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For some, the accelerated transformation of China’s dairy industry is already showing some success.


Farmland reform has had an ugly history in China. Mao Zedong came to power in 1949 championing self-sufficiency in food but the agricultural reforms under his Great Leap Forward 10 years later resulted in famine that left at least 30 million dead.

Six decades later and the communist government is still struggling to develop an agricultural framework to match its growing needs. This time, however, it is roping in the foreign private sector – thus Nestlé, the world's biggest food maker whose brands include Nescafé instant coffee and Kit Kat, is pioneering the country's first dairy institute and adjacent 1,000-cow farm as part of national efforts to move from smallholder to big-scale dairy farming.

Other private sector and quasi-private sector companies, including Fonterra of New Zealand and Denmark's Arla, are also being corralled to help restructure the country's dairy industry – often with a little help. Since 2005, the central government has dispersed 1.5 billion yuan ($238-million U.S.) in subsidies, according to the China Dairy Association, with another 260 million yuan to be granted this year.

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The plans are bold. Before the melamine-tainted milk scandal of 2008, which left at least six babies dead and many more hospitalized, triggered a restructuring of the industry, more than 80 per cent of China's milk was produced in small farms. Large-scale dairies, those with more than 1,000 cows, contributed just 7 per cent of the country's raw milk versus nearly half in the U.S.

But Beijing's efforts to change the structure go beyond reacting to the scandal. They also speak to global trends that are worrying governments and food manufacturers across the globe: how to feed an increasing number of mouths from the same amount of land while still ensuring quality and safety of produce.

"The specific challenge for us is where do we find the milk, the cocoa beans and the rest," says Nandu Nandkishore, who runs emerging markets for Nestlé. "This is a real business challenge because if we don't have quality raw materials, we don't have a business."

Nestlé had already sought a way around this by creating a series of "hub" stations, where farmers with a few cows could come and deposit their milk, which was quality-checked at the door and further tested before being driven direct to the factory.

Now that system is changing as the government prods manufacturers into bigger farms. Nestlé, like its domestic Chinese dairy counterparts Mengniu and Yili, as well as New Zealand's Fonterra, is moving to large farms. But small dairy herds will not be forgotten: in what sounds like model communism, Nestlé will create communal cow sheds where smaller herds can be brought together.

Roland Decorvet, who heads Nestlé's China operations, says the transformation is taking place "in quite a speedy way … Farmers are leaving by the truckload to the city, where the minimum wage is slightly more than you make with five cows and you don't have to wake up at five o'clock in the morning."

China's five-year plan for agriculture forecasts that 40 million farmers will quit their farms for cities between 2011 and 2015.

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While the logic is sound, no one is under any illusions about the scale of the project. The dearth of training is one problem, which explains Nestlé's decision to open the dairy institute, due to be up and running next April, in collaboration with a U.S. university.

Not everyone is convinced this will be enough. Mark Voorbergen, an international dairy consultant, is skeptical. China, he says, is the world's biggest milk importer – shipping in more than 5 million tonnes last year – and faces a huge challenge in morphing "backyard" farmers into specialist milk producers. "China, as with most of Asia, has never been much of a milk-producing region," he says. Milk "has never been an important part of the diet so there is no culture of milking cows, let alone making that your primary source of income."

Mr. Voorbergen also cites the lack of feed supply for dairy. As China's middle classes continue to grow, their diets are changing too, which means more pork and chicken is being eaten. That is putting pressure on feedstock supplies for all farmers.

Yet for some, the accelerated transformation of the dairy industry – China has imported nearly 300,000 foreign heifers in the past three years, according to China Confidential, the Financial Times' online research service, as well as tonnes of frozen bovine semen – is already showing some success.

Martin Wu, dairy analyst for Rabobank in Shanghai, says milk quality in China has improved markedly since the melamine scandal.

"The best evidence is that you can see more and more dairy manufacturers building dairy farm buildings," he says. "Before the melamine crisis, most of the dairy manufacturers were focusing on how to drive sales, doing more activities related to brand-building, but paying less attention to their raw milk supply."

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Mr. Voorbergen demurs. He says every other milk-producing country in the world has taken generations to complete the transformation China wants within just one generation.

But Mr. Decorvet sees the current generation as only too happy to oblige. "Farms of two to three cows have melted like snow in the sun," he says. "Farmers don't have the stamina to stay and don't make enough money."

Copyright The Financial Times Ltd. All rights reserved.

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