Dinghuan Hu
Agricultural Economic Research Institute,
Chinese Academy of Agriculture Science
Beijing
China ’s population represents one-fifth of the global total, but total dairy product output accounts for only 4 percent of world production. Since the beginning of the twentieth-first century, however, the industry has been rapidly growing. Dairy product production jumped exponentially, from 9.2 million tonnes in 2000 to 33.7 million tonnes in 2006 (Figure 1). This striking development of the dairy industry has allowed the industry to fill the increasing domestic consumption demands and, more importantly, to provide employment and increased income for small farming households.9
This case study identifies the factors affecting China’s dairy industry, reviews the implications for smallholder dairy farmers and offers suggestions on how to link them to the growth in demand. It is quite possible that some of the lessons learned in China, within the context of the industry’s history and the current situation, will be helpful in linking small producers to markets in other Asian developing countries.
Figure 1: Milk output in China, 1980–2006
Source: Chinese statistical yearbook
The economic reforms that began in the 1970s laid the foundations for a rapid development of the Chinese economy in general as well as the dairy industry. In 1980, total milk output was 1.4 million tonnes; by 2006, it had swelled to 33 million tonnes, with per capita consumption of milk rising from 1 kg to 25 kg over the same period (Figure 2).
There is a major difference in consumption of dairy products between urban and rural residents. The per capita consumption of dairy products among urban residents was nearly 6 kg in 1992, increasing to 18 kg by 2006. Among rural residents, the per capita consumption increased from 1 kg to 3 kg over the same period. The per capita consumption of dairy products of rural residents averaged only 17 percent of that of urban residents by 2006. Rural residents’ consumption of dairy products is mainly constrained by low incomes but also by a limited tradition of fresh milk consumption (Hu, Fuller and Readron, 2005).
Figure 2: Per capita consumption of dairy products in rural and urban households
Source: Chinese statistical yearbook
From the 1970s to the beginning of the current century, the development of China’s dairy industry can be broken down in three phases: i) the urban dairy industry phase, ii) the dairy industry phase in northern China and iii) the multi-modal dairy industry phase.
Urban dairy industry phase
Urban dairy development is also called the “urban suburbs dairy industry”, which refers to the dependence on raw milk from suburban dairy farms (or nearby regions, including dairy cattle husbandry by rural households near medium- and large-sized cities) for the manufacture of dairy products consumed by urban residents (Xu Ji et al., 1991). Traditionally, apart from minority ethnic nationalities inhabiting western pastoral regions, the Han nationality (representing 95 percent of China’s total population) do not a cultural tradition of consuming milk and other dairy products (Chen Zhao, 2001).
Initially, the practice of raising dairy cattle was to meet foreigners’ demand for dairy products, with most of the cattle transported from Europe . With most foreigners inhabiting coastal cities, the early urban dairy industry concentrated there. Shanghai was one of the five open coastal cities in 1842. Special-purpose dairy cattle breeds were introduced to Shanghai from Europe before 1870 (Dong Debao et al ., 2000). In Tianjin , foreign missionaries brought the dairy cattle in the late nineteenth century ( Wang Shugui , 2000), while foreign residents from Japan and Russia brought their cattle to Dalian City during the Japan–Russia War (Dalian City Dairy Products Project Office, 2000).
Influenced by the consumption habits of those foreigners, the Chinese urban residents realized the nutritional benefits of dairy products. This was reinforced by the changing food consumption tendencies of Chinese who lived abroad. The number of people drinking milk increased, generating dairy product markets in medium- and large-sized cities (Li Yifang, 1998). Chinese- and foreigner-operated dairy farms as well as rural households in the suburbs of the large cities supplied the raw milk for the urban demand (Dong Debao, 2000; Liu Yuanying, 2000). In 1956, the Government started its private-ownership reforms, and dairy cattle raised by private entrepreneurs were transferred to farms affiliated with the state-owned dairy-processing enterprises or to state farms in the suburbs (Wang Shugui, 2000).
Between 1949 and 1979, the growth rate of the Chinese raw milk supply slowed, increasing at an annual rate of 5 percent and increasing from 210 000 tonnes in 1949 to almost a million tonnes by 1979. The slowed growth was attributed to inadequate marketing systems and an inadequate feed supply. Because the supply of dairy products could not meet consumption requirements, the Government implemented an allocation system to ensure that old people, babies, medical patients and officials of a certain grade level were adequately supplied. There were no similar guarantees in small-sized cities and rural areas (Tuo Guozhu, 2000). It wasn’t until the 1980s that rapid growth of the urban dairy industry took off.
Factors underpinning urban dairy development
Multiple factors triggered the rapid development: macro-economic issues, government policies and international assistance. Initially, rising urban incomes supported a growing demand for dairy products. The gap between consumption and production grew, and in cities, especially large cities, the fresh milk supply situation became “very tense” (Xu Ji et al., 1991). To reduce these imbalances, the Government adopted policies to increase the productive capacity of the urban dairy industry. This included allowing private players to raise dairy cattle and contribute to the milk supply, thus breaking the single state-ownership monopoly ( Tuo Guozhu , 2000).
To increase the purchase price of raw milk, the Government introduced milk price subsidies, which also stimulated the growth in milk consumption (Liu Yuanying, 2000). In addition, the Government invested a large amount of funds to further develop the industry. For example, the Beijing municipal government allocated US$400 000 annually as a special fund to support dairy cattle development. It provided subsidies for cattle shed renovations and for new equipment on dairy farms (Liu Yuanying, 2000).
In the 1980s, China encountered imbalances in its grain supply, and some cities adopted the policy of exchanging grain for milk. In other words, the Government provided dairy farmers with a certain proportion of feed, based on the number of dairy cattle they owned (Chongqing Municipal Dairy Industry Administration Office, 2000). In addition, the Government adopted support policies that favoured suburban rural households raising dairy cattle (Ouyang Qian, 2000).
International assistance also played an active role in the industry development, thus increasing the milk supply. Approximately 20 medium- and large-sized cities received a total of $156 million from the World Food Programme (WFP) and the European Economic Community (Tuo Guozhu, 2000).
Prior to the 1990s, the major products in large cities, such as Beijing, Shanghai, Tianjin, Dalian, Nanjing, and Kunming, were pasteurized milk and small quantities of milk powder. Due to the limited supply of fresh milk, pasteurized milk provided the only form of liquid milk to urban residents.
Even though China was moving towards a market economy as of the early 1990s, people’s lifestyles were still fairly regulated. That situation combined with the limited selection of products and the lack of refrigeration resulted in the habit of drinking milk only in the morning. Dairy processing enterprises have since developed sophisticated distribution systems, providing milk to consumers at any time.
However, since the 1990s, the growth rate of the urban dairy industry supply has declined. In Beijing, for example, dairy product output in 1990 was 77 000 tonnes. By 1999, it was only 129 000 tonnes, with an annual growth rate of 0.46 percent. In many cities, the annual growth rate has averaged less than 1 percent, far below the growth rate of double-digit gains during the 1985–1990 period: 11.8 percent in Beijing, 12 percent in Shanghai and 15 percent in Tianjin.
The falling growth in urban dairy systems is attributed to the following factors:
The dairy industry phase in northern China (1980–2000)
China’s overall raw milk supply has not declined in the context of lower urban or peri-urban availability. Rather, the North China agricultural region gradually became the major source of raw milk to dairy processors in the country. The North China agricultural region refers to the crop cultivation zone north of the Yellow River, especially those located in Inner Mongolia Autonomous Region and Heilongjiang and Hebei provinces.11 In 1975, the raw milk output of those three areas totalled less than a million tonnes and accounted for only 13 percent of the national total. By 1985, the regional output more than doubled, to 2.4 million tonnes and then rose to 10.7 million tonnes a decade later. In 2006, the total output of the three areas jumped to 18 million tonnes, or more than half of the national output (Table 1).
