Only qual­ity first can re­vive do­mes­tic dairies

China Daily (USA) - - VIEW -

More than half of China’s dairy farms are re­port­edly in­cur­ring losses be­cause of a steady de­cline in dairy prod­uct prices since early 2015. In­March, the num­ber of cows in stock dropped by nearly 12 per­cent year-on-year. And some dairy farm­ers culled their cows or fed un­sold fresh milk to pigs to re­duce their losses.

Chi­nese dairy farms are fac­ing this prob­lem be­cause their prod­ucts, de­spite be­ing over­stocked, cost more than im­ported ones. Im­ported milk pow­der, for ex­am­ple, re­port­edly cost 18,000 yuan ($2,700) per ton on av­er­age, while the do­mes­tic va­ri­eties can cost as much as 30,000 yuan a ton. Com­pound­ing the dairy farms’ prob­lem is the fall­ing con­sump­tion of dairy prod­ucts in China. The av­er­age an­nual in­crease in the sale of milk was 11.1 per­cent from 2006 to 2010, but it dropped al­most by half dur­ing the next five years.

The over­sup­ply of milk seems weird in a coun­try where the per capita con­sump­tion of dairy prod­ucts is only one-third of the world’s av­er­age. With more than 10 mil­lion cows in stock last year, the pro­duc­tion of fresh milk and dairy prod­ucts reached more than 38 mil­lion tons and 27 mil­lion tons, mak­ing China’s out­put of dairy prod­ucts the third-largest in the world.

The prices of dairy prod­ucts, like that of other an­i­mal hus­bandry prod­ucts, lack elas­tic­ity. In other words, the dairy in­dus­try ex­pe­ri­ences pe­ri­odic cy­cles— from cut­ting prices be­cause of over­stock and culling cows to re­duce losses to in­creas­ing milk price and re­pur­chas­ing cows, and end­ing with an­other round of over­ca­pac­ity.

Sell­ing milk is ar­guably the trickiest part of the dairy in­dus­try’s chain. Chi­nese dairy farm­ers will suf­fer when ex­ported milk cost much less than that pro­duced do­mes­ti­cally. Be­sides, many con­sumers have be­come skep­ti­cal of do­mes­tic dairy prod­ucts af­ter the 2008 scan­dal— in­fant for­mula adul­ter­ated with melamine that left at least four ba­bies dead and thou­sands se­ri­ously ill. And thus peo­ple are more likely to buy for­eign milk prod­ucts, es­pe­cially for infants.

How­ever, that does not mean China’s dairy in­dus­try is doomed, be­cause among the ru­ral pop­u­la­tion, which ac­counts for al­most half of the coun­try’s to­tal, only a few have the lux­ury or the habit of drink­ing milk. Their de­mand re­mains un­tapped and could be huge.

What Chi­nese dairies should do is to re­store cus­tomers’ faith in their prod­ucts. The truth is, the qual­ity of do­mes­tic milk prod­ucts has im­proved sub­stan­tially. About 99.67 per­cent of the dairy prod­ucts mea­sured up to govern­ment stan­dards last year, and no il­le­gal ad­di­tives, such as melamine, have been de­tected in fresh milk over the past seven years, ac­cord­ing to a re­port is­sued by the Dairy As­so­ci­a­tion of China in Au­gust. To con­vince con­sumers of this re­as­sur­ing change, the dairy in­dus­try has to use ef­fec­tive pro­mo­tion.

Bet­ter man­age­ment and stream­lined oper­a­tions are im­por­tant, too, in re­sus­ci­tat­ing China’s dairy mar­ket. To do that, dairies have to op­ti­mize the di­vi­sion of la­bor, more closely in­te­grate dairy farm­ing and pro­duc­tion, and pro­vide proper train­ing to dairy farm­ers. The es­tab­lish­ment of the D20 Al­liance, com­pris­ing 20 lead­ing Chi­nese dairy com­pa­nies last year, is a promising start in this di­rec­tion.

It is also worth not­ing that China’s dairy farm­ing is un­der­go­ing a change that will see the exit of small dairies which only own a lim­ited num­ber of free-range cows. Of­fer­ing dairy in­surance and sub­si­dies to the strug­gling farm­ers, or erect­ing trade bar­ri­ers against im­ported dairy prod­ucts, will make lit­tle dif­fer­ence to the mar­ket’s de­ci­sions. The au­thor is a pro­fes­sor at the School of In­ter­na­tional Trade and Eco­nom­ics, Uni­ver­sity of In­ter­na­tional Busi­ness and Eco­nom­ics, Bei­jing.

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