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Larger dairy herds will cut Chinese food safety scandals – expert

By Ben Bouckley , 13-Jul-2012
Last updated on 13-Jul-2012 at 12:57 GMT

An explosion in Chinese demand for dairy products in the middle of the last decade led to milk supply shortages that drove suppliers to practices such as diluting milk and add melamine to boost protein readings.

That’s according to David Mahon, MD of Beijing-based research and investment advisory firm Mahon China Investment Management, who told this publication that a push towards larger herds by processors such as China Mengniu Dairy Company, would improve the situation.

Mahon told the Associated Press in late June that shortages still led to “corner-cutting and quality problems” today, with farmers reluctant even to dump milk that they knew had problems.

Speaking to DairyReporter.com this morning, dairy-sector expert Mahon disagreed with the suggestion that Chinese dairy farmers (the majority of whom are small scale) were so poor they had to cut corners, saying they were “generally well off”.

More problematic was the fact that they were not dedicated dairy farmers, he added, and sold cattle for meat if the price was right and also raised crops on their land.

Problems meeting demand

The root cause of the safety scandals that blighted the sector from late 2008 – when melamine tainted formula from Sanlu Group killed six babies – was booming dairy demand from the middle of the last decade, with the recognition that dairy products were good for one’s health, Mahon said.

Leading Chinese processors Inner Mongolia Yilli, but China Mengniu in particular drove this message home, Mahon said, and discerning middle-class consumers began consuming dairy products and buying them for their children, while mothers started using infant formula.

However, in 2007 and 2008, there wasn’t enough milk to supply market demand, he added – because the Chinese dairy herd wasn’t big enough – and this led to unscrupulous suppliers diluting milk and adding melamine to produce false protein readings.

The latest industry crisis – although seemingly not linked to a desire for profit – was Bright Dairy and Food Company’s admission in late June that it accidentally flushed alkaline water into milk cartons.

After the 2008 scandal, the Chinese dairy herd head count dropped in 2009 as consumers shunned dairy products, Mahon said, adding that it wasn’t really until last year that the supply situation began to improve with the move towards more intensive dairy farming.

‘Herds of scale’ will help

However, Mahon said that official estimates as to the number of dairy cattle in China were inaccurate: “They currently say there are 18m heads but we think it is close to 12 or 13m,” he said.

In an evolving industry, Mahon said that there would increasingly be more “herds of scale”, where only 20% were currently ‘herds of size’: at least 500 cows.

In time this would ease supply problems and hopefully put an end to safety scandals, he said; Mengniu announced last month that it planned to phase-out small-scale supplier inside three years.

“Foreign private equity players are now looking hard at scale dairy farms in China – there’s a bit of a theme there,” he added.

“In terms of food safety, some people say it’s getting worse because the quality of governance is getting worse, but I think that there’s greater transparency as a result of greater media attention to such issues,” Mahon said.

“But the Chinese government is quick to act when any safety issue arises and has nothing to gain from covering anything up,” he added.