By+Deng+Yaqing

‘Every morning， I prepare breakfast with fresh milk being a must，” said Li Jingyan， a 34-year-old housewife in Beijing， who believes dairy products supply a variety of nutrients.

“I just bought eight packs of Sanyuan milk， whose price has been on the increase since last December，” added Li， “Anyway， its still affordable.”

On December 28， 2013， Beijing Sanyuan Foods Co. Ltd. announced the decision to increase the prices of some dairy products by 5 percent from January 1， 2014， taking the lead in initiating another round of price rising.

“The price of a 234-milliliter （ml） packs of fresh milk was jacked up from 1.9 yuan（$0.31） to 2.2 yuan （$0.36）， while a box of 180-ml yoghurt was priced at 3.6 yuan （$0.6）， an increase of 0.5 yuan （$0.08），” said Lou Juan， a shopping guide at a Carrefour store in Haidian District of Beijing.

Not long ago， a cluster of major domestic dairy manufacturers performed three consecutive jumps in their pricing， with the final markup occurring in last December， when Sanyuan and Shanghai-based Bright Dairy raised prices by roughly 8 percent.

Behind the scenes

The countrys dairy industry has marched into a period of explosive expansion since the end of the 1990s. Per-capita domestic milk output soared from 5.3 kg in 1998 to 30 kg in 2010. Nonetheless， a shortage of milk still haunts the worlds most populous country.

“Despite the fact that Chinas dairy output has registered mushrooming growth in the past decades， if calculating by per- capita availability， the catch-up game is far from over，” said Chen Yu from the Dairy Association of China， noting the per-capita production of milk has surpassed 110 kg globally.

As modernization and urbanization have progressed， the growth of domestic demand for dairy products has outpaced the capacity of milk sources， resulting in a widening supply-demand gap and the following successive price increases.

The rise in the production cost of raw milk is another factor. For dairy farmers， fodder makes up a large part [nearly 70 percent] of the cost of cow breeding. To their dismay， the prices of major grains used in feeding cows， like corn and bean pulp， have run high over the past two years. For example， the price of alfalfa has gone up to 3，400 yuan（$562） from 3，000 yuan （$496） per ton over the previous year.

“Since most domestic cow breeders depend on imported forages， induced by the large demand from the Chinese market， overseas feed dealers tend to boost prices. Now， a great many foreign suppliers have fixed their eyes on the worlds largest dairy consumer country，” Lei Yongjun， a dairy analyst told Securities Daily.endprint

With profit margins being eroded by the rising cost of forage， labor and logistics， many dairy farmers had given up feeding cows， which in turn， has aggravated the milk scarcity， said Wang Dingmian， Director of the Guangzhou Dairy Industry Association.

Stricter rules and regulations， including the recently published Announcement on Prohibiting the Production of Infant Formula Milk Powder Through Contract， OEM and Subpackaging， have also wiped some small manufacturers from the dairy trade map.“This has further reduced the supply of dairy products in the Chinese market，” said Wang.

Aside from that， the Chinese Government has cut off supply from some milk sources in New Zealand since last August when bacteria that can cause botulism were discovered in dairy products manufactured by Fonterra， the worlds largest dairy exporter. This has also partly contributed to the current plight.

A way out

To eradicate the milk shortage， China needs to build up its own milk sources， said Chen.

Now， New Zealand is still the largest supplier of dairy products to China， while imports from Europe are expanding in leaps and bounds. According to New Zealand authorities， dairy products from New Zealand account for 40 percent of total infant food imports in China.

“Due to heavy dependence on foreign sources， domestic milk prices are sensitive to external changes. Once foreign suppliers lift the price of raw milk， domestic products are bound to go up，” said Chen.

In nurturing its own milk sources， China still has to surmount a contradictory obstacle.

Currently， domestic milk sources are mainly supported by small cow breeders and mega ranches run by giant companies. Such a production model has not only posed a severe challenge to the environment， but also put dairy farmers at greater risks， said Dang Guoying， an agricultural expert with the Chinese Academy of Social Sciences who argued if these milk magnates lowered prices， these farmers would be squeezed out of the business.

Song Liang， a senior dairy analyst from the Distribution Productivity Promotion Center of China Commerce Co. Ltd.， held that the government should boost subsidies on small and medium-sized cow breeders and encourage the development of dairy cooperatives. Meanwhile， farmers should be given more access to low-cost and low-risk loans in building up supporting facilities.endprint

“Dairy cooperatives and villages specialized in cow breeding should be promoted on a large scale to ensure stable supply of raw milk， because it is still unfeasible for many domestic dairy companies to build up their own milk sources，” said Zhao Jiuzhi， manager of milk source management department of Feihe International， Inc.， a dairy producer headquartered in Beijing.

Additionally， a new industrial model should be put in place， said Lin Yong， a member of the Xinjiang Committee of the Chinese Peoples Political Consultative Conference. He held that the dairy sector should undergo integration in order to realize standardized breeding.

“By mobilizing all concerned parties， including milk companies， cooperatives and farmers， an organic industrial chain will be created. In this way， facilities like breeding bases will be fully employed， and cow dung can return to local planting bases as organic fertilizer，” said Lin.

“But it may take at least a decade to complete the transformation，” said Song， providing a reminder that the problem of tight milk supply will still persist for years. After all， its a long process.endprint