The development of the dairy industry urgently needs to build a closer community with a shared future

Against a backdrop of sluggish consumption, insufficient market confidence, rising inventories and falling international dairy prices, dairy farmers and dairy companies, though part of the same industrial chain community, have not established close enough interest ties, which has led to the recurring situation where milk is dumped when there is too much and scrambled for when there is too little. Although the current contradiction between market supply and demand is prominent, in the long run China's dairy industry still has deep potential. Dairy companies must strictly abide by the spirit of contract, take a longer view, and genuinely build a closer community with a shared future with dairy farmers, so as to achieve win-win results in farming and processing.

According to reports, in the first half of the year the loss-making share of China's entire dairy industry exceeded 50%, and the mid-year reports of listed dairy companies were also unimpressive, with overall performance declining. Sluggish market consumption, excessively low milk prices, and a serious inversion between international and domestic milk prices are the pains currently afflicting the national dairy industry as it strives to revitalize and develop.

In recent years, China's dairy industry has made major achievements, becoming the world's third-largest dairy producer. In 2015, China's raw milk and dairy product output reached 38.7 million tons and 27.82 million tons respectively; the national sampling pass rates for raw milk and dairy products reached 99.3% and 99.5% respectively; per capita dairy consumption reached 36 kg; the melamine sampling pass rate remained at 100% for 7 consecutive years; and indicators such as milk protein and milk fat in large-scale pastures reached the level of developed countries. The mode of dairy production has clearly changed. The proportion of large-scale dairy cow farming exceeded 48%, and the per-unit yield of dairy cows rose substantially, with Holstein cows averaging 6 tons per unit yield, among which high-yield dairy cows producing more than 9 tons reached 1.5 million head. Large-scale farms have all achieved mechanized milking; specialized dairy farmer cooperative organizations exceeded 15,000, and the level of scale, standardization, mechanization and organization in dairy cow farming has risen markedly. The level of major dairy processing equipment and technology has approached or reached the world's advanced level, and the market share of the top 20 dairy enterprises has exceeded 50%. China spent more than 30 years completing a dairy development journey that took developed countries over a hundred years, and these achievements have not come easily.

In the great development of China's dairy industry, apart from consumers' lack of confidence in consumption, the constantly changing market has also deeply affected dairy farmers at the production end, and news of dumping milk and slaughtering cows has been incessant. In the past, when the market was bad, dairy companies refused to buy on the grounds of small scale, low standardization and poor quality; now that dairy farmers' production level has improved, dairy cows no longer eat straw, drink cold water and sleep in mud, but instead live well eating alfalfa, the "king of forage grass", drinking hot water and sleeping on bedded stalls. The raising environment for dairy cows has improved, and the quality of the milk has improved too, yet dairy farmers still cannot escape their disadvantaged position. Some ranch owners say that when the raw milk market was relatively good, major dairy companies competed to secure milk sources, and large domestic dairy companies all wanted to sign milk supply agreements with them. Moreover, when signing contracts, the two sides did not set an upper limit, only a lower limit, wishing for as much milk production as possible; if the lower limit was not reached, they even had to pay liquidated damages to the dairy company, while there was no clear provision for the upper limit. Because contracts were signed for 10 years, the ranches continuously increased investment and improved technical management, and in recent years the natural growth of fresh milk rose fairly quickly. But unexpectedly, when the dairy market was bad, dairy companies directly imposed volume limits, leaving the increased fresh milk unable to be handled in time and bringing great losses to dairy farmers.

Dairy companies also have their own hardships. Although they continuously increased marketing efforts and kept improving product quality, they still could not stop the trend of consumers buying foreign dairy products. To use a currently popular phrase, the supply side and the consumption side have become disconnected, and this is especially prominent in the dairy industry chain. Although contracts have been signed between production and processing, and even when milk sources were tight the contracts clearly stipulated that a ranch must not deliver less than a certain number of tons of milk per day, the deep-seated contradictions in dairy industry development have not been resolved. Dairy companies and dairy farmers are two business entities both pursuing maximum profit. Against a backdrop of sluggish consumption, insufficient market confidence, rising inventories and falling international dairy prices, dairy farmers and dairy companies, though part of the same industrial chain community, have not established close enough interest ties, which has led to the recurring situation where milk is dumped when there is too much and scrambled for when there is too little. Although at present dairy companies' self-built and equity-participated milk sources account for more than 20% of the total, with Modern Farming's "integration of breeding, farming and processing" and "completing the process from milking to processing in 2 hours" production model, and with the win-win interest linkage mechanism created by Zhongding Dairy through cooperation between dairy farmers and dairy companies, forming the country's largest innovative dairy farmer union and building a model of advancing and retreating together with dairy farmers. But the production part, which carries the greatest cost and risk in the dairy industry chain, is still the part where dairy farmers buy high-priced dairy cows and directly invest in dairy cows and feeding for milk production, while dairy companies handle asset-light links such as processing, branding, channels and sales. Although production and processing are bound by a contract, in a severe market environment a thin contract cannot solve the predicament of dairy farmers and dairy companies.

The development of the dairy industry bears on the happy life of the Chinese people, the employment and income growth of farmers, and the guarantee of the nation's important agricultural product and food supply, and is of great significance. The just-concluded China Dairy Top 20 (D20) Summit and Dairy Industry Revitalization Conference issued a declaration: to take stabilizing milk sources as their own responsibility, build a fair and reasonable interest distribution mechanism, form a community with a shared future with the broad masses of dairy farmers, share pressure and share results, cooperate closely and develop together. This is of great significance at a time when China's dairy industry is at a critical and tough stage of transformation and upgrading.

It should be noted that although the current contradiction between market supply and demand is prominent, in the long run China's dairy industry still has deep potential, and the current saturation of dairy products is at most temporary saturation. Last year, national liquid milk sales growth was still relatively fast among various bulk foods. With population growth, rising living standards and favorable news such as the relaxation of the "two-child" policy, dairy consumption is expected to maintain steady growth for a fairly long period, and China's dairy industry is still at an important stage with much to achieve. At present, during the period of structural adjustment and transformation of the dairy industry, when dairy farmers are producing strictly according to contract, dairy companies must strictly abide by the spirit of contract, take a longer view, and when market consumption is weak, shoulder the responsibility of revitalizing the national dairy industry. They must not restrict the collection of fresh milk from domestic ranches when foreign milk powder prices are low, but must earnestly fulfill their commitments, genuinely build a community with a shared future with dairy farmers, lead industrial transformation and upgrading, and vigorously promote the transition of the traditional dairy industry to a modern dairy industry. Only when dairy farmers and dairy companies jointly shoulder their responsibilities can the goal of a win-win ecosystem for farming and processing be achieved.