Domestic dairy producers despair amid import surge

Many farmers are being forced to pour products down the drain

The plunging price of fresh milk has nearly forced Zhang Xuekai out of the business. The 30-year-old has managed a collective dairy farm in Licheng district of Jinan in Shandong province since 2012. The price of raw milk peaked in 2013,soaring to 5.7 yuan (91 cents) per kilogram, she still remembers.

But the good days had pretty much faded from her memory by April last year when the price had nearly halved to 3 yuan per kg, and situation is yet to improve.

"At these levels, it is hard to keep the business running anymore," Zhang said.

Zhang has invested nearly 4 million yuan in the milk business, about 1 million yuan of which is borrowed.

Despite signing a three-year supply contract with Inner Mongolia Yili Industrial Group Co Ltd at the start of 2013,the domestic dairy giant still stopped collecting milk from her farm atthe end of last year, and she is now considering a lawsuit against Yili for breach of contract.

A major part of that investment was 500,000 yuan spent on a set of imported feed processing equipment, as required by Yili under the contract.

The business used to have 800 cows but most of that herd has now been sold, leaving her just 170 animals. Chen Jiayun, one of the 13 farmers involved in the collective, has sold 38 of her cows, from the original 73.

"Raising cows is as hard as raising a baby," said Chen. "You have to be really careful about hygiene and feed."

Her story is being mirrored by thousands of milk producers across China, as sales prices fall well below break even point, she said.

Before the 50-year-old was forced to start selling her cows, the cost of feed each day was around 3,330 yuan. The 1 metric ton of milk she took from the animals daily brought her around 3,000 yuan.

The milk industry crisis is particularly serious in provinces like Shandong, Hebei and Qinghai, said industry sources.

As an increasing number of dairy companies start to reduce or halt their collection of fresh milk, many farmers there are being forced to pour their milk down the drain or even have their dairy herds slaughtered.

And while domestic farmers find it increasingly hard to sell their fresh milk, the import of dairy products has continued to grow.

According to the General Administration of Customs, the country imported 320,000 tons of liquid milk in 2014,up 70 percent from the previous year. Import of milk powder excluding infant formula rose 9 percent year-on-year to 930,000 tons, and that of infant formula increased to 121,000 tons in 2014,roughly the same level as a year earlier.

About 27.7 percent of the imports were from the Netherlands, followed by 14.1percent from Ireland, 13.5 percent from France, 10.3 percent from Denmark and 8.6 percent from New Zealand. The five countries accounted for 74.2 percent of total formula milk powder imported last year.

Li Liuhang, director of the Shandong provincial dairy management office, said the prices of fresh domestic milk have been dropping monthly since February last year and now sit at a round 4.5 yuan per kg on average. The province, with 1.25 million cows and total output of 2.71 million tons, is the country's fifth-largest milk producer.

Official figures show raw milk prices remain stable at larger farms but small-scale operations have suffered, with prices falling as low as 1 yuan per kg in some regions.

Chen Rongwei, deputy director at the China Dairy Industry Association, said it was the massive import of milk powder in 2013 by dairy processing companies that first accelerated the drop in domestic milk prices, and subsequently the collapse in milk collection from farmers.

Song Liang, a dairy analyst, said growing consumer preference for imported milk has also been fuelled by worries over the safety of some domestic milk and milk products, particularly milkpowder.

Industry analysts fear that if domestic raw milk prices keep dropping this year, and the massive inventories at some of the larger companies remain high, more farmers in more regions will be forced to pour their milk down the drain, or kill their animals.

Earlier this month, the Ministry of Agriculture instructed farming departments at all government levels to help dairy farmers sell their milk. These included urging processing companies to closely monitor sales of fresh milk and offer subsidies to farmers.

Local governments are also being asked to offer financing to farmers who have been affected by the slump in demand.

According to a ministry circular, local dairy departments have already been asked to set up reporting systems to record the weights and numbers of dairy products being declined, collected, or poured away.

Li Shengli, chief scientist at the National Modern Dairy Industry Technological System and a professor at the China Agricultural University, said China's dairy consumption should be dominated by pasteurized milk, and not room-temperature milk products which have a very short expiration period.

Shen Danyang, spokesman for the Ministry of Commerce, said on Jan 21 that imported milk powder should not be blamed as the only culprit for farmers' doldrums.

Shen also highlighted the large gap between prices of domestic and over sea dairy products, rising imported dairy products, and low levels of technology used by domes-tic dairy producers, noting that the industry has historically suffered from fluctuating levels of supply and demand, in both domestic supply and also imports.

For example, Shen said, dairy imports have been growing at more than 20 percent over the past five years, even rising 37 percent in 2013.