Table 1: Raw milk output in the North China agricultural region
|
1975 |
1980 |
1985 |
1990 |
1995 |
2000 |
2005 |
2006 | |
|
Output (100 t) |
||||||||
|
Inner Mongolia |
645 |
702 |
2 590 |
3 960 |
5 120 |
8 300 |
6 969 |
8 805 |
|
Hebei |
216 |
265 |
1 000 |
1 430 |
3 890 |
9 620 |
3 486 |
4 170 |
|
Heilongjiang |
130 |
1 385 |
1 540 |
1 027 |
1 666 |
1 565 |
4 442 |
4 646 |
|
Total |
991 |
2 352 |
5 130 |
6 417 |
10 676 |
19 485 |
14 897 |
17 621 |
|
National |
7 552 |
13 422 |
28 940 |
47 510 |
67 260 |
91 890 |
28 648 |
33 663 |
|
Ratio (%） |
||||||||
|
nner Mongolia |
8.5 |
5.2 |
8.9 |
8.3 |
7.6 |
9.0 |
24.3 |
26.2 |
|
Hebei |
2.9 |
2.0 |
3.5 |
3.0 |
5.8 |
10.5 |
12.2 |
12.4 |
|
Heilongjiang |
1.7 |
10.3 |
5.3 |
2.2 |
2.5 |
1.7 |
15.5 |
13.8 |
|
Total |
13.1 |
17.5 |
17.7 |
13.5 |
15.9 |
21.2 |
52.0 |
52.3 |
|
National |
100 |
100 |
100 |
100 |
100 |
100 |
100 |
100 |
Source: China dairy statistical report, Department of China Dairy Yearbook | ||||||||
The remarkable and rapid development of the dairy industry in these three areas can be attributed to many reasons favouring competitiveness and production. Compared with dairy husbandry in the suburbs or even in some of the agricultural regions south of the Yellow River, these areas have encouraging conditions for dairy cattle husbandry. Per capita farmland availability in Heilongjiang and Inner Mongolia is 0.6 h and 0.5 h, respectively, exceeding the national average by 0.3 h. It is certainly far larger than the per capita farmland in the suburbs of Beijing, Shanghai and Tianjin (0.2 h, 0.1 h and 0.3 h, respectively). These three areas have fairly abundant labour resources and low wages. For example, the proportion of the population of rural residents engaged off-farm is 18 percent (Hebei), 11 percent (Heilongjiang) and 10 percent (Inner Mongolia), compared with 74 percent in Shanghai, 66 percent in Beijing and 54 percent in Tianjin.12
Wage rates also play a decisive role in determining the production cost of raw milk. At $400, the per capita income in the North China agricultural region is lower than in the suburbs and among rural residents in South China . In Beijing , Jiangsu , Shanghai , Tianjin and Zhejiang , it ranges from $627 to $883. As well, air temperature influences a cow’s milk production; the average temperature in North China is more than 3°C lower than in South China .
Additional factors supporting dairy development in the North China agricultural region: i) Dairy product consumption in medium- and large-sized cities has exceeded the development pace of urban dairy industries. ii) Local governments have adopted policies to promote industry development. iii) Investment in dairy-processing enterprises has increased. iv) Available credit, foreign investment and access to technology also have increased.
Growth in dairy consumption prompts a regional shift in dairy production
From 1992 to 2000, the annual average growth rate of the raw milk supply was 3 percent in Beijing, 9 percent in Tianjin and 0.8 percent in Shanghai. However, during the same period, expenditure on dairy products in those three cities grew at an annual average rate of 52 percent, 33 percent and 29 percent, respectively. The gap between supply and demand has created conditions for dairy products from other regions to enter the urban markets.
Local policies support the process
The financing of local governments in China is heavily reliant on local taxation. This dependency has prompted local governments to actively develop and attract outside businesses to local regions through tax policies. In the coastal regions in South China, due to their existing industrial base, local governments have initiated policies on taxation in town and village enterprises (TVEs). At the same time, they have absorbed rural labourers in large quantities so as to increase the income of rural residents (Sonobe, Hu, Otsuka, 2002; Hu, 2003).
In the North China agricultural region, which lacked an industrial base as of the 1980s, the local governments pushed to develop the local dairy industry through policy and capital support. For example, the government of Inner Mongolia listed the dairy product processing industry as the leading sector of the whole autonomous region. From 1980 to 1985, total investment in dairy product processing was $11 million, and the autonomous region initiated the technical transformation and expansion of 25 dairy-processing enterprises (E. Guangyu, 2000). The governments of Shijiazhuang City and Tangshan City in Hebei province perceived the dairy industry as a “pillar” for development in general and made use of preferential policies to support the dairy industry and leading enterprises, encourage rural farmers in dairy cow husbandry and attract outside investment. To encourage more enterprise investment, those city governments reduced by half, over a five-year period, the local portion of the income tax required for production, dairy product processing and feed-processing enterprises. As well, investment initiatives of more than $3.75 million were exempted from land-use taxation, and land rent fees were reduced by half (MOA Dairy Industry Project Office, 2004).
The original dairy-processing enterprises in the North China agricultural region were small in scale with limited processing capacity. For example, in 1978, Heilongjiang province had 34 dairy-processing enterprises, with a daily processing fresh milk capacity of 340 tonnes, or an average daily processing capacity of only 10 tonnes per enterprise (Zhang Xiulan, 2000). In Hebei province, the daily fresh milk-processing capacity (excluding Sanlu Dairy Group) was less than 5 tonnes (Ju Guoquan, 2000).
Dairy product processing expansion in Inner Mongolia
By 1987, the number of dairy-processing enterprises in Inner Mongolia had increased to over 100. However, with limited market access to the high-demand areas in China, more than half of the processing capacity was not used (E. Guangyu, 2000). For instance, the Huhhot Hui Nationality Food Processing Plant (which later became the Yili Industrial Group (Yili Group)) had total fixed assets of only $8 000, consisting of small factories and hand-made workshops. With the change in management came multiple system reforms. In 1993, the Yili Group became an equity enterprise, and in 1996, its stock was sold on the Shanghai Stock Exchange Institute. By going public, Yili leveraged funds urgently needed for expansion; its revenues reached $106 million, generating profit of $8.2 million. That expansion contributed to the daily fresh milk-processing capacity in Inner Mongolia reaching 2 900 tonnes (Yili Group, 1999, 2003).
The China Meng Niu Dairy (later called the Inner Mongolia Meng Niu Dairy or Meng Niu Group) was established in July 1999 as a dairy-processing enterprise with high-level administrators and technicians taken from the Yili Group and with investment funds of only $1.25 million. Adopting a strategy of “establishing the market first and then establishing the factory”, the sales of Meng Niu dairy products increased from $5 million in 1999 to $263 million in 2002. Its fresh milk daily processing capacity increased by 1 700 tonnes ( Niu Gensheng , 2003).
The successful processing enterprises also included the Wandashan Dairy in Heilongjiang province ( Zheng Xinmin , 2003) and Sanlu Dairy Group Co.13 of Shijiazhuang in Hebei province ( Gao Yucheng , 2003). These enterprises absorbed local resources and, with loans,expanded their processing capacity while establishing milking stations. They additionally expanded dairy husbandry to increase the fluid milk supply in the region (Hu, 2005).
Financial support for industry expansion
Large quantities of capital funds have been invested into the dairy-processing enterprises in the North China agricultural region. Having listed on the Chinese exchange in 1996, Yili’s stock had acquired $49 million from capital markets as of end 2003 (Yili, 2004). Meng Niu procured a total of $1.706 billion from the Hong Kong stock market (Xie Baokang, Cheng Dong, 2004). The investment has provided enterprises in the region with adequate funds to expand factories, invest in modern equipment and technologies, assist rural households in dairy cattle husbandry in surrounding regions to expand their milk supply and develop sophisticated product-marketing strategies.
