Tuesday, September 24, 2013

"Milk Famine": China Dairies Raise Prices

Chongqing City's Commerce News reports that Chinese dairy companies have been raising prices of milk products to cover higher costs due to tight milk supplies--another example of the sticker shock associated with "modern" agriculture in a crowded country.

Last week, Chongqing resident Li Jiehong told a reporter he had noticed the price for a 950-ml carton of Tianyou brand milk had risen from 10 yuan to 12 yuan. He observed that prices had risen on quite a few milk products offered by different companies. The Chongqing Commerce News reporter visited several supermarkets and found that prices on many pure milk products had been increased from 3-to-20 percent.

These simultaneous price increases by China's biggest domestic dairy companies come about six weeks after Chinese officials slapped fines on multinational dairy companies for raising prices. According to the New York Times, China's regulators were alarmed that prices for foreign-brand infant formula had risen 30 percent since 2008--an average of 6 percent a year.

The domestic company price increases for liquid milk this month are about 10-percent on average. The two biggest domestic companies--Yili and Mengniu--were the first to announce price increases.

Chinese dairy company managers say this month's increases are passing on higher costs of raw milk supplies. A Tianyou company manager said their company has taken steps to gain direct control over milk supplies and costs have risen. A Mengniu company official also said their price increases reflected higher milk costs.

A dairy industry analyst attributed the milk price increases to a "milk famine" this year. He estimates that the annual demand for raw milk is 43.5 million metric tons, but China has a 4-mmt deficit.

Over the last several years there has been little or no increase in raw milk prices while producers have been under pressure to adopt costly measures to guarantee safety and accommodate closer supervision. Consequently, small farmers have been dropping out of the industry. Companies have been setting up their own farms, but not enough to offset the lost supply from the exiting farmers.

A Mengniu spokesman said his company's raw milk cost had risen 12 percent this year. Ministry of Agriculture data shows that the average raw milk price for January-August 2013 was 6.4 percent higher than last year. The price in August was up 1.4 percent from July and 10.1 percent higher than a year earlier.

Dairy cattle need to eat grass--a lot of it--and China doesn't have many wide open spaces. Hillsides where cattle would graze in North America or Europe are planted in grain in China. The second lesson is that food safety is a costly good. Raising cattle in barns with professional managers, storing their milk in temperature-controlled tanks and daily testing is more expensive than keeping them in sheds in a thousand backyards and milking them into buckets.

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