Van de Ven, Roel Bernardus Martinus - Ghent University...

Academic year 2014-2015

DRIVERS AND CONSTRAINTS OF CHINESE DAIRY

FARMING DEVELOPMENT

Van de Ven, Roel Bernardus Martinus

Promotor: Prof. Jeroen Buysse

Thesis submitted in partial fulfilment of the requirements

for the joint academic degree of International Master of Science in Rural Development

from Ghent University (Belgium), Agrocampus Ouest (France), Humboldt University of

Berlin (Germany), Slovak University of Agriculture in Nitra (Slovakia) and University of

Pisa (Italy) in collaboration with Wageningen University (The Netherlands).

I

This thesis was elaborated and defended at Ghent University (Belgium) within

the framework of the European Erasmus Mundus Programme “Erasmus Mundus

International Master of Science in Rural Development “(Course N° 2010-0114 –

R 04-018/001)

Certification

This is an unpublished M.Sc. thesis and is not prepared for further distribution.

The author and the promoter give the permission to use this thesis for consultation

and to copy parts of it for personal use. Every other use is subject to the copyright

laws, more specifically the source must be extensively specified when using results

from this thesis.

The Promoter The Author

Prof. J. Buysse R.B.M. van de Ven

Thesis online access release

I hereby authorize the IMRD Secretariat to make this thesis available on line on

the IMRD website.

The Author

R.B.M. van de Ven

II

Table of Contents Foreword .................................................................................................................................. IV

Abstract .................................................................................................................................... IV

List of Figures and Tables..................................................................................................... VIII

Abbreviations ........................................................................................................................... IX

1 Introduction ........................................................................................................................ 1

1.1 Problem Statement ...................................................................................................... 1

1.2 Research Objectives and Research Questions ............................................................. 3

1.3 Methods and Materials ................................................................................................ 4

1.4 China and Dairy .......................................................................................................... 4

1.5 Academic and Practical Relevance ............................................................................. 6

1.6 Structure ...................................................................................................................... 7

2 Theoretical Framework ....................................................................................................... 8

2.1 Chinese Dairy Farming in an International Context ................................................... 8

2.2 Chinese Agricultural Modernization Process .............................................................. 9

2.3 Resource-Based View ............................................................................................... 10

2.4 The Resource-Based View in Dairy Farming Development ..................................... 13

3 Methodology ..................................................................................................................... 14

3.1 Value Chain Mapping ............................................................................................... 14

3.2 Participant Recruitment ............................................................................................. 15

3.3 Interview Design ....................................................................................................... 15

3.4 Interview Analysis..................................................................................................... 16

3.5 Evaluation with Resource-Based View ..................................................................... 17

4 Value Chain Analysis ....................................................................................................... 18

4.1 Dairy Farming Systems ............................................................................................. 18

4.2 Dairy Farming Inputs ................................................................................................ 22

4.3 Dairy Farming Processes ........................................................................................... 27

4.4 Dairy Farming Output ............................................................................................... 30

4.5 Dairy Processing ....................................................................................................... 30

4.6 Link between Dairy Farming and Dairy Processing ................................................. 33

4.7 Dairy Consumption ................................................................................................... 39

4.8 Dairy Supply Chain Development ............................................................................ 42

5 Results and Discussion ..................................................................................................... 46

5.1 Challenges at Dairy Firm Level ................................................................................ 46

5.2 Ideal Farm Location .................................................................................................. 49

5.3 Challenges at Industry Level ..................................................................................... 51

5.4 Resource-Based View in Chinese Dairy Farming..................................................... 55

III

6 Conclusion and Limitations .............................................................................................. 59

6.1 Conclusion ................................................................................................................. 59

6.2 Limitations ................................................................................................................ 61

7 Practical Recommendations and Further Research .......................................................... 62

7.1 Practical Recommendations ...................................................................................... 62

7.2 Opportunities for Further Researchers and Value Chain Actors............................... 62

8 References ........................................................................................................................ 66

Appendixes .............................................................................................................................. 72

IV

By three methods we may learn wisdom: First, by reflection,

which is noblest; Second, by imitation, which is easiest; and

third by experience, which is the bitterest.