Foreign capital entered the North China agricultural region through joint ventures, establishing processing enterprises and making use of the local resource advantages to benefit from the growing demand for dairy products throughout the country. The Shuangcheng Nestlé Co. is a joint venture between the Swiss Nestlé Co. and Shuangcheng Dairy and Food Industry Co., producing milk powder as its major product. Total investment, generating an average daily fresh milk processing capacity of 900 tonnes, has increased from $10 million to $75.8 million. The three international financial institutions of Morgan Stanley, Yinglian Investment and Dinghui Investment injected funds into the enterprise in October 2002 and October 2003. In the first-round capital increment, those three institutions provided a total of $26 million, drawn from companies abroad; in the second round, they invested a total of $35 million (Yu Yongfang, 2005).
New technologies open markets
The dairy industry in the North China agricultural region started to grow in the 1980s. This movement has linked to the growing demand in the South China market where the per capita income was higher, particularly in medium- and large-sized cities. At that time, the major product was milk powder due to restricting transportation conditions and the lack of cold chain facilities. The proportion of national milk powder produced in the region was 58 percent in 1982, rising to 78 percent by 1991. However, it declined to 69 percent by 1997 (Nan Qingxian, Lu Ling, 2000). Dairy product supplies from the North China agricultural region currently dominate national production.
Through the production of processed milk powder, the abundant raw milk resources in the North China agricultural region were tapped, but it had disadvantages. In particular, the use of milk powder was not very convenient and the taste was not perceived as good as liquid milk. More importantly, many urban consumers believed that milk powder was not as nutritious as liquid milk (Guo Benheng, Zheng Xiaoping, 2000). These perceptions restricted further growth of milk powder consumption and created a surplus. By end 1997, 50 000 tonnes of milk powder were in stock, accounting for 15 percent of the total national milk powder output. This resulted in financial difficulties for some small- and medium-scale processing enterprises, in some cases even bankruptcy, which impacted the income of dairy farms and dairy cow-raising households that provided raw milk to those enterprises (Tuo Guozhu, 1999).
At that time, however, the dairy industry in North China identified a new development opportunity: ultra-high temperature (UHT) processing technology. Introduced by foreign enterprises to meet the demand of high-income consumers, UHT technology fed on large quantities of raw milk to eventually produce low-cost milk products. Initially, the products were more expensive and thus of little interest to consumers in medium- and large-sized markets (Hu, 2005). The Yili Group began using UHT processing equipment from the Swedish Tetra Laval Holdings & Finance SA in 1996, going into production a year later. Reward came swift. By second quarter 1998, UHT milk was in strong demand among consumers in medium- and large-sized cities (Sun Xianhong, Zhang Zhiguo, 2006). Meng Niu acquired its UHT technology in 1999; a year later it adopted new packaging, developed by the same Swedish company. Although it reduced the cost of the final product, its shelf life also reduced, from the original 6 months to 45 days. The low-cost UHT milk enabled Meng Niu to enhance its competitiveness and expand its market share in medium- and large-sized cities (Sun Xianhong, Zhang Zhiguo, 2006).
According to the China Association of Dairy Product Industry, the output of UHT milk increased from 2 million tonnes in 1999 to 3.8 million tonnes in 2000 and to a remarkable 48 million tonnes in 2004. Its share of liquid milk output increased from one-fifth in 1999 to nearly 60 percent by 2004 (Table 2).
Table 2: The output and proportion of liquid milk variety in China14
|
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
|
|
Output (’000s) |
||||||
|
Pasteurized milk |
5 815 |
8 291 |
6 965 |
10 485 |
12 549 |
18 470 |
|
UHT |
2 045 |
3 785 |
7 146 |
15 397 |
31 987 |
47 820 |
|
Yoghurt and other |
1 640 |
2 827 |
4 126 |
7 520 |
9 030 |
14 380 |
|
Total |
9 500 |
14 903 |
18 237 |
33 402 |
53 566 |
80 670 |
|
Proportion (%) |
||||||
|
Pasteurized milk |
61.2 |
55.6 |
38.2 |
31.4 |
23.4 |
22.9 |
|
UHT |
21.5 |
25.4 |
39.2 |
46.1 |
59.7 |
59.3 |
|
Yoghurt and other |
17.3 |
19 |
22.6 |
22.5 |
16.9 |
17.8 |
|
Total |
100 |
100 |
100 |
100 |
100 |
100 | Source: China Dairy Industry Association |
The rapid expansion of UHT milk in China resulted from several conditions:
The UHT technology was instrumental in opening markets to the dairy-processing enterprises in North China and thus to the region’s rapid development of dairy cow husbandry (Hu, 2005). Having a good resource base and competitively produced milk allowed the region to dominate in the liquid milk market and become competitive with urban processing enterprises. Yili is now the second-largest and Meng Niu the third-largest dairy-processing enterprises in China, behind the Shanghai Bright Dairy.
Multi-modal dairy industry phase (2000 to the present)
Since 2000 and supported by the sustainable and high-speed development of the dairy sector, the market in China has gradually changed from one of shortage to relative surplus (Tuo Guozhu, 2000). There have been two primary supporting factors: first, local economies and governments adopted accommodating policies, which resulted in dairy-processing enterprises expanding investment that pushed production beyond consumption. According to the China Association of Dairy Industry, by 2002 the capacity of the national dairy-processing industry exceeded the country’s processing needs by 30 percent (Fang Yousheng, 2003). Second, heightened competition to capture greater market share led dairy-processing enterprises to reduce prices (Yi Chengjie, 2004). Thus the small enterprises that operated with obsolete equipment and backward technology, were poorly managed and lacked product competitiveness were forced out of business (Tuo Guozhu, 2000). It was at this point that China’s dairy industry entered into a multi-modal development phase: dairy industry restructuring became characterized by integration and asset recombination.
The first development in this multi-modal industry phase was a linking between, or gradual integration of, dairy enterprises in the North China agricultural region and urban dairy enterprises , leading to a gradual disappearance of enterprise borders. The original urban dairy enterprises started to feel pressure as Meng Niu , Yili, Sanlu, Wandashan, etc. entered into markets of medium- and large-sized cities with their UHT milk and milk powder. Peri-urban dairy enterprises that had certain scale and market share quickly adapted their original strategy of safeguarding suburban resources through sales of pasteurized milk and started to explore foreign, export markets. During this period, the Shanghai Bright Dairy formed its development strategy of “using national resources to explore the national market” ( Wang Jiafen , 2002). Here, “resources” refer to the milk supply in Heilongjiang province and Inner Mongolia . By building dairy-processing factories in North China , where the milk source is abundant, the Bright Dairy procured its low-cost raw milk. The “national market” refers to cities beyond Shanghai . In 2002, Bright Dairy’s share of total milk sales beyond Shanghai reached more than 60 percent ( Wang Jiafen , 2003).
By 2004, Bright Dairy operated 14 dairy-processing factories in 11 provinces and autonomous regions beyond Shanghai. Currently, it has a total daily milk-processing capacity of 6 508 tonnes (including dairy product processing plants in Shanghai). Its major milk source is North China, specifically from processing factories in Inner Mongolia (UHT milk) and Heilongjiang province (milk powder). Obviously, accessing resources enabled Bright Dairy to compete with the Meng Niu and Yili enterprises in North China.
Bright Dairy also has processing factories in Beijing and Tianjin, with major products consisting of pasteurized milk, yogurt and dairy beverages. Its aim is to seize the dairy markets in other cities. And it has processing factories in Jiangsu, Henan, Hubei, Hunan, Guangdong and Shaanxi to make use of local raw milk resources and thus dominate the markets in those cities.
