Retreat From Small-Scale Dairying in China

China's dairy production never really took off until dairy companies started recruiting small farmers in the hinterland to milk cows a few at a time. Until then, most dairy farms were on city outskirts where feed was scarce and costs were high. But now, the Chinese industry appears to be reversing course to a large-scale farming model.

Milk production in China never really took off until ultra-high temperature (UHT) technology permitted milk to be produced in the hinterland by millions of scattered herdsmen and transported to urban markets without spoiling. That didn't end well, though. Scattered production and frenetic growth with thin margins and no control led to the melamine incident in 2008 which ground the industry's growth to a halt. 

Following the melamine incident there has been a surge of investment in large-scale dairy farms that has reversed the strategy that created frenetic growth during the last decade. Government authorities have pushed processors to procure milk from company-owned farms or from a fixed aggregation of farmers who keep their cows together in a centralized location. The surge of investment is reversing the course of dairy development, moving it back toward big, high-overhead operations.

A scan of news reports and project descriptions shows a surge of large investments in farms with thousands of cows. The examples below are mostly in western provinces and farms range from 2000 to 5000 head with planned investment per cow works out to about $3200-$6000, not that high by western standards. But the tens of millions of dollars freezes out small farmers. Most of the projects are led by local animal husbandry bureaus and are recruiting investors who probably have little or no knowledge of farming. Several projects mention that land for the farms has been leased from farmers. In effect, dairy farming in China has returned to a large-scale employee-operated mode of operation similar to the poorly-run state farms of past decades.

Sample Chinese dairy farm projects announced during 2012-13

Location	Number of cattle	Investment
Gansu, Jingyuan County	5000	RMB 120 millon
Gansu, Minhe County	2000	RMB 180 million
Inner Mongolia, Hohhot, Yuquan District	3000	RMB 62 million
Heilongjiang, Harbin	2000	NA
Qinghai, Huzhu County	3000	RMB 60 million
Shaanxi, Weinan Prefecture	2000	RMB 50 million
Shandong, Dongying	3000	US$ 15 million
Inner Mongolia, Tuzuo Banner	5000	RMB 145.3 million
Ningxia State Farm System	Add 100,000 by 2015	NA
Shaanxi, Heyang County	7000	RMB 280 million
Source: Chinese news reports and project descriptions.

Most projects include thousands of cows, a barn, one or more milking parlors, storage for feed and silage, manure handling and gasification facilities. They mostly don’t mention anything about sources of feed. Two projects mention that they have several hundred mu of land (about 50 to 100 acres) which doesn’t seem adequate for thousands of cattle.

One ambitious county-wide project in Shaanxi Province plans to build two 1000 head farms, four 500-head farms, and ten 300-head farms plus a dairy processing project from 2012 to 2017. The county is on a shopping spree for Australian cattle. In 2012 they brought in 2000 head with a total subsidy of 11,200 yuan each (split between the province, prefecture and county). They plan to bring in another 10,000 australian cattle by 2016.

The county promises investors access to a dizzying array of subsidies. There is a 500-yuan annual interest subsidy per farm for a loan of 10,000 yuan. Grants for farms of varying sizes are approximately 500 yuan per head. Farms get a 50-yuan-per-mu subsidy for buying alfalfa seed if they can consolidate a 500-mu parcel of land.

Farms in the county can also benefit discounted water and electricity rate and from various rural construction subsidy programs for roads, drinking water, and electricity. Machinery purchases are subsidized by the national program. Other policy support includes an artificial insemination subsidy of 100 yuan per attempt and a one-time 2000-yuan subsidy to set up an on-farm frozen semen station. Insurance for cattle is subsidized and organized by the county. There are free mandatory immunizations and testing for brucellosis and tuberculosis. 

An October 2012 article in a veterinary publication paints a grim picture of the dairy farming industry in China since the melamine crisis. Rising feed and labor costs have crimped farm profits, as have disease problems. When cows get sick you have to stop milking them for ten days or more. Meanwhile, milk prices have been stagnant and many farmers complain that milk sells for the same price as bottled water.

The article says most Chinese dairy farmers lack scientific and specialized knowledge, and have a hard time controlling disease. It calls for a consolidation of the dairy processing industry by “guiding” companies through mergers and acquisitions to “weed out” excess capacity and foster more “dragon head” enterprises. The author thinks government guidance, the price lever and other methods can be used to lower enterprise cost and to raise the China dairy industry’s influence and competitiveness.