A worker prepares to milk cows at a farm managed by New Zealand dairy giant Fonterra Co-operative Group Ltd in Yutian county, Hebei province.[Photo/Agencies]
The year has begun ominously for dairy farmers in northern China, with many of them being forced to dump their milk and slaughter their cows because of the falling prices of dairy products. Some in Hebei province have even been feeding fresh milk to pigs.
The imbalance between demand and supply is the main reason for the slumping milk prices. The Chinese dairy industry has witnessed high fluctuations in prices in recent years because it is still in transition - from free-range to large-scale farming - and yet to recover from the melamine-tainted baby formula scandal involving the Sanlu Group in 2008.
Besides, the rapid rise in imports of dairy products last year, in contrast to the sagging demand for other products at home, has also dealt a blow to the domestic dairy farmers. For instance, the country imported nearly 300,000 tons of Ultra-High Temperature processing liquid milk and 100,000 tons of infant formula in 2014 at much lower prices than in the domestic market. This was possible because overproduction caused milk prices to fall in the world markets from March.
In addition, since the per ton Cost, Insurance and Freight for imported milk powder could be 10,000 yuan ($1,617) less than those for domestic products, domestic dairy companies have opted for cheaper overseas alternatives and reduced their purchases from Chinese suppliers. This has aggravated the slump in the dairy industry.
The combined effect of all these factors has forced Chinese dairy farmers, especially those in northern China, to dump their milk and kill their cows in order to avoid further losses. The vicious circle of "price slump - milk dumping and cow killing-rising imports", haunted the dairy industry throughout last year.
Although low domestic consumption - along with surplus supply and mounting imports of dairy products - is also to blame for the present situation, the root cause of the problem is the disadvantaged position of dairy farmers vis-à-vis dairy companies.
Unlike in countries that have an integrated system of cattle farming, and processing and selling dairy products, such as Australia and New Zealand, in China it is often dairy companies that hold the upper hand in purchase and pricing. The existing system of separate farming and processing enables dairy companies to "hoard milk in times of low production", and "refuse supplies from farmers in times of overproduction". No wonder, the dairy farmers in China get less than 10 percent of the total profit of the industry and are left with no choice but to quit the industry to reduce their losses.
But applying market rules alone cannot break the vicious circle. Since the modern dairy industry is new to China, the lack of a controlled market order will only worsen price fluctuations, which would be good neither for dairy farmers nor for the industry as a whole.
Many dairy farmers use bank loans to purchase cows. So they cannot repay their loan instalments by dumping their milk. In contrast, their overseas counterparts also have stakes in dairy companies, which prioritize farming over production, insulating the industry to a large extent from the impact of market fluctuations. In the long run, this model has to be adopted by China's dairy industry.
Limiting the import of dairy products is impossible because of global trade rules. Moreover, the value of a product depends on its cost and quality. Therefore, what the Chinese government could do to prevent excessive imports of dairy products is to exploit the technical barrier without violating the World Trade Organization's fair trade principles.
Also, short-term measures such as encouraging dairy companies to increase the purchase of milk from domestic suppliers, and produce more high value-added products, should be taken. In the longer run, however, a modern management system that integrates dairy farming and production would help establish a fair farmer-company relationship.
The author is a professor at the School of International Trade and Economics, University of International Business and Economics, Beijing.