The Beijing Sanyuan Group Foods in Beijing also has established a factory in Inner Mongolia, producing UHT milk, milk powder and yogurt. The company has a factory in Shanghai to produce pasteurized milk, yogurt and dairy beverage that compete with the Bright Dairy. The Nanjing Weigang Dairy Group in Nanjing, Jiangsu province, operates processing factories in Shanghai and in Anhui and Jiangxi provinces to expand its market share in those areas (Table 3).
Table 3: Distribution of factories of China’s top eight dairy-processing enterprises
|
Enterprise |
District |
No. of processing factories |
Daily processing capability (tonnes) |
Main products |
|||||
|
Fresh milk |
UHT |
Yogurt |
Dairy drink |
Milk powder |
Others |
||||
|
Sanyuan |
Beijing |
7 |
1 227 |
* |
* |
* |
* |
* |
|
|
Tianjin |
1 |
100 |
* |
||||||
|
Inner Mongolia |
2 |
350 |
* |
* |
* |
* |
|||
|
Shanghai |
2 |
130 |
* |
|
* |
* |
|||
|
Bright Dairy |
Beijing |
4 |
360 |
* |
* |
* |
|||
|
Tianjin |
1 |
300 |
* |
* |
|||||
|
Heilongjiang |
1 |
1 000 |
* |
* |
|||||
|
Inner Mongolia |
1 |
350 |
* |
||||||
|
Shanghai |
4 |
3 750 |
* |
* |
* |
* |
* |
||
|
Jiangsu |
2 |
250 |
* |
* |
* |
||||
|
Henan |
1 |
140 |
* |
* |
* |
||||
|
Hubei |
1 |
128 |
* |
* |
* |
* |
|||
|
Hunan |
1 |
80 |
* |
* |
|||||
|
Guangdong |
1 |
300 |
* |
* |
* |
||||
|
Shanxi |
1 |
200 |
* |
* |
|||||
|
Meng Niu |
Beijing |
1 |
250 |
* |
* |
||||
|
Inner Mongolia |
2 |
5 700 |
* |
* |
|||||
|
Henan |
1 |
800 |
* |
* |
|||||
|
Yili |
Beijing |
1 |
500 |
* |
* |
* |
|||
|
Hebei |
2 |
360 |
* |
* |
* |
||||
|
Inner Mongolia |
2 |
5 600 |
* |
* |
* |
||||
|
Shanghai |
1 |
280 |
* |
* |
* |
||||
|
Heilongjiang |
2 |
240 |
* |
* |
|||||
|
Shanxi |
1 |
800 |
* |
* |
|||||
|
Wandashan |
Tianjin |
1 |
350 |
* |
* |
||||
|
Liaoning |
1 |
150 |
* |
* |
|||||
|
Heilongjiang |
1 |
1 200 |
* |
* |
|||||
|
Weiwei |
Jiangsu |
1 |
560 |
* |
* |
||||
|
Shandong |
2 |
600 |
* |
* |
* |
* |
|||
|
Shanxi |
1 |
180 |
* |
* |
* |
||||
|
Sanlu |
Hebei |
10 |
3 660 |
* |
* |
* |
* |
* |
* |
|
Henan |
1 |
460 |
* |
* |
* |
||||
|
Weigang |
Shanghai |
1 |
50 |
* |
|||||
|
Jiangsu |
4 |
500 |
* |
* |
* |
* |
* |
||
|
Anhui |
1 |
50 |
* |
||||||
|
Jiangxi |
1 |
70 |
* |
* |
* |
* |
|||
Source: China dairy statistical report,2005, Department of China Dairy Yearbook | |||||||||
The Yili Group went on to open factories in Beijing and bought a processing enterprise in Shanghai to produce pasteurized milk, yogurt, dairy beverages and ice cream and thus avoid long-distance transportation requirements. The Meng Niu Group has broadened its production to include yogurt and dairy beverages.
The second development in the multi-modal industry phase was the expanding diversity of dairy products . Since 2000, choice among dairy products in China has increased very rapidly. In 2003, a variety investigation by the China Association of Dairy Industry found a total of 381 dairy products produced by different manufacturers on the shelves in the Huapu, Jingkelong and 11 other supermarkets in Beijing . They included 45 types of pasteurized milk, 45 UHT milk choices, 111 types of yogurt, 62 different whole milk powders, 8 sugar-added whole milk powder varieties, 16 skimmed milk powder types and 94 different baby formulated milk powders ( Li Yifang , 2003). In January 2006, students at the Graduate School of the Chinese Academy of Agricultural Sciences conducted a survey on liquid milk marketing in nine supermarkets in Beijing . They found that, on average, each supermarket offered 167 varieties of liquid milk, consisting of 6 types of pasteurized milk, 32 UHT milk varieties, 93 different types of yogurts and 36 distinct dairy beverages (Table 4).
Table 4: The variety of dairy products sold in nine Beijing supermarkets
|
Supermarket |
Area of shopping |
Food area size |
Total products varieties |
Area of frozen dairy products |
Area of fresh dairy products |
Varieties of dairy products |
|
|
sq m |
No. |
sq m |
No. |
||
|
Carrefour |
16 000 |
4 500 |
22 000 |
155 |
220 |
181 |
|
Wal-Mart |
18 000 |
5 000 |
20 000 |
120 |
180 |
272 |
|
Lotus |
12 600 |
3 500 |
18 000 |
80 |
150 |
127 |
|
Chengxiangcangchu |
2 500 |
1 200 |
5 100 |
35 |
50 |
190 |
|
Chaoshifa,Shuangan Store |
700 |
550 |
3 000 |
25 |
30 |
179 |
|
Champion |
3 000 |
2 000 |
4 500 |
80 |
120 |
126 |
|
Chaoshifa Shuangyushu Store |
3 960 |
1 800 |
6 000 |
30 |
50 |
182 |
|
Chaoshifa Nongkeyuan Store |
1 560 |
780 |
4 200 |
20 |
30 |
126 |
|
Xidan |
4500 |
1700 |
4200 |
50 |
70 |
124 |
Source: Survey data by the author and students, February 2006 | ||||||
The rapid increase of dairy product varieties is in response to strong competition for dairy products by consumers, with each “large-scale dairy product processing company relying on the development of new products to expand their market and increase the added value of dairy products to obtain even higher return” (Du Binhua, 2003).
The third dimension of the multi-modal industry phase was the concentrating of dairy-processing capacity in large-scale enterprises . The number of dairy-processing enterprises with a capacity of more than 50 tonnes per day was 698 in 2005 and 717 in 2006, generating total sales of $6.1 billion and $7.7 billion, respectively. The top-ten ranking of these enterprises, according to sales, are Yili, Meng Niu, Sanlu, Bright Dairy, Mead Johnson, Jiaobao, Wandashan, Taizinai and Yahua. The total sales of those ten top enterprises were $6.1 billion in 2005 and $7.7 billion in 2006. Although those ten enterprises represented less than 2 percent of the total number of dairy-processing enterprises in China also in 2005 and 2006, their combined sales exceeded more than half of the total dairy product sales (Table 5).
