In a country still haunted by bitter memories of food shortages,which during the Great Leap Forward led tens of millions of Chinese to become “hungry ghosts,” the sight of milk being discarded makes for painful viewing. But currently in Hebei, Shandong, Inner Mongolia, and many more places, milk is simply being dumped into open fields.
Not even the pig farmers want to buy it as feed for their piglets. Chinese dairy farmers are pouring milk onto the ground and slaughtering their herds in order to save money on cattle feed. Many have been forced to go bankrupt and have no hope of ever again making a living as dairy farmers.
This dire situation has been going for at least 10 months already and shows signs of getting worse. For decades, milk had been in high demand in China. Indeed, by the end of 2012, this “white gold” could fetch 5 yuan per kilo for farmers. Banks readily financed medium- to mega-sized dairy farming projects, including some with more than 10,000 head of imported Holstein cows.
Farmers dump milk in a field near Weifang city, Shandong.
The problem is that Chinese consumers have an overwhelming preference for imported milk and other dairy products. That preference is the long-lasting result of the melamine milk scandal of 2008, which saw 300,000 babies afflicted with various kidney ailments. The demand for milk in China had been so high before the scandal that farmers were selling their milk to local dairies that would falsify quality tests by using chemical additives. Their share of the domestic market accounted for some 30%. However, the price of milk was just 3.5 yuan per kilo, which hardly made it a profitable activity.
In the first 11 months of 2014, China imported 884,000 tons of milk powder, a jump of 20% from the previous year. And making matters even worse for Chinese dairy farmers was an unwelcome external shock in the form of Western trade sanctions against Russia. Russia had been a big importer of Western dairy products and responded with a ban on farm products from Europe. As a result, the huge volume of excess milk powder from Germany, the Netherlands, and France had to be sold elsewhere: China. With the Chinese market being so large and influential, prices plummeted worldwide. Thus, in China, a ton of New Zealand milk powder that cost 420,000 yuan in January, could only fetch half of that amount in November. By that point, domestic dairies ceased buying fresh local milk. It was cheaper for them to reconstitute milk from imported New Zealand powder at 2.2 yuan per kilo.
This development has, in turn, laid bare an Achilles heel in the business model of China’s mega-dairy farms, namely their heavy reliance on the combination of expensive imported fodder, such as soycake or corn pellets from the Americas, and lower calorie grass to feed their cows. This makes their milk not only more expensive, but less rich in protein as well. Local farmers suffered yet another setback when the tariff on imported New Zealand milk was cut in 2013 at around 5%, following the free-trade agreement Beijing signed with Wellington five years earlier.
Faced with such a crisis, China's Ministry of Agriculture is trying to convince local giants Yili and Mengniu to buy its milk from domestic farmers. Officials have been urging them to do so both for patriotic reasons and to ensure that domestic sources for milk will exist in the future. They argue that if local dairy farmers go under, the likes of Yili and Mengniu will be completely reliant on imported milk and run the risk of being blackmailed by greedy Western producers. The Agricultural Ministry is also seeking to negotiate with other ministries in the government to institute a set of subsidies to help local farmers ride out the current crisis.
However, in the long-run, the best solution is to raise the productivity and efficiency of local Chinese dairy farmers, so they can produce and sell milk at competitive prices. And doing that may take years, if not decades.
