produced in Inner Mongolia can cost as much as 3 yuan per kg. The prices are expected to continue rising as winter approaches in the major raw milk bases in the north. Just before this August spike, the purchase price nationwide had held steady around 1.7-2 yuan per kg for the past couple of years.

China saw pork price hikes earlier this year due to an increase in the price of feed, and a shortage of pigs. After pork prices dropped from their peak level, prices of milk have soared in a similar way. Since this August, the retail prices for milk powder produced by foreign brands Wyeth and Dumex have increased by 5-20 percent, and domestic brands soon followed. Since then, the DAC has allied with more than 100 dairy manufacturers to negotiate for solutions and measures.

Supply scramble

Many large dairy manufacturers have to purchase raw milk outside their bases due to the shortages in the local raw milk supply. At the end of August, Wonder Sun Dairy and Heilongjiang Dairy Group, all based in Heilongjiang Province, submitted a complaint to the Central Government that Mengniu and Yili from Inner Mongolia had been poaching raw milk on their turf.

Yet, since China is increasingly marked by a market economy, the government will do nothing about such complaints. Cow breeders retain the right to sell milk to whoever offers the most competitive prices.

"The competition is conducive to increasing the income of cow breeders and we should offer them choices," said Qi Xiaorong, head of Mengniu's raw milk department.

Large dairy manufacturers have vied to establish processing factories in major cow breeding regions including Gansu, Shaanxi, Hebei and Heilongjiang provinces, competing with local manufacturers over raw milk. For instance, Yili, Mengniu and Bright have all constructed factories in Shaanxi Province.

Manufacturers who control the raw milk bases will enjoy advantages of lower costs in future competition. Manufacturers busy beating down the purchase price of fresh milk a year ago have had to secure a portion of the raw milk market at much higher prices today.

Eerguna in Inner Mongolia hosts one of Nestle's major milk bases in China. As Nestle offered purchase prices much lower than that in surrounding regions, local dairy manufacturers such as Beixue and Caoyuanchun have had to come to Eerguna for raw milk. At present, the city sells as much as 100 tons of milk to manufacturers outside the city every day. Under this pressure, Nestle has increased its purchase price for the fourth time since April 2007.

According to Wei Kejia, Secretary General of the DAC, the domestic dairy sector has been overdeveloped in the past several years and all large and medium-sized manufacturers are faced with a shortage of raw milk. Besides this, cow breeders and milk sheds are loosely connected to the dairy manufacturers by contracts. Individual breeders feed up to several dozen cows; the milk sheds collect raw milk from them in one village and in turn sell it to manufacturers. The lack of efficiency on the part of cow breeders is probably one important reason for their losses.

The soaring costs have brought uncertainty to China's dairy sector and dairy manufacturers are adjusting their strategies, from focusing on liquid milk products to milk powder with higher value-added in hopes of easing cost pressure. Wei believes large manufacturers capable of beating prices down enjoy cost advantages over small ones that have to buy milk powder and fresh milk at any cost for production.

Words from the wise

Wei believes the protection of cows should be the government's top priority to ensure a healthy development of the sector. A cow breeder will spend an average of 50,000-odd yuan buying five cows, a large investment for any ordinary household in China. Furthermore, the investment won't see returns until at least 25 months after the birth of a calf. Subject to a fickle market, epidemics and other risks, individual cow breeders have little chance to see a return if they suffer losses, said Wei. He advocates that the government must provide cow breeders with more favorable measures such as feed subsidies, cow insurance and loans to buy cows.

Besides these measures, the government should focus on fine breeding, establish a complete network to monitor, forecast and control related epidemics and ensure a competent veterinary team available at grassroots veterinary hospitals, Wei advised.

The government could also allocate financial subsidies for milking equipment and environment friendly machines in order to enhance the production efficiency and quality of dairy products. It could also consider encouraging the society of cow breeders to make technical guidance, feed supply and sales channels accessible to individual breeders and to play a more active role as a coordinator to better safeguard the interests of cow breeders.