Table 5: The total sales of the top-ten dairy-processing enterprises (unit: US$ million)
|
Enterprise name |
2005 |
2006 |
|
Yili |
1 623.3 |
2 178.5 |
|
Meng Niu |
1 443.3 |
2 166.1 |
|
Sanlu |
993.9 |
1 158.0 |
|
Bright |
920.5 |
961.7 |
|
Meadjohnson |
200.0 |
266.7 |
|
Jiabao |
254.4 |
254.4 |
|
Shuangcheng Nestlé |
360.0 |
244.7 |
|
Wandashan |
200.0 |
206.7 |
|
Taizinai |
62.7 |
156.8 |
|
Yahua |
38.1 |
145.7 |
|
Total |
6 096.3 |
7 739.3 |
|
National gross sales |
11 491.1 |
13 885.6 |
|
Proportion of national gross sales (of the 10) (%) |
53.1 |
55.7 |
Source: China dairy statistical report, 2006 and 2007 | ||
The fourth development is that in order to seize the market, the dairy-processing enterprises had to hugely invest in marketing and advertising to improve their products’ image among consumers. According to ACNielsen, total advertising expenditure for dairy products in January–October 2003 was $353 million. Of that, Fujian Changfu Milk spent $11.5 million, which accounted for 30 percent of its marketing budget. Wandashan’s advertising expenditure was $13.5 million, or 10 percent of its marketing budget. Wahaha spent $30.1 million on advertising, which was 9 percent of its marketing budget; Meng Niu spent $46.75 million, also 9 percent of its marketing budget, only to be surpassed by Yili, which spent $53.4 million (8.7 percent of its marketing budget). Bright Dairy spent only $27.1 million, accounting for 5.5 percent of the marketing budget, while Sanlu limited its marketing expenditure to 2.9 billion yuan ($349 million) (Zhongqiu Advertisement, 2003). By 2004, Meng Niu became the new champion by spending $38.8 million on advertising, followed by Yili, at $26.8 million (Dong Suyu, Nie Yan , 2005).
Finally, foreign investment played a very important role in accelerating the development of dairy products in China . There are three ways for foreign capital enterprises to enter the Chinese market: The first method is to directly establish a dairy-processing enterprise in China and produce branded dairy products. As previously noted, Nestlé built up a large-scale milk powder processing enterprise in the 1990s in Shuangcheng City, Heilongjiang province, through a joint venture. Since then, it has continuously expanded its production scale. By 2004, its total investment into milk powder production reached nearly $84 million (China Network, Harbin Channel); its revenues reached $3 billion, ranking the joint venture as fourth among dairy-processing enterprises in China . Among the top-ten dairy-processing enterprises, three are linked to direct foreign investment.
The second method is through joint ventures , such as the Daneng Co., which bought up shares of the Bright Dairy through stock purchases. By end 2005, through numerous purchases, Daneng owned 12 percent of Bright Dairy stock. Meanwhile, Daneng handed over its brands to the Bright Dairy, and both parties agreed to establish a dairy product research centre ( Gao Suying , 2005).
The third method is through direct investment . For example, in 2002, Morgan Stanley , Dinghui Investment and Yinglian Investment invested more than $26 million in the Meng Niu Group, buying 32 percent of the company stock. In 2003, these institutions injected an additional $35.2 million into Meng Niu from their foreign mother companies. Currently, the three companies own one-third of Meng Niu Group stock (Hu, 2005).
Before the policy reforms that began in the 1970s and opened China to the outside world, there were no individual dairy cow-raising farm households or individual milk sellers in the country. The Government did not allow private dairy cow operations; the state-operated and the commune-owned dairy cow farms were the main source of raw milk (Xu and Yin, 2004). Since the implementation of the household contract responsibility system, the Government reversed its policy restricting individual farm households from raising dairy cows. Within the context of increasing market demands for dairy products and promoted by government policy, more and more farm households have engaged in dairy cow raising and milk production.
D airy cattle farms in China are pyramid shaped: At the base are small farm households that own 1–5 dairy cows while at the top are the large operations with more than 1 000 dairy cows. According to the Dairy Association of China, there were approximately 1.37 million dairy cattle farms in 2002. Of them, 1.14 million (or approximately 83 percent) owned 1–5 cows. By 2006, the total number of dairy cattle farms and farm households nearly reached 1.6 million, up 15 percent compared with the data for 2002 (Table 6).
Table 6: Number of dairy farms, by number of cows owned in China, in 2002 and 2006
|
Herd size |
No. of farms |
No. of cows |
Milk output (tonnes) |
|||
|
No. |
% |
No. |
% |
No. |
% |
|
|
Year 2002 |
||||||
|
1–5 |
1 140 022 |
83.30 |
3 042 197 |
44.79 |
4 951 102 |
37.30 |
|
5–20 |
200 083 |
14.62 |
1 991 830 |
29.32 |
3 665 841 |
27.62 |
|
21–100 |
25 698 |
1.88 |
950 090 |
13.99 |
2 115 959 |
15.94 |
|
101–200 |
1 789 |
0.13 |
243 137 |
3.58 |
673 210 |
5.07 |
|
201–500 |
650 |
0.05 |
193 814 |
2.85 |
603 855 |
4.55 |
|
501–1000 |
262 |
0.02 |
172 991 |
2.55 |
605 886 |
4.56 |
|
>1000 |
112 |
0.01 |
198 488 |
2.92 |
658 050 |
4.96 |
|
Total |
1 368 616 |
100.0 |
6 792 547 |
100.0 |
13 273 903 |
100.0 |
|
Year 2006 |
||||||
|
1–5 |
1 271 729 |
81.00 |
4 034 876 |
44.10 |
5 356 552 |
35.31 |
|
5–20 |
263 715 |
16.80 |
2 714 241 |
29.67 |
4 135 290 |
27.26 |
|
21–100 |
30 780 |
1.96 |
1 257 814 |
13.75 |
2 827 367 |
18.64 |
|
101–200 |
2 294 |
0.15 |
335 503 |
3.67 |
713 905 |
4.71 |
|
201–500 |
950 |
0.06 |
336 148 |
3.67 |
741 448 |
4.89 |
|
501–1000 |
336 |
0.02 |
235 228 |
2.57 |
707 555 |
4.66 |
|
>1000 |
162 |
0.01 |
234 816 |
2.57 |
688 867 |
4.54 |
|
Total |
1 569 966 |
100.0 |
9 148 626 |
100.0 |
15 170 984 |
100.0 |
Sources: China dairy statistical yearbook, 2006 and China dairy information, 2007 | ||||||
Obviously the small-scale dairy cow farms dominate the milk production, serving as the main suppliers of raw milk to Chinese consumers and processors. Their numbers expanded considerably since the policy reforms began, but particularly over the past decade and despite the many obstacles involved in shifting from crop growers to dairy husbandry, such as lack of credit, 15 production practices and market access. The factors supporting the inclusion of more than 1 million farm households into smallholder dairy production entail: i) good economic returns; ii) policy/institutional support from central and local governments; iii) involvement and support from private sector milk-processing enterprises.
Most of the farm households shifting from crop growing to dairy husbandry are driven by favourable economic returns (Hu, 2005). Farmer income from growing crops is much lower. Table 7 presents a cost–profit analysis (or calculation of returns) of planting maize or potatoes compared with dairy husbandry. The average milk yield from a dairy cow in a farm household is 4 875 kg per year, which translates into a value of $1 334. The total production cost of the milk is $1 062, leaving a net annual profit of $273 and a cost–profit rate of nearly 27 percent. By comparison, a farmer choosing to grow 1 mu of potatoes realizes annual net profits of $76, while that of a farmer growing 1 mu 16 of maize earns $19 of net profit.
The profit from dairy cow husbandry is greater than from growing potatoes or maize; the net profit from raising one dairy cow is 14 times larger than from growing 1 mu of maize and 3.6 times larger than growing 1mu of potatoes.
In most parts of China , the small-scale dairy farmers also plant maize, which is used to feed dairy cows, thus reducing the need to buy feed. Fermented dairy cow manure can be used as an organic fertilizer for growing the maize, enhancing yields at a low cost as well as reducing environmental pollution.
