April 25, 2012

 

China to make historic global cattle import

 

 

As much as 100,000 heifers from Uruguay, Australia and New Zealand will board multistory cattle-carrying ships this year bound for China in one of the largest transoceanic cattle drives in recorded worldwide.

 

The global roundup is a key part of China's effort to satisfy growing domestic demand for milk and remake its dairies after a deadly tainted-milk scandal in 2008 devastated production and caused distrustful consumers to turn to imported milk.

 

Some farmers in countries that are exporting their prized heifers worry that in coming years China could go from customer to rival in the global milk market.

 

"It's building the herds of our competitors," says Nick Renyard, owner of a 550-head dairy in Victoria State, Australia. "It's like selling the family silver, you can only do it once."

 

The cow pipeline is expected to stay full for several more years as Chinese dairies try to meet government production targets that could eventually wean the country from imported milk.

 

"We have to solve our dairy problem ourselves," says Deng Jiuqiang, the millionaire founder and chairman of China Modern Dairy, which has quickly become the country's largest milk producer. Modeled on America's biggest dairies, Modern Dairy has 15 industrial farms and another four under construction. The company now has 128,759 heads of cattle and is importing about 22,000 more per year until it reaches its goal of 300,000, including imports and breeding, around 2015.

 

Modern Dairy, which benefits from government subsidies and tax incentives, received critical funding from US private-equity firm KKR & Co., along with several other investors, which put US$150 million into the company. KKR stationed two full-time consultants on its farms, advising on, among other things, the best mix of fodder to feed cows to maximize production.

 

"China has a short history of dairy. I'm confident we can be doing as well as the US"  Deng says.

 

To get to that point, China's dairy industry will have to overcome the lingering distrust from the melamine scandal of 2008. Milk was in short supply at the time and the government, concerned with rising inflation, leaned on milk sellers to hold down prices, crimping profits.

 

Traders and processors watered down the milk and added toxic melamine powder to pass crude protein tests. At least six babies died, and tens of thousands suffered kidney problems.

 

In reaction, China quickly implemented an overhaul. Provincial governments banned backyard farms and insisted small-time operators move their animals into approved group facilities known as cow hotels that could be more easily monitored by inspectors.

 

To encourage growth of big farms, the government has mandated that the country's top milk processors - those who buy from the farms and turn raw milk into boxed milk, yogurt, ice cream and cheese - purchase a substantial percentage of their milk from big farms.

 

Foreign companies and financiers have jumped on China's dairy bandwagon. Hong Kong-based private-equity firm Olympus Capital and Mueller Milch, a large German dairy, have invested in Chinese dairies. New Zealand dairy cooperative Fonterra, the world's biggest exporter of milk products, is building its third dairy farm in China stocked with Kiwi cows.