How Can China's Dairy Industry Revitalize? Analysis of Current Status and Way Out
Dairy Industry Suffers Growing Pains
The "double punch" of low-priced imported dairy products and slowing consumption growth - difficulty selling milk begins to emerge
"The raw milk price keeps falling. Two years ago it reached 4 yuan per kilogram, and now it is about to drop below 3 yuan. At this rate, we will soon be losing money." Recently, Lu Xianglai, a dairy farmer at the Xiwang Dairy Farming Community in Xingtang County, Hebei Province, has been very worried. Unable to withstand the continued decline in milk prices, Qiu Shengming, a large-scale farmer in Jinan, Shandong, who has 1,800 dairy cows, is preparing to sell some cows at a low price despite the pain. The situations of Lu Xianglai and Qiu Shengming are not even the worst. As milk prices continue to decline, some places have begun to see practices such as feeding fresh milk to pigs.
Yu Kangzhen, Vice Minister of Agriculture, said that at present more than 50% of China's dairy industry as a whole is operating at a loss. According to fixed-point monitoring by the Ministry of Agriculture, by March the loss-making share of dairy farming had reached 51%, up 5.8% year on year; at the same time, dairy cow inventory fell 11.9% year on year. More seriously, this situation is still continuing and still spreading. So much so that the dairy industry has been listed by some banks as a "high-risk industry."
Analyzing the causes of losses in the dairy industry, Yu Kangzhen said that over the past two years, with the "double punch" of low-priced imported dairy products and slowing growth in dairy consumption, the entire dairy industry has faced challenges, product sales have been sluggish, and the loss-making share has continued to expand.
On the one hand, international milk prices and domestic milk prices are severely inverted. Data released by the International Dairy Economics Society show that in May this year, the average global raw milk price was equivalent to 1.44 yuan per kilogram, while the average raw milk price in China's 10 main producing regions was 3.46 yuan per kilogram. On May 3, auction prices at New Zealand's Fonterra Global Dairy Trade showed whole milk powder at 2,176 US dollars per ton, 58.2% lower than the highest price of 5,208 US dollars per ton in 2013. Recently, the landed price of imported milk powder was 18,000 yuan per ton, while domestic prices were close to 30,000 yuan per ton.
On the other hand, the growth rate of dairy product consumption has slowed. Taking liquid milk as an example, according to National Bureau of Statistics data, in 2015 the total national sales volume of liquid milk was 27.389 million tons, an increase of 3.6% over the previous year. But compared with the average annual growth of 5.1% during the "12th Five-Year Plan" period and 11.1% during the "11th Five-Year Plan" period, the increase was notably low. At the same time, consumer confidence in domestic milk is still in the repair stage.
When a cow is bitten by a gadfly, the cow will feel growing pains. Gao Hongbin, President of the China Dairy Association, said that at present the dairy industry's growing pains are prominently manifested as "threefold difficulties."
The first difficulty is low milk prices. At present, the purchase price of fresh raw milk at large-scale farms has fallen 10% year on year, and at small-scale farming communities and farms, the purchase price of fresh raw milk has fallen 15% year on year.
Another difficulty is the difficulty of selling milk. Under downward pressure on consumption growth, dairy companies have begun to limit purchases of fresh raw milk, with the restricted volume accounting for about 10% of total fresh raw milk production. Some large-scale farming enterprises, also due to sales difficulties, have had to spray raw milk that was not processed into fresh milk into milk powder, with the amount sprayed into powder accounting for about 5% of total fresh raw milk output.
There is also another difficulty: large losses. At present, the loss-making share among dairy enterprises is something not seen in many years.
Yu Kangzhen said that at present, the difficulties facing the dairy industry are related to the broader macroeconomic environment and the cyclical fluctuations of international dairy product prices, but the main reason is still that our own competitiveness is not strong enough, the costs of factors such as feed and labor are rising quickly, the ability to improve cost reduction and efficiency through technology and management is increasing slowly, the integration of dairy farming and dairy processing is still not high, the interest linkage mechanism is not tight, and consumer confidence in domestic dairy products is still not strong.
Deep Development Potential
Dairy consumption is expected to maintain a stable growth trend over a relatively long period
The difficulties facing the dairy industry are also a kind of "growing pains." Gu Jicheng, Secretary-General of the China Dairy Association, said that after years of effort, China's dairy industry has made considerable progress.
Production methods have improved. In 2015, the share of large-scale dairy farming nationwide reached 49%, 29.5 percentage points higher than in 2008. Whole-plant silage feed became rapidly widespread, and mechanized milking and cold-chain storage and transportation were fully realized. The share of milk sources self-built or jointly invested in by dairy enterprises exceeded 20%.
Per-cow milk yield has increased substantially. At present, the average milk yield of Holstein dairy cows is 6 tons, 1.2 tons higher than in 2008. Among them, high-yield dairy cows with a milk yield of more than 9 tons reached 1.5 million head, and a production system centered on large-scale dairy farms and medium- and high-yield dairy cow herds has taken initial shape.
Quality and safety levels have risen significantly. The qualification rate of spot checks for prohibited additives in fresh raw milk has remained 100% for 7 consecutive years, and the main quality and hygiene indicators of raw milk produced by large-scale pastures have reached the level of developed countries. In 2015, the national qualification rate of dairy products reached 99.67%.
