Raw milk now costs more in China than almost any other country in the world, which is unsustainable in the long-term as domestic milk production ultimately competes against imports.
The high price paid is a reflection of both the lack of supply and the high cost of producing milk in China. Consumer demand continues to expand while milk supplies have languished during the past five years, increasing the supply shortage.
The changes in recent years have come as the industry tries to move forward from the melamine scandal of 2008. Worldwide media attention embarrassed China’s leaders and turned its public away from domestic milk brands, so processing companies are moving to source milk from large, corporate-style farms. Keeping tabs on milk quality on small farms and educating peasant farmers on milk safety standards is regarded as an impossible task.
The majority of China’s milk is now being produced by large farms, for which processing companies will pay a premium, and backyard farmers are expected to completely disappear within the next decade.
Chinese authorities are aiding the development of new dairy farms with subsidies and grants for developing farm buildings and milking plant, stock purchases and replacements, and artificial breeding. The degree of assistance varies from province to province as most of the subsidies are administered at local government level.
Local support is also usually required to obtain land for farm development and in some cases to secure feed supplies, as many farms don’t have enough land to grow feed. Purchased feed can make up as much as 90% of farm working expenses, posing a big risk to the ability to operate a profitable system unless farms continue to receive very high milk prices.
Concentrated feeds like dried distillers grain, cotton seed, soymeal, and corn are usually sourced locally. Access to quality forages is limited and many farms are choosing to source alfalfa and oat hay from overseas markets. While the United States is the main source of alfalfa, Spain has also recently been approved. Oat hay is imported mainly from Australia and the US.
Alfalfa hay is expected to be in short supply this season because of drought in California, where most of the crop is grown. Growing demand from China means alfalfa prices are likely to stay high well into next year.
Large dairy farms have made good profits in recent years with milk prices extremely high in 2013 because of the shortage of milk both domestically and in international markets. But prices have been tracking downwards since the beginning of the year. At their peak average milk prices in China exceeded RMB4.20/kg or $11/kg milksolids (MS) but have now fallen below $10/kg MS.
These official milk prices under-represent the returns large farms are receiving, as they generally receive a premium of 20% or more because of strong competition for supply.
It’s uncommon for dairy farms to have long-term supply contract with a particular processor unless there’s a financial interest in the farm. It’s also common for farms to supply milk to more than one dairy company, favouring farms during times of supply shortages, but exposing them to a high degree of risk if the market becomes over-supplied.
Milk is delivered to the factory by the farm, the processor, or a third party. Milk quality testing is usually done by the processor with no independent third-party testing. How stringent the milk quality rules are depends on the processor. National milk standards are well below New Zealand, with bacteria levels of up to two million/ml acceptable compared with 50,000 in NZ. There is no specific standard for somatic cell counts.
Wages are generally not high by international standards, although skilled staff members are usually very well paid because of a shortage of skilled farm managers and vets. The cost of the inexperienced workforce is reflected in very high rates of mastitis, lameness, extended periods between calving, and outbreaks of disease.
High prices for raw milk are eating into milk processing profits. In 2013 dairy companies were only making profits on high-margin products so they focused on premium-grade products, infant formula, and milk-based beverages that may contain very little milk.
The prices have also opened up the market to further competition from imported products. UHT milk is the largest consumer market, traditionally dominated by milk produced and processed in China, but consumers can now choose from a massive range of international brands. Imported UHT milk is very competitively priced, retailing at about $3-$4/litre, and is rapidly gaining market share.
This competition is putting further pressure on dairy processing companies, over which dairy farms have the upper hand. Some companies have financial interests in farming and in some cases these are held by employees of the processors, who may help set the high milk prices.
Many of the recently developed large dairy farms are now listed companies, with some criticised for inflating profit expectations and for the rapid exit of initial investors once shares are trading.
