Every morning, retired forest worker Li Shulin and his wife get up at 5 am, milk the cattle in the shed, load the fresh milk on a truck, and drive to the nearby milk station to sell it to Swiss food giant Nestle, a major raw milk collector in the area.
Having raised cows for almost four years, Li says it’s getting harder to make a living, as the cost of forage is growing rapidly and dairy companies’ standards on milk collecting becoming tougher.
“The price of cow forage has risen much faster than the milk price during the past two years. Forage is now sold at 3,000 yuan per tonne already, which is nearly 20 per cent higher than a year ago,” said 60-year-old Li, who lives in a small village in the Hulunbuir Grassland in northern China’s Inner Mongolia region.
All dairy companies have adopted stricter inspection measures when collecting raw milk since a scandal involving melamine-tainted baby formula ravaged the nation’s dairy industry in 2008.
“Milk stations would reject your milk if they discover any suspicious chemicals or extra water in it,” said Li. Last year, the couple earned around 30,000 yuan on 10 cattle.
“Quite a number of cow-raising families in our village have quit. It’s much easier to make money by working as an employee in big cities, ” said Li. “But we are too old for big changes in our life.”
China’s dairy industry is undergoing a drastic transformation, with up to 40 per cent of farmers leaving the industry in the last two years, according to industry estimates. Domestic dairy makers such as China Mengniu Dairy, Inner Mongolia Yili Industrial Group and Shanghai-based Bright Dairy are spending billions of yuan to construct and invest in mid-to-large-scale ranches and are seeking to expand overseas for safe and stable milk supply.
Demand is outstripping the milk supply.
“China’s dairy industry is in the most painful period. The top priority for every player is their milk source,” said Song Liang, a senior dairy industry analyst of the Distribution Productivity Promotion Center of China Commerce, a Beijing-based think tank.
The milk shortage that has spread across the mainland China market since last November shows no sign of easing. “The milk shortage may last for another three to five years as more and more individual dairy farmers give up cow raising while big modern ranches are still under construction,” said Song, adding that a big-scale ranch would usually take 9 to 10 years to recover its costs.
According to China’s Association of Dairy, the country’s total milk yields fell a record 5.7 per cent to 35.3 million tonnes in 2013. The supply gap has since been filled by imported milk powder, mostly from New Zealand. The amount imported from that country soared 50 per cent to 854,000 tonnes last year and is expected to top one million tonnes in 2014.
A scramble for milk among dairy makers is definitely on.
Mengniu Dairy is an ambitious player in this area. It is now constructing eight large ranches in Inner Mongolia, Gansu, Hebei and Shandong provinces. During the past two years, it imported 14,000 cows from Australia and New Zealand and used dairy management systems from Denmark in its ranches.
Last year, Mengniu also increased its stake in the nation’s largest ranch operator, China Modern Dairy, by forking over HK$3.2 billion to become its biggest shareholder. The company also invested US$60 million in another dairy maker, Heilongjiang-based Yuan Sheng Tai Farm.
“By next year, 100 per cent of the raw milk used in our products will come from the ranches we built or work with,” said a Mengniu spokesman. Currently, this figure stands at 94 per cent.
Yili, China’s largest dairy manufacturer in terms of sales, is more active in expanding overseas. The company signed partnership agreements with Dairy Farmers of America, the number-one dairy company in the United States, and the Italian dairy maker Sterilgarda Alimenti during the past year. In addition, it invested 1.1 billion yuan to build a baby formula facility in New Zealand to take advantage of the rich milk resources in the country.
Likewise busy securing milk sources are Bright Dairy and Beijing Sanyuan Food. The former is in cooperation talks with Israeli dairy company Tnuva while the latter plans to expand its farms in Hebei and Shandong provinces.
Foreign players including Nestle and Fonterra of New Zealand also said they will construct more ranches in China.
Dong Mei, a partner of global advisory services firm KPMG, said almost every mid-to-large dairy company in China is mulling going into the international market.
“To acquire established ranches is of course their primary target. But this is very difficult considering many farms in foreign countries are owned by a large number of small dairy farmers who are often reluctant to sell. It’s also costly to transport fresh milk over long distances into China,” said Dong.
“Comparatively, it’s more common to set up a factory to take use of local raw milk resources or act as an agent for a foreign formula brand in the mainland market.”
Source: SCMP