Table 7: Comparison of the costs of dairy cow raising with maize and potato growing
|
Per mu/per cow |
Unit |
Dairy cow raising |
Maize growing |
Potato growing |
|
a. Output of main products |
Kg |
4 875.9 |
423.5 |
1561.8 |
|
b. Total output value(c+d) |
US$ |
1 334.2 |
74.2 |
179.1 |
|
c. Output value of main products |
$ |
1 204.2 |
71.6 |
178.9 |
|
d. Output value of by-products |
$ |
130.0 |
2.6 |
0.2 |
|
e. Total cost (f+k) |
$ |
1 061.6 |
54.9 |
102.8 |
|
f. Production cost (g+h) |
$ |
1 058.3 |
45.1 |
91.3 |
|
g. Materials and service charge |
$ |
920.9 |
25.1 |
57.6 |
|
h. Labour cost(i+j) |
$ |
137.3 |
20.0 |
33.7 |
|
i. Family labour (monetary value) |
$ |
136.8 |
18.7 |
29.6 |
|
j. Labour-hiring cost |
$ |
0.5 |
1.2 |
4.1 |
|
k. Land cost(l+m) |
$ |
3.3 |
9.8 |
11.5 |
|
l. Land rent |
$ |
0.0 |
0.7 |
0.4 |
|
m. Self-owned land rent |
$ |
3.3 |
9.1 |
11.1 |
|
n. Net profit(b-e) |
$ |
272.6 |
19.3 |
76.3 |
|
o. Cost-profit ratio (n/e*100) |
% |
25.7 |
35.2 |
74.2 |
Source: Compilation of cost-profit ratios of agricultural products of the whole country compiled by the Price Department of the National Development and Reform Commission, 2007. | ||||
“I have a dream and my dream is that each Chinese person, and especially the children, can afford to buy one jin [500 g] of milk to drink every day,” Chinese Premier Wen Jiabao said in 2006. In recognition of the relative profitability of dairy operations, the central Government as well as local governments interested in supporting industry development have formulated favourable policies to encourage farm households to buy breeding stock.
Since 2000, the State Council and its relevant departments enacted favourable policies to promote the sector, which led to: i) 10 000 high-yielding cow embryo transfers; ii) development plans in large milk-producing regions; iii) studies on key technologies and integrated demonstration of technologies in the fifth five-year development plan; iv) Circular of the Ministry of Agriculture on the Rapid Development of Animal Husbandry” transmitted by the General Office of the State Council; v) the fifth five-year plan of animal husbandry, feed, national food industry and light industry and the long-range objective plan of 2015; and vi) a programme of dairy industry in the land reclamation and cultivation sectors.
The more important objectives of the Government are focused on increasing farmer incomes through dairy cow husbandry and dairy-processing projects. Under the leadership of the central Government, local governments, especially those of Inner Mongolia, Heilongjiang and other provinces, have supported the dairy sector because of its contribution to farmers’ income as well as to overall economic growth.
In supporting these policies, relevant ministries and commissions as well as local governments have invested considerable resources (Table 8). Since 2002, for example, the central Government has issued national debt funds to support 16 dairy-processing projects. In total, these projects received $21 million. Use of national debt funds has mobilized the resources of banks, local governments, enterprises and social forces to assist the sector. The ministries and commissions, under the State Council, have continuously invested in dairy industries, such as with the Ministry of Agriculture’s Good Animal and Poultry Varieties Engineering Programme. The central finance department alone invested $6.5 million in animal breeding, or one quarter of the programme’s total investments from 1998 to 2001. In 2002, the Ministry of Agriculture invested 126 million yuan ($15 million) to set up 17 original-stock dairy farms, 9 bull stations and 6 embryo-transfer centres. The embryo-transfer activities were initiated in nine cities, provinces and autonomous regions (Beijing, Xinjiang, Heilongjiang, Inner Mongolia, Ningxia, Shaanxi, Shanxi, Hebei and Shandong). A year later, in 2003, the Ministry invested more than $14 million in animal and poultry variety/stock engineering (Hu, 2005).
Table 8: Policies and measures adopted by local governments and dairy-processing enterprises to encourage farm households to raise dairy cows
|
Regions |
Events |
Source of data |
Remarks |
|
|
Government policy |
||||
|
1. |
Shijianzhuang City and Tangshan City, Hebei |
Dairy cow-raising households can obtain loans of up to 10 000 yuan, based on having an identity card, and up to 50 000 yuan on the provision of a certificate of house property. The specialized dairy development fund of the city financial department will pay 50 percent of the discounted interest for farm households that have borrowed money. |
Dairy Industry Talking, pp.29-30 |
|
|
2. |
Shuozhou City, Shanxi |
Construction of dairy cow barns on land contracted by farm households. If the farm households have no land to construct cattle barns, the village or township governments will provide them with land for free. For each dairy cow added, a farm household will receive a loan of 3 000–5 000 yuan, with a discounted interest rate from the government. If a village has more than 200 dairy cows, the government will build a milking station. |
Dairy Industry Talking, pp.31-32 |
|
|
3. |
Shuangcheng county, Heilongjiang |
The farmers are organized in dairy associations, with members eligible for loans to purchase dairy cows. |
Dairy Industry Talking, p.46 |
Nestlé is located in Shuangcheng County. |
|
4. |
Tianjin |
The government supports the construction of dairy cow-raising areas, providing 400 000 yuan for each. |
Dairy Industry Talking, pp.52 |
|
|
5. |
Daxing district, Beijing |
The government stipulated a policy in 2002 to support and encourage farmers to raise dairy cows. A farm household can get a bank loan of 5 000 yuan to buy a dairy cow. The government encourages farmers to use high-quality bull semen and embryo transfer technology, through the provision of 150 yuan and 1 500 yuan subsidies for each cow, respectively. |
Yearbook of Chinese Dairy Industry, 2003, pp.131 |
|
|
6. |
Tumotezuo League, Inner Mongolia |
The government helps farm households obtain bank loans to buy dairy cows. In 2000–2002 and with government assistance, farm households received a total of 190 million yuan from banks for the purchase of some 18 000 dairy cows. |
Yearbook of Chinese Dairy Industry, 2003, pp.136 |
|
|
7. |
Daqing City, Heilongjiang |
The government uses 7 million yuan to offer discounted interest loans for farm households to purchase imported dairy cows. The farm households are eligible for loans of 8 500 yuan for purchasing a dairy cow and 400 yuan as discounted interest. |
Yearbook of Chinese Dairy Industry, 2003, pp.138 |
|
|
8. |
Huairou district, Beijing |
From 1984 to 1998, the government encouraged farm households to raise dairy cows through the provision of loans ranging from 20 000 to 40 000 yuan, with a discounted interest rate. The government later renewed this policy. |
Yearbook of Chinese Dairy Industry, 2004，p.173 |
|
|
9. |
Yanmao Hui autonomous county, Xinjiang |
The county government pursues a project of "100 households with 100 dairy cows engineering”. The dairy-processing enterprises provide dairy cows and the cows are distributed to farm households and fed by them, with the farm households using the milk yield to pay the enterprises for their dairy cows. |
Yearbook of Chinese Dairy Industry, 2002, p.185 |
|
|
10. |
Wuhan City, Hubei |
Wuhan City government encourages farm households to purchase dairy cows from other regions. The dairy cow farmers can get a subsidy of 8000 yuan to buy a dairy cow from other regions and 4 250 yuan to buy a high-yielding cow from a foreign country. |
Yearbook of Chinese Dairy Industry, 2005, p.98 |
|
|
Enterprise support |
||||
|
11. |
Huhehot and Baotou cities, Inner Mongolia |
Cooperative dairy cow farmers are eligible for loans of 6 000 yuan from the Meng Niu Group or 4 500 yuan from the Yili Group to buy a cow. The farm households repay the loan from the earnings of milk sold to the company within a three- to four-year period. |
Dairy Industry Talking, p.43 |
The two cities are source areas of raw milk for the Yili and Meng Niu processing companies. |
|
12. |
Shijiazhuang City, Hebei |
The Sanlu Group helps households to purchase dairy cows through a variety of programmes: 1) “leasing” the dairy cows to farm households according to the value of the cow. The households repay the company by using one-third of earnings from milk sales each month. When the “lease” is paid off within three years, the households own the cow. 2) The company sells dairy cows to farm households at a 30 percent-discounted price. 3) The company agrees to be a loan guarantor for a farm household borrowing half the buying price of a cow from a bank. |
Dairy Industry Talking, p.76－77 |
The Sanlu Group is the largest milk powder processor, located in Shijiazhuang City, Hebei. |
Source: Collected by the author | ||||
Local governments have supplied funding for dairy-processing enterprises to buy equipment from foreign countries, to invest in dairy barns and dairy plants and construct dairy farms. They have provided farm households with loans and allowed farmers to raise mortgage credits on their dairy cows, cattle barns, related facilities or equipment and other fixed assets from the banks. To ensure and stabilize the raw milk supply, dairy-processing enterprises helped farmers to procure loans by providing guarantees.
