of domestic technique, product prices, business revenues. Dairy companies depend on imported milk powder rather than domestic fresh milk production. The sector faces supply and demand imbalances as domestic herds can only meet about 20-30 percent of total nationwide demand. Heavy dependence on foreign markets for input materials creates a risk of margin compression due to fluctuating prices of imported dairy products. According to the Ministry of Agriculture and Rural Development (MARD), Vietnam imported 72 percent of its total dairy product consumption in 2009, including 50 percent of milk material and 22 percent of finished milk products.

 

On the other hand, with the WTO membership, Vietnamese dairy enterprises are under ever rising pressure caused by reducing tax for imported milk as in Vietnam’s commitments to the Common Effective Preferential Tariff Agreement in the ASEAN Free Trade Area (CEPT/ AFTA) and WTO. “Vietnamese preferring foreign products” negatively impacts the consumption of the dairy products. Currently, dairy products only account for 30 percent domestic share.

 

Another factor that influences consumer’s decision is product quality and safety. Due to the lack of criteria and inappropriate evaluation procedure, many dairy products with no clear origin are still sold in public. Such incidents as melamine-tainted milk, milk with lower quality than disclosed facts, etc pose difficulties on the milk consumption, influencing the manufacturing companies.

 

To deal with those challenges, some dairy companies have come up with innovations to meet the market’s demands with substantial initiatives.

 

However, not every business has enough financial capacity and supporting services to successfully apply their initiatives.

 

With the aim of offering opportunities for businesses’ initiatives through inclusive business models, Vietnam Business Challenge Fund (VBCF) is launched to support business consultancy and provide non-reimbursement up to 49 percent of the project’s total investment. VBCF’s funding amount is ranging from US$100,000 to US$800,000 for each selected project. This is a big opportunity for Vietnamese businesses in general and dairy ones in particular.

 

To be supported by VBCF, businesses must show their innovative and applicable models with the engagement of low income people in the way that benefit both. The proposals must be under one of the three sectors: agriculture, green growth, infrastructure and basic services. Businesses must prove their operations, at least two years, in the relevant sector of their proposal and have capacity to invest at least 51 percent of the project budget.