-

Confucius

Founder of Confucianism

(551-479 BC)

http://www.brainyquote.com/quotes/quotes/c/confucius131984.html




V

Abstract

Chinese government targets its milk production on 57 million tons in 2020, while current milk

production is just 30 million tons (NBS, 2014). This study aims to identify drivers of and

constraints to the feasibility of this production target and to dairy farming development in

general. The nature of this study is explorative, employing qualitative research methods with

field research in China. Results will serve as input for a resource-based view application to

seek for sustainable competitive advantages in Chinese dairy farming.

Existing literature is validated with interview results concluding that drivers for Chinese

dairy farming development are derived from increasing welfare growth of domestic consumers.

Constraints are identified on farm-level and industry-level concluding that major constraints

are found in natural resource scarcity, environmental pollution, underdeveloped Chinese dairy

markets and growing global competition.

Dairy farming development and production growth can occur in two distinct dairy

farming locations related to the conflicting factors of market proximity and resource

availability. Furthermore all Chinese value chain functions have been upgraded in the past

decades except for input supply, which is still highly dependent on costly imports. Therefore

major benefits can be obtained from investments in dairy farming input supply, although this

is subject to major constraints.

The competitive environment of Chinese dairy farming, in particular scale farming, is

changing towards more influences of global competition. Chinese raw milk prices have

diverged from global prices after the melamine crisis due to a shortage of raw milk in China.

However the raw milk market is currently saturated, since dairy processors have found other

channels to procure their inputs, new dairy farms have entered and existing farms have

improved. In this changing environment Chinese dairy farming has few sustainable competitive

advantages, found in organizational and financial resources.

VI

Preface

After six months of dedication towards the fascinating Chinese dairy industry, I can

conclude that it has been a true expedition in unexplored fields, both during the field research in

China as well as the desk research in the Netherlands at the FrieslandCampina office. Little is

known about the Chinese dairy sector in academics, which forced me to reconsider my research

design towards, for me, unexplored qualitative research methods. I hope to contribute by

providing a basis for further research in one of the most interesting dairy sectors around the

globe. I am the first one to acknowledge that Chinese dairy is incomparable interesting, despite

the obstacles the topic has given me during the road of thesis writing. From day one until the last

moment I have been intrigued with the dynamics in Chinese dairy enhanced by the devoted

people working in this sector.

Fortunately, I was able to rely on many people’s expertise and encouraging advice. First

of all I would like to thank Atze Schaap, director of Dairy Development within

FrieslandCampina, for the opportunity to conduct my master thesis within the wonderful world of

dairy development and his infinite source of experience I could rely on. Secondly, I am very

grateful to Marleen de Rond, Dairy Market Analyst within FrieslandCampina, for her practical

guidance and enthusiasm during the research period. Also I would like to thank Professor Jeroen

Buysse and Bérénice Dupeux, who guided me through the process with their constructive

feedback and support. Furthermore, I would like to thank my parents for their continuous support

during my studies at first in Tilburg and later around the globe as part of the IMRD program.

They have always encouraged me to get the best out of myself by stimulating my choices, aiming

to strengthen my capabilities and gain a variety of experiences. Most of all, I would like to thank

Marly for her patience, support and faith, wherever I was on this globe.

However, this research would have been impossible without the great support of the

SDDDC in Beijing. In special I would like to thank Liu Xiao, Liu Kai and Professor Li Shengli

for their unlimited hospitality during my field research. Thanks to their amazing effort, I was able

to interview this many value chain actors, which I thank for sharing their experiences. The last

big thanks go to Jacky Yeh and Sophie van Kilsdonk for their help during the interviews.

In conclusion, the last six months have provided me with multiple life lessons and great

experiences to carry with me for the rest of my life. The whole IMRD program has been a

fantastic journey around the globe and provided me with unique insights in the fascinating world

of food and agriculture. I consider myself privileged with the valuable memories gathered

throughout my journey. I hope to continue creating new memories in my new position as

management trainee of Rabobank.

VII

FrieslandCampina

This research is conducted in close cooperation with Royal FrieslandCampina, which

is a Dutch dairy company, wholly owned by the cooperative FrieslandCampina.

FrieslandCampina has offices in 32 countries with 22,000 employees and its products serve

markets in more than 100 countries. The activities are divided over four business groups,

namely Consumer Products Europe, Middle-East & Africa; Consumer Products Asia; Cheese,

Butter & Milk powder and Ingredients. The strategy ‘Route 2020’ focusses on growth and

value creation. Due to its cooperative basis FrieslandCampina aims to generate the most value

to the milk delivered by the member farmers of FrieslandCampina.

