Wednesday, June 22, 2016

China Dairy: Structural Adjustment is Key

Ironically, Chinese communist leaders may be the leading proponents of take-no-prisoners capitalism in the world today. China's dairy industry is an example: officials prescribe structural adjustment through market competition for the industry to escape its depressed state--basically a shake-out of weak players.

Communist party officials adopted a somber tone at a China dairy industry association meeting held earlier this month at a national dairy expo in Qingdao. They described the industry as facing "the most difficult stage since the melamine adulteration incident in 2008." Looking ahead, however, the officials expressed confidence that the discipline of vicious market competition is producing a core of lean, mean companies that will ensure a brighter future for the industry.

Officials speaking at the meeting cited three major problems plaguing the Chinese dairy industry: falling prices, difficulty selling milk, and big losses. The price received by large farms is down 10% from a year ago, and the price is down 15% for smaller farms. Dairy companies have reportedly cut back the volume of purchases by 10% as well. Financial losses by dairy farms were said to be as much as 50%, and spreading more widely.

The problems were attributed to falling consumer demand and pressure from lower-priced imported milk.

Dairy association official--and former vice minister of agriculture--Gao Jibin said this is a really tough time for the industry, even though there is no particular incident like the 2008 infant formula incident causing difficulties. However it's all relative, Gao said, pointing out that other industries are facing tough times as well, as are dairy producers in other countries.

Looking forward, Mr. Gao espoused optimism based on "supply side adjustment"--what others might call "creative destruction." Gao told a reporter, "Innovative reform and transformation through structural adjustment must be the top priorities of China's dairy industry under the 'new normal' [of slower economic growth]."

Gao expressed hope that the industry will transform "from traditional to modern" and "from vulnerable to efficient" during the current economic slowdown and market fluctuations. Supply side reform "respects the market and peoples' needs," he said. Through "survival of the fittest" and "competition in a buyers' market," resources will be concentrated in the hands of the most competitive and innovative companies.

The objective is not an increase in quantity, Gao explained, but rather quality improvement. Supply side reform means upgrading the industry through modern science and technology, bringing in new material and equipment, development concepts, business models, and industry organization.

"The traditional industry structure must be reformed, costs reduced, efficiency improved, and competitiveness increased," Gao said.

Current Vice Minister of Agriculture Yu Kang agreed that improvement of product safety was the core objective in establishment of policy support and supervision systems. He said the production model had been improved with great increases in milk per cow. Yu recited the supply side structural reform and competitiveness mantras. The Vice Minister urged listeners to maintain their confidence and insisted the industry should be guided by consumer demand. The Chinese market for milk appears to have reached a saturation point, with milk-dumping and excess supply. But in the long run, the Vice Minister assured industry participants that consumption would grow along with income and urbanization.

Gao Jibin agreed that China's dairy industry is a most promising industry with huge potential.

There was no mention of the usual knee-jerk prescriptions for hard times--subsidies or barriers to imports.

Apparently contradicting the "survival of the fittest" narrative offered by Mr. Gao, the article in China Livestock Industry magazine proclaimed that China's dairy industry is at a "new point of departure" of "harmonious development."

The article described the China Dairy Industry Association as an organization that serves as a "bridge to build relations between the communist party and government with companies, technicians, farmers, and consumers" designed to organize, coordinate and implement support policies.

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