April 16, 2004

China's Milk Processing Capability Outpaces Development Of Dairy Farms

The development of China's dairy industry is being curbed by a lack of concurrent progress in the expansion of dairy farms and dairy herds.
 
"The laggard construction of dairy farms has become a bottleneck curbing the healthy development of China's milk industry. We should take every effort to raise more and better cows," Liu Chengguo, chairman of the Dairy Association of China, said at the First China Cow Conference held in Shijiazhuang, Hebei Province. Liu is the former vice-minister of agriculture.
 
Despite the call and rising profits of China's milk industry, the situation of dairy farm development in the country is far from optimistic.
 
The country's production of dairy products totalled 16.5 million tons last year, an increase of 17.86 per cent over 2002.
 
During the first 11 months of last year, China's milk industry's production value was RMB45.66 billion (US$5.5 billion). Profits rose to a combined RMB2.79 billion (US$336.9 million), up 51.89 per cent year-on-year.
 
Yet the growth of milk processing capability has far outpaced the development of dairy farms and the growth of the cow population.
 
The double-digit growth has spurred many investors to pour their money into the milk industry. As a result, milk processing enterprises nationwide have surpassed 1,600.
 
Most of them spend their money to buy machines and equipment instead of developing dairy farms or helping farmers do so.
 
The laggard development of dairy farms causes "wars" to break out for fresh milk from dairy farms of other milk processors, said Dou Ming, director of the editing department of China Dairy Yearbook, and organizer of the First China Cow Conference.
 
Processors scramble for fresh milk from dairy farmers by giving higher prices than local milk producers.
 
The rising number of milk producers leads to price wars in the market, which either significantly reduce profits of producers or push them to lower the quality of their milk.
 
Due to the lack of fresh milk, it is estimated that nearly half of the liquid milk sold in the Chinese market is produced from cheap imported milk powder mainly from New Zealand and Australia, Dou said.
 
But the rising importance of milk sources has not pushed milk producers to massively invest in dairy farms.
 
It is much easier and cheaper to buy a machine than to raise and milk cows, said a senior official of Inner Mongolia-based Yili Group, the largest milk producer in China.
 
The official, who refused to be named, said Yili has long paid importance to the construction of dairies, but now it is seriously challenged by its competitors who buy milk from dairy farmers who have already signed exclusive supply contracts with it.
 
"Now signing a supply contract with dairy farmers cannot assure that they will sell the milk to us, especially when the market demand is very strong," the Yili official told China Business Weekly.
 
In China, most dairy farmers are small-scale and independently run operations. Milk producers commonly sign long-term supply contracts with them and offer technical support. If the numerous dairy farmers violate the contracts to sell their fresh milk to others, it would be very difficult and costly for producers to punish them.
 
But it is only one side of the coin. Dairy farmers also accuse the contracted milk producers of refusing to buy their fresh milk or they buy it at a much lower price when market demand drops.
 
Fujian Changfu Milk - based in Nanping in Fujian Province - is trying a new strategy by directly establishing its own dairy farms.
 
Zheng Hexin, the marketing director of Changfu, said the company has poured RMB1.1 billion (US$132.8 million) into constructing its own dairy farms since 1998.
 
"We have to wait for three or four years until our cows begin to produce milk, but it is worthwhile because we now have a stable and high-quality milk supply which cannot be touched by others," Zhang told China Business Weekly.
 
Other milk producers would rather invest the money in marketing.
 
But the Changfu model is challenged by the fact that there are high transport costs, if its milk is to be sold nationwide. That prompts most producers to buy fresh milk from local dairy farmers instead of investing in dairy farms near their markets.