Marketing milk: one year on from melamine in China

Posted by Daniel Palmer on 25th August 2009

China’s fledgling and buoyant dairy industry was brought to its knees after last year’s melamine scandal but, slowly, there are signs growth is returning to the sector. Beijing has ordered China’s dairies to tighten up their supply chains and the country’s top processors are highlighting those moves to convince consumers their milk is safe. Mark Godfrey reports from Beijing.

The marketing gloves are back off in China’s dairy industry.

Almost a year on from the melamine contamination that killed at least six children and sickened thousands, and with an apparent industry-wide recovery in full swing, China’s top dairy processors are outdoing each other in a PR onslaught to assure consumers of their supply chains are robust.

Market leader Mengniu sent 500 million New Year messages to China’s mobile phone users assuring them of safe milk and has elaborately detailed its supply chain on an easy-to-use website. The Yili Group, China’s second-largest dairy producer, has launched an attempt to grab the initiative from Mengniu with a nationwide advertising offensive under the slogan ‘Milk You Can Trust’.

However, in the wake of the melamine scandal, which sunk China’s top milk powder producer, Sanlu, there’s been a reluctance to come out with new products until it is clear how sustainable any rebound is. “For now firms are putting all their efforts into securing the supply chain; they’ve had to work so hard on this,” explains Wang Huaibo, a Beijing-based agronomist and author of 50 Years of the China Dairy Industry.

Nevertheless, China’s dairy sales rose 12.4% in the first quarter of 2009, compared to figures for the last quarter of 2008, according to agribusiness analysts Rabobank. Yili announced first-quarter profits of US$19.5m – double what it earned in the previous quarter. Mengniu has said it will reverse a US$150m loss in 2008 to a profit of at least US$100m in 2009.

Offering confidence that the recovery will continue, Song Kungang, director general of the China Dairy Industry Association, last month predicted in an interview in the country’s key People’s Daily newspaper that, by December, overall dairy consumption will be back to 90% of pre-melamine crisis sales levels.

Sales may have been lifted by the Chinese government tightening milk supply chains while also using subsidies to replenish the national dairy herd. Though short on specifics, China’s overhauled regulatory regime in the wake of the poisoning scandal will centre on a National Food Quality Supervision & Inspection Centre, tasked with applying best global practice in China’s regions. More dramatically, the government’s Department of Agriculture claims to have shut 4,000 of the country’s 20,000 milk collection stations, points to which farmers either delivered milk or their cows to be milked.

Meanwhile, China’s leading dairy producers have also made much of improved supply chains. Yili has created what it calls ‘cow communities’, which put 2,000 cows in the hands of a limited number of tightly monitored (but still independent) farmers.

Others are more sceptical of dramatic change. China’s lack of pastureland means more than 80% of its milk comes from households keeping an average of five cows, according to the China Dairy Yearbook. This is unlikely to change, says Jiang Yaming, director of one of several farms supplying Shanghai-based Bright Dairy Co. “Government would prefer to see milk production as an income source for poor peasants. The problem with that is there’s only basic knowledge of animal husbandry and milk quality.”

In any case, several Chinese cities have already long been spending on Yili-like ‘dairy zones.’ Farmers near Tianjin, east of Beijing, take their cows – purchased with CNY5,000 (US$731.50) per cow subsidies – to milking stations supervised by local authorities. Milk output in Tianjin has climbed from 22,000 tonnes in 1980 to 200,000 tonnes in 2008, according to the local branch of the China Association of Dairy Industry.

Subsidies and a rebound in price are double good news for China’s milkers. In Xingtang County, a suburb of Sanlu’s homebase and regional capital, Shijiazhuang, local media has reported US$12m in subsidies to augment a local herd of 75,000 Friesian and Holstein cows. Milk prices have rebounded to RMB2.60 (US$0.33) a litre, says Cao Shen, the manager of a 250-cow dairy in Xingtang, a region of Hebei better known for water melon farms and market gardens. In November 2008, the farm was forced to accept RMB1.4 (US$0.20) per litre.

Elsewhere, government support has also extended to publicity campaigns. An official at the Chongqing Dairy Industry Office reveals government funds have been marked for cow herds and promotion. “Local TV has been alerted to make programmes and news reports showing the reform of the local dairy industry and health benefits of milk,” the official says.

However, after the melamine scandal, foreign investors remain cautious about stepping up their involvement in China’s dairy industry. Having watched New Zealand-based Fonterra get burned by the collapse of its joint venture partner Sanlu, foreign investors have backed away from China’s milk sector.

The scandal choked potential cash for smaller dairy firms receptive to foreign investment, notes Frank Kaiser, a dairy analyst at the Shanghai offices of InterChina Consulting. Nevertheless, he adds: “There has not, however, been the cull of weaker players that might have been expected as government was intent on restoring confidence at all cost.”

China’s dairy scene is still seen as having long-term potential for investors, which, pre-melamine, targeted the sector in recent years based on optimism that the country’s per capita dairy consumption will continue to rise from the current individual average of 30 kilos towards the world average of 120 kilos. Rabobank has calculated that 50% of global rise in demand for dairy is coming out of China and India.

A dairy analyst at the Rabobank’s Shanghai branch, Cindy Yang, sees a great future for local and imported dairy products. “It’s inevitable given continuing urbanisation and the spread of western food chains like McDonald’s.”

However, foreign investors may have to focus on tapping into the local industry, rather than shipping their wares into China. As Kaiser insists, local brands will continue to have an edge. “They’re cheaper than foreign imports.”

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