Under the combined effect of these factors, China's dairy product output has increased substantially. In 2015, China's dairy cow inventory reached more than 10 million head, and the output of fresh raw milk and dairy products reached 38.7 million tons and 27.82 million tons respectively, ranking third in the world. At the current level of demand, supply is basically saturated.
Gao Hongbin said that imported dairy products have intensified the imbalance between supply and demand. In the first half of this year, cumulative imports of dairy products reached 1.226 million tons, up 30.49% year on year; imports of liquid milk rose 77.31% year on year; imports of infant formula rose 25.42% year on year.
"De-stocking" is an urgent task for the dairy industry. "It is necessary to guide consumption and, by expanding structural supply such as pasteurized milk and cheese products, better meet the people's needs," said Wang Junxun, Deputy Director of the Animal Husbandry Department of the Ministry of Agriculture.
Although the imbalance between 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. Yu Kangzhen said that in 2015 China's per capita milk consumption reached 36 kilograms, an increase of 28.4 kilograms over 2000 and about 6 kilograms over 2008, but it was still only 1/3 of the world average. He said: "Last year, the growth in national liquid milk sales was still relatively fast among all major categories of food. With population growth and rising living standards, dairy consumption is expected to maintain a stable growth trend over a relatively long period, and China's dairy industry is still in an important stage with much to be achieved."
The Way Out Is Right Under Our Feet
Reform and innovation, structural adjustment, and transformation and upgrading are the "only choice" for dairy industry development
How should we respond to the difficulties currently encountered by the dairy industry?
Some people say that since imported dairy products put so much pressure on China's dairy industry, why not just import less? Peng Wensheng, Chief Economist of CICC, said frankly that in fact the continuous decline in international milk prices has been affected by the dairy development cycle. US Department of Agriculture data show that over the past two years, revenue at dairy farms across the United States fell 35%, and in June this year US cheese producers' cheese inventories reached 759 million pounds, an increase of 104 million pounds year on year. Moreover, in today's increasingly deepened trade globalization, the closed-door approach will certainly not work.
"The way out for the dairy industry lies right under our own feet." Han Changfu, Minister of Agriculture, said that reform and innovation, structural adjustment, and transformation and upgrading are the "only choice" for China's dairy industry development. In response to the current problems in the dairy industry, a combination of measures should be used. Continue to strengthen the construction of milk source bases, continue to strengthen the construction of the forage and feed production system, continuously strengthen oversight of the quality and safety of fresh raw milk, continuously strengthen consumption guidance, and use science and technology, material equipment, development concepts, business methods, and industrial organization to reform the traditional industry, reduce costs, improve efficiency, and enhance competitiveness.
Wei Lihua, President of Junlebao, said: "When a cow is bitten by a gadfly, the cow will run wildly with all its strength." At present, supply-side structural reform of the dairy industry is being advanced, and the vitality of dairy innovation is bursting forth.
The path of improving quality and efficiency is becoming ever broader. Just as a coin has two sides, the other side of more than 50% of the entire dairy industry operating at a loss is that some dairy enterprises above designated size have posted "red" performance. Data from the China Dairy Industry Association show that in the first half of the year, sales revenue of dairy enterprises above designated size increased 5.4% year on year; total profit increased 15.8% year on year; and inventory products fell 14.28% year on year. This brings some warmth to the severely challenged dairy industry.
The operating conditions of dairy enterprises above designated size are still acceptable, and one important reason is that many enterprises, especially listed enterprises, have explored from the operation of "10,000-head pastures" a "zero-one model" that opens the door to high quality. Deng Jiuqiang, Chairman of Hebei Flag Dairy, introduced that the "zero-one model" is the "zero-distance integration" model. Modern Dairy, the earliest in China to implement the "zero-one model," has already won the gold award at the World Food Quality Assessment Conference three times in a row. Gao Lina, Chairwoman of Modern Dairy, said that the secret of the company's production of high-quality milk lies in the production model of "integration of planting, breeding, and processing" and "completing the process from milking to processing in 2 hours." By the end of last year, Modern Dairy had built 27 "10,000-head pastures" nationwide, contracted more than 800,000 mu of forage grass, had 230,000 head of high-quality dairy cows in inventory, and had lactating cows with a milk yield of more than 9 tons.
Exploration of a win-win interest linkage mechanism for cooperation between dairy farmers and dairy enterprises is also being steadily advanced. At present, 15,000 dairy farmer professional cooperatives across the country are growing stubbornly like bamboo shoots after spring rain. Zhongding Dairy took a different path, entrusting the full process management of dairy cows at small and medium-sized pastures, supplying high-quality raw milk to large dairy enterprises, and serving as a dairy industry "attendant." This enterprise, founded only in May 2013, through models such as entrustment, equity participation, self-building, and technical trusteeship, has successively integrated 140 pastures nationwide, signed up 100,000 head of dairy cows in inventory, produced 1,100 tons of fresh milk per day, jumped to become one of the nation's top 5 animal husbandry enterprises, and formed the country's largest innovative dairy farmer consortium.
Various explorations are bringing a steady stream of vitality. Although the current situation is severe, we firmly believe that it will not be too long before China's dairy industry emerges from the trough.