“I have a dream to provide every Chinese, especially children, with sufficient milk each day,” former premier Wen Jiabao declared in 2006. Almost a decade on, it appears that Wen’s dream has not only come true but now there is enough milk to feed all the pigs in China too. According to CBN, in provinces like Hebei and Shandong – large production bases for dairy – pigs are now being fed fresh milk.
Why the new diet? Well, it has nothing to do with trying to make better pork. Plagued with oversupply, dairy prices have plummeted. Many farmers are now having to sell their milk at extremely low prices – sometimes to local pig farmers to reduce inventories.
But selling to pig farmers is not a long-term solution. “Those pig farmers who used to come here to buy milk have stopped recently. They say even if they want to buy more, pigs can’t digest so much lactose,” a dairy farmer told the Beijing Times.
Other dairy farmers simply throw the milk into the gutter – since they’ve few other means to deal with the supply glut. Some have even killed their cows to prevent further losses. “The cost of keeping them is just too high,” another farmer sighs. “No one can think of another option.”
The downturn has come as a surprise to the industry since, paradoxically, China is consuming more milk than ever.
Euromonitor, a market researcher, says dairy consumption has been growing about 10% a year, with demand for premium brands rising at around twice that rate.
As a result, China’s dairy prices were on a steady uptrend from 2013, thanks in part to a disease that hit supply as well as industry consolidation. Milk prices jumped to more than Rmb5 ($0.8) per kg in December 2013 from Rmb3.4 per kg a year earlier. The dairy boom prompted domestic farmers to invest heavily in cowsheds while purchasing large numbers of dairy cows to boost production.
But this boom proved to be short-lived. The market price for milk started to drop last March, when global milk prices fell drastically owing to high inventory levels around the world and a supply glut caused by Russia’s ban on US and European food imports.
Milk prices fell for 10 consecutive months starting in February 2014. In the first three quarters of last year, prices hovered around Rmb3.8 per kg down from Rmb4.3 per kg, and the trend showed no signs of stopping in the last three months of 2014, says the Ministry of Agriculture.
Local dairy experts calculate that is not enough to cover an average farmer’s cost of production.
Taking advantage of the global downturn, Chinese dairy companies have been buying large quantities of cheaper milk abroad – China’s annual dairy imports rose 36.5% in 2014 versus the year before. They, in turn, cut back purchases from small local suppliers, causing milk prices at home to drop even further.
Another reason dairy farmers are struggling is because large Chinese dairy brands – keen to ensure quality after so many scandals in the past – have also moved upstream and invested in their own farms, thus shunning local milk suppliers. Mengniu, for instance, has invested in 14 modern ranches and will invest further so that its facilities produce all the milk it needs within three years, says Century Weekly. Bright Dairy and Inner Mongolia Yili have also built ranches overseas.
That’s bad news for small-scale farmers, one of whom told Xinhua: “If we cannot get through the winter, our farm probably will shut.”
Meanwhile, industry observers counsel that as they wait for the cycle to turn, dairy farmers should strive to improve their milk quality – by using better feed, for example – if they want to survive.
“Only in this way can we prevent situations like dumping milk and create a prosperous dairy industry,” says Zhang Yuan, deputy director-general of the Dairy Association of China.
But while the current environment is proving tough for farmers, the drive to increase quality is a boon for China’s long-suffering consumers. Ironically the quality of the milk drunk by pigs today may well be higher than that which humans were drinking in early 2008 when the melamine scandal broke.
© ChinTell Ltd. All rights reserved.
Exclusively sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.