Dairy enterprises and their supportive role
The rapid increase of raw milk in China is closely related to the strong link between dairy-processing enterprises and dairy producers, in terms of the former’s promoting the latter’s development. There was a time when the insufficient supply of raw milk constrained dairy development. In response, dairy-processing enterprises helped farm households buy cows and improve their husbandry knowledge, which became both an incentive for farmers to enhance their income and expand the milk supply. Interventions by Sanlu and Jinniu (Box 1) as well as Meng Niu, Yili and others focused on helping farm households to first access cows or a bank loan for buying cows and then offering technical guidance.
|
Box 1 : Linking processors and farmers by leasing animals to households Beginning as a cooperative of 18 farm households with 30 cattle and 170 sheep, the Sanlu Group Co. has become China ’s largest milk powder-processing company, with total assets of US$324 million and annual income of $1.158 billion. To help expand the milk supply and help itself grow in the early 1990s, Sanlu sold, at favourable rates, some 2 080 dairy cows from its own farm in Hebei province to households that were willing to raise them. The farmers paid off the price of the cows through their milk sales. Additionally, Sanlu also helped families access bank loans by serving as the guarantor. Through this support, Sanlu developed more than 4 100 dairy cow-raising households in 754 villages of 24 counties of Hebei (author’s investigations, 2004). The Jinniu Group Co., a medium-sized dairy-processing enterprise in Jiangxi province, also offered itself as a guarantor for cow-buying bank loans for families with labourers younger than 40 and willing to raise dairy cows. The company provided those households with technical training and established technical service stations in villages with a large dairy cow population, providing veterinary service in disease control and cow breeding. The company’s feed-processing mill also extended concentrated food to those households, and Jinniu set up milk collection stations in villages to make selling milk more convenient. In the six years after beginning operations (in 1992), Jinniu developed 11 specialized dairy cow-raising villages and 436 dairy cow households, feeding some 8 800 cows (Li Yifang, 1998). |
1. Dispersed raising and the mobile-dispersed milk-collecting model
From the 1980s to the 1990s, dairy-processing enterprises turned to a mobile-dispersed milk-collecting model to purchase raw milk. The consignee of the enterprise went from household to household with a milk-tank truck, buying their milk (with cash) and transporting it to the processing plant. There was no focus on specific households, and the households were free to sell to any enterprise.
The most serious problem of this model was the inability to guarantee the quality of the raw milk because it was aggregated and stored in a container. The farm households did not have appropriate chilling equipment, thus leading to high bacteria counts. Some households violated regulations and mixed water into the milk, resulting in economic losses and a lower quality of milk. The dairy-processing enterprises responded with concentration meters to determine the level of adulteration when colleting the raw milk. However, some households then resorted to other ways of nullifying the test, with the quality of the milk declining even further (Hu, 2005).
2. Linking companies and farm households through milking stations
In the mid 1990s in response to the difficulties with the mobile model, most of the dairy-processing enterprises began setting up collection stations. They built mechanical milking facilities; farmers took their cows to these stations for milking. Under the supervision of management personnel, milk was directly transported through the milking machine to storage tanks, thus maintaining low temperatures and preventing the adulteration of the milk. Typically, the stations were constructed in villages with a large dairy cattle population. Currently, one milking station services about 200 dairy cow households. The farmers take their cows to the station at a fixed time (twice a day). The workers at the station maintain a record of the milk procured and pay the households once a month.
Types of milking station owners:
The construction of milking stations directly benefits dairy cow farmers by reducing labour requirements and ensuring the availability of a stable market and technical training. The dairy-processing enterprises benefit from a stable source of high-quality raw milk and limited opportunities for milk adulteration (Duan, 2007).
|
Box 2 : Government support to milking stations 1. Beijing Miyun County Ligezhuang Dairy Raising Cooperative obtained 100 000 yuan in government funds to construct a milking station, purchase equipment and technically train its members. 2. Shanxi Jinzhong Yuci District Xiuwen Dairy Association sourced 150 000 yuan from the government to purchase sterilized milk tanks and milk-testing and other equipment. 3. Lianshan District Dairy Raising Cooperative bought milking machines with 150 000 yuan it obtained from the government. 4. Zong Zhai town in Qinghai Huangzhong county used 150 000 yuan of government funds to purchase milk tanks. Source: China dairy industry yearbook , 2006, p. 61 |
3. Dairy husbandry areas or dairy zones
In this model, dispersed dairy cow farmers are grouped into a designated area or zone. Dairy-processing enterprises construct the necessary infrastructure, with input from farmers and township government. Some individuals also invest in the construction. Typically, at a minimum, there are dozens of households in a zone, with a combined total of approximately 200–300 cows, though sometimes as many as 500–1 000 cows. The cow sheds/barns and other facilities are uniformly designed and constructed, and the households manage their own cows. They also produce, harvest and process their own fodder. They buy concentrated feed from a specialized processing plant. Although each household feeds its own cows, the milking, disease control and other supportive activities are contracted to administrative and managerial departments within the region.
The government and/or the dairy-processing enterprise provides each zone with technical assistance and supervision; the geographical separation between production and residential areas results in better disease control and limits possible infection between humans and animals. With government support, 17 some large-scale dairy-processing enterprises have invested in these zones. For instance, with about 100 million yuan, Sanlu (based in Shijiazhuang , Hebei province) established more than 200 zones, in cooperation with farm households. The Sanlu-created zones adopted the model of “one separation and four unifications”, which means that households own the dairy cattle and the zone management provides “unified milking, unified milk selling and unified services” for households. Similarly, the Yili Group set up 85 zones with 300–500 dairy cows in each and 92 areas with 500–1 000 dairy cows each. 18
Dairy zones enable several advantages: i) households can access stable markets and technical services; ii) the quality of raw milk is improved; iii) sufficient quantities of quality raw milk can be guaranteed for enterprises; and iv) assistance in financial subsidies is available through the government’s supporting policies (Box 3).
|
Box 3 : A dairy zone example Wuqing district in Tianjin municipality first obtained subsidies for the construction of dairy zones in 2002, along with 5 million yuan in financial support from the government to expand and improve the condition of the dairy cattle. Consequently, the district’s dairy cow population reached 33 000, a 65 percent increase in one year. Similarly, the governments of Beichen district and Jinghai county, also in Tianjin, appropriated specialized funds for building roads and a bridge that would help promote the development of dairy zones (Li, 2003). |
4. Pastoral dairy parks
In pastoral regions/areas, households with large herds have joined together with assistance from dairy-processing enterprises. In 2003, the Yili Group invested more than 13 million yuan to build an integrated dairy cattle pastoral region in Huhehot City. This entailed individual pasture land, an area for raising cattle and a modern milking station. Each household in the pastoral park owns more than 200 dairy cows, for a combined total of more than 6 000 cows in the park. The annual output of fresh milk is estimated at 30 000 tonnes. The Yili Group also constructed six other pastoral parks, each with a cow population between 1 000 and 3 000; the Meng Niu Group set up five large dairy cow pastoral parks.
