October 15, 2004

 

 

Fresh Milk Labels May Affect China's Dairy Companies

 

The Dairy Association of China (DAC) says it will introduce a fresh milk identification system in major Chinese cities.

 

Some big dairy companies in northern China, including Fonterra's joint venture target, Shijiazhuang Sanlu Group Co Ltd, may be affected.

 

Industry observers have said such a certification system could potentially penalise some companies in the north of the country which produce liquid milk from milk powder or rely on UHT milk for a significant part of their liquid milk sales.

 

An identification system would benefit companies which are close enough to the big affluent markets in the south of China to produce milk, pasteurise it, and get it to customers within a day or so.

 

A senior DAC expert, Dou Ming, who is responsible for the identification work, said the fresh milk identification system would first be launched in big cities like Beijing or Shanghai within the year, and then be gradually promoted nationwide.

 

Fresh milk identification would enable producers to sell their products at a better price, Mr Dou said.

 

Industry observers have said the new system is expected to reshuffle China's burgeoning milk industry, with potential implications for Inner Mongolia-based Yili and Mengniu, Shanghai-based Bright Dairy, Beijing-based Sanyuan and the Hebei Province-based Sanlu, in which Fonterra is negotiating to buy a 39 per cent stake.

 

Despite the dairy boom in China, its milk flows have started to fall short of demand and lagging development of dairy farms has resulted in a scramble for supply of fresh milk, even from other milk processors.

 

About 80 per cent of China's dairy farms are located in northern regions such as Heilongjiang, Jilin and Hebei provinces, Inner Mongolia, and Xinjiang, while 80 per cent of milk is consumed by residents in affluent southern coastal cities.

 

Mr Dou revealed that it had become an open secret for some producers to "produce" fresh milk with milk powder, which is about 15-20 per cent cheaper than genuine fresh milk.

 

Other national brands use UHT (ultra high temperature-processed) milk, to promote their products nationwide.

 

The fresh milk identification system has been under development for two years. But the DAC had reportedly received strong resistance from major milk producers, other industrial associations and some government departments.

 

The dairy industry is one of the fastest developing industries in China, with its production last year valued at RMB 50.9 billion ($NZ9.19 billion), up 35 per cent on the previous year.

The country's dairy production totalled 16.5 million tons last year, an increase of 17.86 per cent over 2002.

 

"The pressure is imaginable," Mr Dou said. "The fresh milk identification will greatly reduce the price of those using milk powder and have an impact on the market share of UHT milk producers," he added.

 

He stressed that fresh milk was different to powdered milk or UHT milk in terms of nutrition and quality.

 

"The identification system does not mean powdered milk and UHT milk have a poor nutritional value, but it is unfair that UHT milk, powdered milk and fresh milk are all sold at the same price," he said. "The system will ... help maintain the consumers' right to know".

 

But officials from the China Dairy Industry Association (CDIA) - whose members are mainly big dairy producers - were reported to have opposed the fresh milk identification system.

 

CDIA chairman Song Kungang declined to comment on the identification system, but said: "We think the name of 'fresh milk' is unscientific, because so-called fresh milk has been pasteurised. Pasteurisation and UHT are just two different ways to process milk."

 

"Before a major initiative is launched, the interests of more sides should be fully considered," Mr Song added.

 

An official with Yili said that the "fresh milk" label would harm the business of Yili, whose major product was UHT milk.

 

Industry analysts said the identification scheme would result in a shake-up of the dairy market.

 

"National brands' UHT milk is expected to sell more cheaply than milk from smaller local firms," said Zhang Hexin, an official with Fujian Province-based Changfu Milk. "For local producers with sufficient dairy farms like us, it is good news.

 

"Our fresh milk can arrive in Shanghai and Guangzhou within one day so those northern milk giants can hardly compete with us in quality in these cities," Mr Zhang stated.

 

But the Yili official, who declined to be named, said: "The national promotion of UHT and supplying fresh milk everywhere are two totally different systems, requiring varying logistics and promotion mechanisms. I can hardly see any benefits to us from the fresh milk identification."