June 18, 2012

Mengniu Dairy to invest in large-scale farms in China

Mengniu Dairy plans to invest RMB3.5 billion, or US$552 million, to build 8-12 self-operated large scale dairy farms in China  by 2015.

The farms will feature about 1,000-10,000 heads of cattle, and will be located in China's northeast and southern regions, as well as in the Hebei province and in Inner Mongolia.

The project will enable the company to source milk from its own farms, and help to ensure the quality of its milk supply. This move is crucial to ensure the quality of its milk and to regain consumer confidence, after the melamine milk scandal of 2008.
 

By shifting to large scale farms, Mengniu Dairy expects improvement in the quality of cattle, control and feeding. To ensure safety, the company has increased the number of staff involved in quality checks at small dairies and invested RMB30 million, or US$4.72 million, to procure quality assurance systems.

Mengniu currently sources 80% of the fresh milk from large scale industrial farms which are either partly company-owned or which have exclusive supply contracts with the company. The investment contributes towards the company's plan to slowly phase out sourcing from small farmers, who currently cater to one-fifth of its fresh milk requirement.

The Chinese Government passed a regulation in 2009 under which dairy firms will have to gain control of at least 70% of the raw milk they process, following the 2008 melamine scandal. The government also offered farms that raise more than 1,000 cows annually a subsidy of RMB1.5 million, or US$235,900.

Dairy companies, in response, have been establishing their own dairy farms. Bright Dairy Food is planning to build a RMB130 million (US$20.44 million) farm in Hubei province, while Yili Industrial opened a RMB220 million (US$34.60 million) farm in Inner Mongolia in May 2012.