In the pastoral parks, the milk-processing enterprise invests in its construction (including necessary facilities) and the farm households raise the cows. The enterprise also provides technical assistance to ensure that good genetics of the animals and good husbandry management. Some pastoral parks also produce organic milk (author’s investigation).
5. Dairy farm household cooperatives
There were no farmer associations or cooperatives representing smallholders in the dairy sector in China until recently. The dispersed smallholder dairying households lacked the negotiating and bargaining power necessary to benefit from marketing arrangements with dairy-processing enterprises and feed marketing enterprises. After 2000, the Government recognized the potential importance of farmers’ cooperatives and established cooperative societies. The Government issued the Law of Farmer Specialized Cooperative Society in 2007, thus providing a legal basis for farmer cooperatives to organize. Some local governments are exploring the possibility or are already helping dairy operators set up dairy industry cooperatives. In Heilongjiang province, for instance, the Anda City government helped establish more than 50 dairy associations and dairy industry cooperatives. Among them, the Taipingzhuang Dairy Association has more than 730 members, with a total of 4 200 dairy cows producing a daily output of more than 30 tonnes of milk.
Smallholder dairying households encounter considerable problems, mainly related to: i) poor remuneration resulting in declining income and ii) difficulties in meeting the quality standards for raw milk.
Declining incomes for dairy producers
According to the Ministry of Agriculture, since early 2007, dairy cow farmers’ incomes have decreased gradually: 40 percent of households are not breaking even, and the average earnings from each cow are now 1 500 yuan, lower than in 2006. Some dairy cow farmers have resorted to selling or slaughtering their cows due to the low profitability. 19
The reduction in incomes is due to higher production costs and relatively stable milk prices paid by the processors. Price collusion among processors is resulting from an oligopolistic market structure, with the purchasing price of raw milk controlled by only a few dairy-processing enterprises. The dispersed farm households have no bargaining power and are unable to negotiate higher prices; thus, they are obliged to receive the price offered by dairy-processing enterprises.
While the milk price paid remains fairly constant, the price of feed is rising: Over a one-year period, feed corn prices increased by 16 percent and dry alfalfa hay prices increased by more than 20 percent. In comparison, the purchasing price of milk in Heilongjiang , Inner Mongolia and Shanxi increased only by 7 percent, 6 percent and 3 percent, respectively 20 – despite rising prices of milk products in international markets.
Quality control of raw milk
Of considerable concern to the industry and consumers are effective controls on milk quality. The quality of raw milk not only influences the quality of dairy products and the safety of consumers on the one hand, but it limits its use in the production of value-added products. For instance, in the course of fermentation of sour milk and milk drinks, some raw milk cannot be used if the level of antibiotics is too high.
Before the 1980s, most raw milk was supplied by state-owned dairy farms to consumers in urban areas, and the quality could be controlled easily. After the 1990s and the expansion of smallholders, effective supervision became very difficult. Considering that most dairying households had a capacity of less than five head of cattle and owing to the great difference among the households in technical and management skills, sanitary conditions and quality awareness, quality problems in raw milk production have evolved into a major concern.
Current quality problems in raw milk include: i) variable protein levels due to the influence of different feeding regimes; ii) high bacteria count; and iii) high levels of antibiotic substances due to farmers’ lack of knowledge. Often when dairy cows are given antibiotic substances, the farmers, due to economic interests or lack of knowledge, do not stop milking them (Hu, 2005).
The development of China’s dairy industry over the past decade has been an impressive one. Encouraging participation of smallholders in milk production has been a component of national and regional policies to promote regional development and reduce poverty. Large processors also have played a significant role in expanding and keeping smallholders in operation. Through the introduction of centralized milk collection stations, millions of small farmers have entered the sector, particularly in the poor western provinces. This has been supported by enabling policies of central and local governments, especially those that encouraged investments in higher-quality animals and infrastructure.
Although China’s dairy sector has enjoyed rapid growth, it has encountered new challenges – the most visible of which was revealed in the melamine scandal in 2008. The dairy industry is experiencing considerable transformation – the quantity-based expansion is being replaced by the need to ensure milk quality. It is difficult for scattered smallholder dairy farmers to produce the quality of milk that processors and markets require. Developing large commercial dairy farms is unlikely to be a viable model in China, particularly in the medium term. Rather, alternative models in which an enterprise provides a milking station and proper management to smallholder dairy farmers, dairy parks and farmer associations are developing and proving to be practical. Many other different organizational models exist in practice. This calls for further evaluation on the performance of different organizational forms for linking smallholder farmers with the processors.
It is clear that the large processors have dominated and will continue to drive the next stage of China’s dairy development. Critical to ensuring strong growth in the sector is the development of incentive systems for rewarding good practices to increase milk quality, either market based or institution based. The processors need to take a leadership role in setting up effective premium-based pricing systems to support a sustainable dairy sector. Implementing higher standards means higher costs for producers. It is important to understand the cost of compliance to adhering to these new standards, particularly to small farmers if they choose to participate in the evolving systems. In addition, it is important to look at innovative ways of sharing these costs between the farmers and processors, ensuring that farmers receive a fair price for high-quality milk.
China ’s dairy development policies, particularly regional policies, are very much biased towards large dairy farms. The Government needs to promote rural economy growth and improve the well-being of the rural population through increased technical support and financial subsidies. The policy objectives should focus on enhanced dairy practices, farm management and better-quality milk. The regional governments tend to focus on their regional economy in the short term, prioritizing a quantitative increase in production. Less attention is paid to improving financial rewards for a quality product through enhanced farming practices (through technical training). This has resulted in demand imbalances, which are characterized by limited supplies of raw milk nationwide and oversupplies in some regions. Limited incentives are in place for farmers to improve their farming and raw milk-quality management. Current policies promoting large dairy farms will need to be re-visited, if one of the policy objectives is to provide effective assistance to smallholder dairy farmers.
It is also clear that the current oligopolistic economic stage of the sector, owing to smallholder inability to negotiate with the large-scale dairy processing enterprises, results in dispersed smallholder dairy farmers not receiving fair prices for their raw milk. Therefore, dispersed households need to organize themselves and strengthen their capacity to negotiate with enterprises, thus ensuring long-term profitability to their investment and economic activities. The Government should formulate a positive policy to encourage and support the smallholder dairy farmers to establish institutional systems, such as cooperative organizations.
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9The income from dairy cow raising is higher than that from crop planting in China.
10The author of this case study report visited the Ninth Pastoral Farm of the Shanghai Bright Group to talk with the farm’s director, Jiang Yaming, who mentioned the major difficulties in operations; this is the summary of his five points.
11In the North China Pastoral Zone, due to serious desertification of grassland, inconvenient communication access and other reasons, the dairy industry has not developed as expected (John Longworth, 1998).
12In Jiangsu and Zhejiang provinces in South China, the share of rural residents working off-farm is 56 percent and 63 percent, respectively.
13This paper was written before the company declared bankruptcy as a result of the 2008 scandals related to milk products containing melamine.
14The association has not published any new data since 2004.
15The price for purchasing a dairy cow is more than 10 000 yuan (US$1 200), but the annual income of a farm household is only 3 000–5 000 yuan.
161 mu = 0.067 ha
17The largest support from the provincial government in dairy cow zones has been the provision of land. In rural areas of China, the use of land is strictly controlled. The provincial government’s support includes the use of wastelands that are not suitable for crop cultivation or allows a transfer of a portion of cultivated land for use in dairy cow farming.
18In Huhehot City and Hulunben’er grassland of Inner Mongolia and Du’er’bote grassland of Heilongjiang.
19“Loss incurred in 40 percent of the dairy cow raisers in the whole country and the Ministry of Agriculture considers that the milk price forming mechanism is not reasonable”, http://www.yndaily.com 2007077.
20China securities journal, 26 November 2007; “The dairy cow raisers kill their dairy cows as a result of increase of cost and thus resulting the high price of milk in the whole country.”
