Sunday, September 15, 2013

No Milk on the Shelf in Shanghai

China is struggling to supply its consumers with milk. Replacing small farmers with big farms has been the main strategy to address dairy industry problems, but this strategy is undermined by soaring costs. Meanwhile, the small farmers who formed the foundation of the industry are disgruntled over their weak position in the supply chain.

According to a Xinhua News Agency report, a Mr. Wang in the Xuhui District of Shanghai complains that his local supermarket was often out of milk during the summer months. The article reports that milk supplies are tight during the hot summer months when temperatures exceed 35 degrees centigrade and milk output can fall by 40 percent.

This summer's seasonal shortage draws attention to the structural shortage becoming more apparent as China's demand for milk outpaces its output. According to China Dairy Association statistics, China's dairy cow herd stayed steady at 14.4 million between 2011 and 2012 while milk output went up a modest 2.3 percent, reaching 37.4 million metric tons (mmt). Imports of dairy products were 1.14 mmt in 2006 2012, up 26 percent.

Song Liang, an analyst with a Chinese dairy promotion organization, says many farmers have quit dairy farming due to low profitability, high risks due to poor disease control, and rising labor costs. Song says many dairy companies now are building their own farms to guarantee their milk supply but these farms only account for 15 percent of their milk supply. The cost of setting up and operating such farms is soaring. With standards increasing, Song estimates that the cost of setting up a company-operated dairy farm has soared from 10 million yuan to 40-50 million yuan.

Rising costs of feed and labor are one reason for the soaring costs. Skilled veterinarians and farm managers are scarce and many farms are bidding for their services. Access to a large tract of land to build a farm depends on "local land management." The dairy analyst estimates that new company-operated farms are barely offsetting the loss of output due to departure of small farmers.

An interview with a leading dairy scientist reported in Farmers Daily acknowledged that China's dairy industry has received a lot of negative attention since the melamine incident but the scientist notes that the industry has a short history of 20 years or less and development of a strong industry "doesn't happen overnight."

The Farmers Daily interviewer observes that the interests of dairy companies and individual farmers are at odds and asks how their interests can be aligned. The scientist describes the strategy of concentrating cattle in centralized production complexes while maintaining ownership by individual farmers as a "transitional stage" in the structure of dairy farming. The scientist implies that farms of a "reasonable scale" are the future dominant form of production but notes that farms have high investment requirements.

He then lapses into discussion of need for improvement of breeds, nutrition and milk per cow. He observes that China needs to integrate researchers with local extension stations. How will this extension system be staffed? Few universities have a program oriented toward practical veterinary training and few students or knowledgeable experts would consider working for low salaries in the countryside. Plus, as noted above many companies are bidding aggressively for their services.

An opinion piece in Economic Times boldly proclaims that organizing dairy farmers to protect "the interests of 1 million dairy farmers" is the crux of the industry's problem. He argued that the industry can't sustain itself on profits in processing and retailing--farms have a weak negotiating position versus companies and are consequently the weak link in the supply chain.

The Economic Times pundit praised the example of a union of dairy farmers organized in Shanxi Province. The leader of the alliance negotiated with the two largest dairy companies, gaining a significant boost in the purchase price for the farmers in the alliance. Reportedly, this story drew enthusiastic applause at a national meeting of dairy cooperatives and numerous dairy leaders have come to learn about his alliance and negotiation strategy.

The writer argued that subsidies don't address the fundamental problems in the industry. The main problem is to align the interests of producers and dairy companies while raising milk yields and achieving a suitable scale of production--a tall order.

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