By Mike Caggeso
China's demand for dairy products is so strong that worldwide milk prices have spiked and fattened the wallets of farmers around the world. And yet about 30% of China's dairy farmers lost money last year, the country's National Development and Reform Commission reported.
And with liquid milk consumption in China projected to grow at a 15% annual clip for each of the next five years, the central government is urging local jurisdictions to implement measures to support dairy farmers by the end of the year. The reason: The government is worried that China's frustrated dairy farmers will fight back and try to recoup their losses by sending the price of domestically produced milk soaring skyward.
China's Milk Price Paradox
It's a bit surprising that China would need any dairy-farming incentives, given that country's increasing consumption of dairy products. China's demand for dairy has offset the global dairy trade, fattened the wallets of dairy farmers around the world, and opened several opportunities for investors to profit. Yet, it hasn't been enough to carry its own dairy farms.
The high-loss rate among domestic Chinese dairy farmers are blamed on several factors:
- The cost of feed increased by 30%, underscoring the long-term profit opportunity in rising global commodity prices.
- The cost of human labor has doubled, a downside to the economic miracle tale; while higher wages enable domestic consumers to buy more, they also drive up production costs, and in a big way, since the ascent is so steep.
- And expenses for transportation, water and power have also increased – though the degree of increase has varied from region to region. But those rising costs are also a result of the strong growth China is experiencing.
Making the Move Now
But with liquid milk consumption expecting to grow 15% each year for the next five year, China's government is intervening now before the dairy farmers take power into their own hands and jack up prices.
Why haven't farmers done so already? After all, other food prices are rising sharply – meat, in general, is up 50%, while pork was up 86%, according to a study done this summer. The prices of eggs and other dairy products also spiked.
But the price of milk at the wholesale level remained flat last year in China, and combined with increasing costs of operation, dairy farmers lost an average of 1,200 Yuan (about $160) per cow, the state-run news agency, Xinhua, reports. The average price of milk didn't move because farmers didn't raise prices out of fear backlash from markets and retailers.
This further proves how competitive and premature the Chinese dairy boom actually is. Dairy products in China haven't fully infiltrated the diets of China's surging middle class. But that's going to change as wages continue to rise and as Chinese consumers continue to emulate the wants and desires of their counterparts in western markets such as the United States.
Government officials understand all this. So the government is rolling out a broad subsidy program for all raisers of cows that produce offspring in the country. Previously, the program was offered in 181 counties. The government will also extend loan payment periods for farmers, allowing them to invest more into their operations. In addition, the government will also encourage dairy breeders to buy insurance.
A lot is riding of these dairy-boosting measures. And if farmers aren't happy with the government's incentives, the rest of the world will likely have to deal with another sharp price hike in average price of milk.
Got Milk (Profits)?
Two American companies are also positioned to feed China's need for dairy. Shares of Maryland-based Synutra International, Inc. (SYUT) have moved a blistering 141% since the start of the year.
[For our full investment report on potential ways to profit from the growth in dairy demand in China, please click here. The report is free of charge.]
Related Stories and Links:
- People's Daily Online:
China steps up efforts to promote troubled dairy industry.
- Money Morning:
Four Ways to Profit as China Ignites Global Milk and Dairy Prices.
- Money Morning News Analysis:
As China Soars, Prices Are Rising More Than Most Realize.
- Money Morning Investment Analysis:
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