The 53-year-old Chinese farmer has slaughtered 180 dairy cattle—about 20% of his herd—in recent months as a global glut of milk drove prices to six-year lows. Mr. Pi, who began in the industry as a 16-year-old milker, held out for months. “I don’t think I could bear it if I had to kill any more of the cows,” he said.
Still, he is losing more than 100,000 yuan (US$16,000) a month, and as China’s Lunar New Year begins, he may be forced to consider his options. “If prices fall, I will have to kill some more,” Mr. Pi said. “I just need to survive. What choice do I have?”
Other farmers in China have been dumping milk and culling cows as a dairy boom has swung to a bust over the course of three years. The impact is being felt beyond China, too, as farmers from the U.S. to Australia to New Zealand brace for price wars, smaller herds and cuts to income this year. New Zealand’s central bank says the drop in dairy prices is one of the biggest economic risks for the country, a big milk exporter.
The industry’s troubles illustrate China’s outsize sway over the world’s commodities. About three years ago, the country’s voracious demand for milk, baby formula and cheese led everyone from New Zealand farmers to Wall Street bankers to bet big on cows. Global milk production will be 8.6% higher this year than it was in 2011, according to estimates by the U.S. Agriculture Department.
The 53-year-old Chinese farmer has slaughtered 180 dairy cattle—about 20% of his herd—in recent months as a global glut of milk drove prices to six-year lows. Mr. Pi, who began in the industry as a 16-year-old milker, held out for months. “I don’t think I could bear it if I had to kill any more of the cows,” he said.
Still, he is losing more than 100,000 yuan (US$16,000) a month, and as China’s Lunar New Year begins, he may be forced to consider his options. “If prices fall, I will have to kill some more,” Mr. Pi said. “I just need to survive. What choice do I have?”
Other farmers in China have been dumping milk and culling cows as a dairy boom has swung to a bust over the course of three years. The impact is being felt beyond China, too, as farmers from the U.S. to Australia to New Zealand brace for price wars, smaller herds and cuts to income this year. New Zealand’s central bank says the drop in dairy prices is one of the biggest economic risks for the country, a big milk exporter.
The industry’s troubles illustrate China’s outsize sway over the world’s commodities. About three years ago, the country’s voracious demand for milk, baby formula and cheese led everyone from New Zealand farmers to Wall Street bankers to bet big on cows. Global milk production will be 8.6% higher this year than it was in 2011, according to estimates by the U.S. Agriculture Department.
ENLARGEThe price of milk powder on the trading platform GlobalDairyTrade, a benchmark for the global market, hit a six-year low at US$2,229 a metric ton on Dec. 2, down 55% from a year earlier. Prices have picked up by a little since then, but analysts foresee further declines.
“There was a miscalculation toward the end of 2013 among the milk industry that domestic milk supply was going to remain very tight,” Sandy Chen, a dairy analyst for Rabobank Group NV, an agribusiness lender, said of the Chinese market.
Similar scenes are playing out in the markets for commodities ranging from iron ore to coal and copper after years of bets by producers on Chinese demand.
The sharp swing has its roots in 2008, when tainted milk in China killed six children, injured thousands and put the dairy sector under scrutiny. In 2009 and 2010, Beijing began raising quality standards and forcibly folding some small farms into state-owned giants in a broad industry shake-up that continues today.
Even though Chinese milk demand was growing, production remained roughly flat. But in 2013, a second milk-safety scare forced a number of smaller farms out of the market, and domestic production fell by about 6% from 2012 to 35.3 million tons. By April that year, prices had zoomed to more than triple the level in June 2008, before the first milk-safety scandal.
Producers in New Zealand, the U.S. and elsewhere jumped in. China’s milk imports from New Zealand, which accounts for 80% of the milk the country buys from abroad, rose 47% to 622,000 tons in 2013 from a year earlier, according to the USDA. China’s remaining milk imports come mainly from Australia and Europe.
Farmers and investors began betting on continued strong demand. New Zealand’s central bank says dairy-related debt grew by nearly half to 35.52 billion New Zealand dollars (US$26.8 billion) as of June from the same month in 2008 as people poured more money into farms.
In 2008, the private-equity firm KKR & Co. joined a group thatinvested $150 million in China Modern Dairy Holdings Ltd. , which used the funds to help import thousands of head of cattle. A spokeswoman for KKR, which sold what was left of its stake last year, said it invested in Modern Dairy to meet “a social need” resulting from China’s food-safety challenges.
As milk prices soared toward record levels in mid 2013, small Chinese dairy farmers started to re-enter the market and expand. China’s milk production rose 5% to 36 million tons in 2014 from 2013.
In the first quarter of last year, China bought almost an entire year’s worth of imports, totaling 930,000 tons of milk powder. Then, with their stockpiles replenished, importers sharply reduced their buying, according to Renee Tai, an analyst at UOB Kay Hian Holdings, a Hong Kong financial services firm.
Global events worsened the blow from the decline in Chinese buying. When Russia banned imports of European food products in August in retaliation for international sanctions imposed over the Ukraine conflict, global markets were saddled with more unsold dairy products.
Prices plunged. By November, Chinese milk prices had fallen 50% compared with the start of the year. In December, Fonterra Cooperative Group Ltd. , a New Zealand dairy giant, slashed its forecast of the annual payment it will make to farmers by 44% to NZ$4.70 per kilogram of milk solids, the lowest proposed payout since the 2008-2009 season.
Toward the end of 2014, Chinese milk processors, which had resumed importing milk powder as prices fell, began to cancel contracts with farmers, or decline to renew them. Unable to find buyers, some small and midsize dairy farms dumped milk.
Huaxia Dairy Farm Ltd., a giant operation with 18,000 head of cattle just east of Beijing, has reduced its target for expanding its herd to 25,000 cows by the end of 2015 from an original goal of 30,000, said Charles Shao, the firm’s chairman. Mr. Shao said he is also “aggressively retiring” his cows—a euphemism for having them slaughtered early. “Today, I’d say I’m glad I didn’t go bigger,” he said.
Some farmers are taking the opportunity to change the way they do business. Wei Pu, who owns the 800-head Langfang City Delong Dairy Cow Breeding Ltd. in Hebei province, a major milk-producing area in China’s north, said he is focusing on breeding calves for meat as a way to reduce the farm’s dependence on milk.
For Mr. Pi, the farmer in Linli County, in Hunan province, killing his cows wasn’t a quick or easy call. The beasts have made him prosperous enough to tote an iPhone 6 and drive a Honda sport-utility vehicle. An affable man who sometimes speaks as if he is yelling, Mr. Pi tried to stave off the slaughter for seven months by freezing wage increases for his staff and trying unsuccessfully to get aid from the local government.
“Prices fell in April, then May, then June, then August, September, October and November,” Mr. Pi said. “By November, I started killing my cows.”
Source: WSJ
