A Wall Street Journal article recently pointed out China's rising demand for milk. As a result, prices and profits are rising for American dairy conglomerates like Dean Foods (DF). We've seen this same effect with pork products: last year, Chinese firm Shuanghui International acquired America's largest pork producer, Smithfield Foods.
Just like Smithfield and its pork business, United States dairy companies face declining domestic milk demand in combination with rising Chinese demand. These trends will reshape America's dairy industry -- but what comes after China's milk demand rises may result in even more profits.
Two factors have led to China's rising milk demand: higher incomes and emulation of Western diets. These factors don't force China to import milk from American companies like Dean Foods, but many Chinese don't trust domestic companies to produce safe milk.
Chinese consumers pay premiums for reliable American foodstuffs -- more so when it comes to milk-formula products that could jeopardize their children's health. China's 2008 melamine-tainted milk scandal spawned millions of wary dairy consumers in the country.
That's all great news for American milk companies like Dean Foods, which can continue milking profit from China even though they face stagnant demand and overproduction at home.
However, what happens after China reaches peak dairy consumption, as the United States has?
Infant soymilk industry
China's tendency to follow the United States' historical development regarding cigarette, automobile, and food consumption patterns hints at a major investment opportunity.
WhiteWave Foods (WWAV) peddles healthy foods that include soy and almond milk. The United States' soy and almond milk industry rose 8.4% to $1.5 billion in 2012. Health-conscious consumers spurned dairy in droves for these plant-based milk alternatives.
WhiteWave actually spun-off from Dean Foods in May 2013 and it now stands poised to capitalize on China's rising almond and soymilk consumption for decades to come. Last month, WhiteWave announced a partnership with Chinese Mengniu Dairy Company.
The partnership will allow WhiteWave to sell soy and almond milk in China. China still sips soy and almond milk like a baby, but its sizable market may soon be a boon to WhiteWave.
Coffee cream skimming
A third company will profit from China's rising dairy consumption, no matter how soon China favors soy and almond milk over conventional milk: Starbucks (SBUX 0.09%).
Starbucks skims its cream from coffee-milk products like Frappucinnos and Soy Lattes. These drinks carry frothy margins and as China imports and drinks more dairy, that will further Starbucks' steaming growth spurt in Asia. Right now, projections call for 25% growth for Starbucks in Asia, and Starbucks plans to open 750 new stores in the region this year.
Rising milk consumption in China indicates that imports of soy milk, almond milk, and coffee should also rise. Investors can profit today on these drinks as they will likely quench China's thirst for years to come.
In the short-term, Dean Foods sees a rise in milk prices and profits. In the medium term, Dean's spin-off WhiteWave Foods could sell oodles of almond and soy milks to China. All the while, Starbucks should skim cream off China's rising demand for premium coffee.