Dairy Industry Melamine Aftermath

China's dairy industry is still reeling from the aftermath of last year's "Sanlu" melamine milk powder adulteration incident. The government has been busy trying to rectify the industry. Each province and county is doing its own thing with general guidance from the central government, but there are common themes.

One major thrust is to eliminate competition among milk collection stations. In Inner Mongolia, raw milk supply has been carved up into territories, and each processing company is assigned a territory; they can't buy outside their territory--a monopsony. For example, Helin village in Inner Mongolia used to have 2 milk stations affiliated with Yili Company, 3 affiliated with Mengniu Co., and 3 bulk milk collection points. when milk was in short supply, companies would compete for supplies from these stations. Now everyone in Helin village sells to 2 of the Mengniu stations. A third station is being reorganized; the others have been closed down. Both Mengniu and Yili have to pay the same price--2.4 yuan/kg. In Helin's county, the number of stations has been reduced from 274 to 219 and each village sells to only one company. The reasoning is that a company will be more willing to invest in a local milk collection station if it can be assured of maintaining the village as a milk supplier.

Milk stations must be directly managed by a particular company or have a fixed supply relationship with a company. Company representatives must be posted at the station to monitor milk tanks and fix a seal on each milk truck. Milk is tested by a third party, which appears to be the county branch of the technical supervision bureau.

Another strategy is to stabilize the price of milk. In Heilongjiang, the province sets a province-wide reference price for milk based on various data, and local commissions decide on a price band for their area. In Fuyu county, they claim to have kept the milk price in a range of 2.20-2.45 yuan/kg despite a steep drop in demand since 2008. Many regions are paying subsidies to processors so they'll keep buying milk at a healthy price. In Bazhou, a region of Xinjiang, the subsidy was raised from 0.1 yuan/kg to .2 yuan/kg this spring and expanded from 1 company to three.

Farmers are required or strongly encouraged to keep their cows in a "standardized livestock production zone" instead of keeping them in their backyard. Xingtang County in Hebei Province built 120 of these zones and claims that 96% of dairy cattle are now in the zones.

There are lots of little subsidies, mostly given by local authorities. Fuyu County reported a long list, including 12 million yuan for construction of new milk stations:
Loans for building new milk stations;
Subsidies for culling diseased cows;
Subsidies for village veterinary technicians' salaries;
Subsidy of 2 yuan per artificial insemination
Provision of idle land, well-drilling, and tree saplings for newly-built dairy farms of 100 head or more;
Subsidies for constructing storage facilities for silage;
Annual financial awards for individuals in the industry.
Changji City in Xinjiang has been allocating 3 million yuan annually for dairy industry subsidies since 2002, but increased the amount to 10 million yuan in 2009. The loans are for building new milk stations and related water, electricity and road construction, buying cattle, building animal housing in production zones, purchasing milking equipment, and artificial insemination.

News reports indicate that the industry is still in serious trouble in some places. In Nanchong, a poor area in Sichuan Province, a report on an investigation of dairy farms from the local statistical bureau said farms' milk sales were down 30-50%, costs had gone up, and policy support had not arrived. Bazhou in Xinjiang reported a new round of subsidies to address the industry's serious problems there: 1 million yuan for artificial insemination, 970,000 yuan for replacement heifer subsidies, 4 million yuan for livestock production bases, and 10 million yuan for machinery purchases. Bazhou is also increasing the subsidy for school milk to 1 yuan per package per student per day.