Demand for infant milk formula in China is expected to increase by 10%, after China relaxed its one-child policy; allowing couples to have two children, according to Rabobank.

There is to be a 10% increase demand each year as the policy unfolds, Rabobank’s Food and Agribusiness analysts expects.

The impact on dairy companies will depend on their category exposure, but Rabobank has said that the developments around the new birth policy in China certainly warrant close monitoring.

According to Rabobank, the infant formula sector is set to be the primary beneficiary of this policy change.

The assumption is of a 16.6% average increase in newborn babies annually over the five years following the full implementation of the ‘One Couple, Two Kids’ policy, it states.

Assuming also that the current breastfeeding ratio of 28% remains unchanged for the second child, Rabobank initially estimates that the infant formula market could be boosted by about the same 16.6% a year.

This is equivalent to about 117,000t/year (based on Euromonitor data of 704k tonnes in 2014), it states.

This may add an estimated 3-4 percentage points to Rabobank’s current infant formula volume growth expectation of 7-8% Compound Annual Growth Rate (CAGR) into 2020.

Actual incremental demand for infant formula could be less, as at the lower end of its initial estimate, Rabobank initially calculates about 1.6m newborn babies a year once the new policy goes into full implementation.

This, by itself, would mean about 10% incremental demand for infant milk formula (approximately 70,000t) every year in the first few years as the policy unfolds, according to Rabobank.

It stresses that this is assuming the same breastfeeding ratio and penetration ratio of infant formula for the second child.

The policy shift will likely enable increased infant formula manufacturing in China in the coming years, according to Rabobank, boosting the demand for ingredients such as infant formula-grade skimmed milk powder (SMP), whole milk powder (WMP) and lactose in this market.

The change will have little noticeable impact on the demand for milk and its pricing globally, it states.

Infant formula accounts for only about 4% of dairy consumption in China (liquid milk equivalent), so the impact on dairy farmers via this channel is negligible, Rabobank states.

Rabobank expects the broader demand for dairy (liquid milk, yoghurt, cheese, etc.) will benefit from any increase in population growth in China in the coming years, but will likely only cause a small shift.

The policy relaxation aside, there are still hesitations for people in having a second baby in China, according to Rabobank.

The previous relaxation policy (fully implemented in 2014) has only been met with, at the best, a lukewarm response, it states.

Rabobank has said that the economics of having a second baby are causing parents (who are eligible) in China to hesitate about whether or not to take advantage of the relaxed birth policy.

Considerations include the cost and availability of housing, costs of education, employment, career development of women, as well as the acceptance of the first child, it said.

According to Rabobank, cost of raising a child becomes the biggest factor in the decision making, especially in the large cities.