The Chinese dairy market has been growing rapidly over the past years and is expected

to grow to one of the largest retail markets in the world according to experts within

FrieslandCampina. FrieslandCampina has a specific department, named Dairy Development,

with the responsibility to monitor and contribute to the development of the dairy sector in

China. FrieslandCampina has set up a knowledge sharing center in China, together with

Wageningen University and China Agricultural University, which is named Sino-Dutch Dairy

Development Center (SDDDC). In short, this research is carried out in intensive cooperation

with Dairy Development Department of FrieslandCampina and the Sino-Dutch Dairy

Development Center (SDDDC).

VIII

List of Figures and Tables

Figures

Figure 1.1. Development of milk production between 1995 and 2014 in China in million MT … 2

Figure 1.2: Geographical distribution of dairy deficits or surpluses on provincial level … 5

Figure 1.3: Milk production and dairy consumption in China in 2012 … 15

Figure 1.4: Overview of thesis structure … 7

Figure 2.1: Overview of the resource-based view … 12

Figure 4.1: Overview of simplified Chinese dairy farming value chain with four distinct … 18

Figure 4.2: Overview of the farming function in the Chinese dairy value chain … 19

Figure 4.3: The number of cattle distributed over farm size in 2011 and 2012 … 20

Figure 4.4: Increase in Chinese alfalfa (and pellets) imports after melamine crisis … 23

Figure 4.5: Chinese and U.S. corn prices between 2001 and 2015 … 23

Figure 4.6: Chinese dairy cattle imports and its destination between 2009 and 2013 … 25

Figure 4.7: Agricultural water use, total water use and total water resources… 25

Figure 4.8: Produced volume of dairy products 2000-2012 … 33

Figure 4.9: Chinese dairy imports between 2001 and 2013 … 37

Figure 4.10: Global, New Zealand and Chinese raw milk prices between 2006 and 2015 … 37

Figure 4.11: Overview of Chinese dairy value chain with value chain functions … 45

Figure 4.12: Schematic overview of Chinese supply chain development … 46

Figure 5.1: Ideal dairy farming provinces geographically presented … 50

Figure 5.2: Overview of identified constraints and drivers along the value chain based on its category … 54

Figure 7.1: Three identified policy objectives in China … 66

Figure 7.2: Two generic strategies combined with factors considered of ideal dairy farming locations … 67

Figure B.1: Urban consumer dairy expenditure per capita and regional GDP per capita in RMB in 2012 … 78

Figure B.2: Regional rural and urban pure milk consumption per capita in 2005, 2010 and 2012 … 78

Figure B.3: Urban dairy consumption per capita in volumes in 2005, 2010 and 2012 … 79

Figure B.4: Urban dairy consumption per capita in value in RMB in 2005, 2010 and 2012 … 79

Figure B.5: Proportional urban dairy consumption per capita in terms of value in 2005, 2010 and 2012 … 80

Tables

Table 4.1: Thee distinct types of dairy processors … 34

Table 4.3: The distinction of raw milk suppliers within Mengniu and their additional payments … 39

Table 5.1: Overview of the ten identified constraints in Chinese dairy farming on farm-level … 48

Table 5.2: Overview of the eleven factors considered in the ideal Chinese dairy farming province … 51

Table 5.3: Overview of motivation for feasibility of 2020’s production target … 53

Table 5.4: Application of VRIN-model … 58

Table A.1: Selection of the variety of feed inputs used at the visited case study farms … 77

Table B.1: Raw milk quality performance bonus expressed in RMB/kg … 78

Table C.1: Dairy farming interviewees and their characteristics …81

Table C.2: Interviewees and their characteristics in relation to their identified ideal dairy farming province … 82

Table C.3: Interviewees and their characteristics in relation to feasibility of milk production target … 83

Table D.1: Total overview of interviewees (part 1) … 84

Table D.2: Total overview of interviewees (part 2) … 88

Table F.1: Results of challenges on farm-level before data reduction … 99

Table F.2: Results of the identified factors considered regarding ideal dairy farm provinces before data

reduction … 104

Table F.3: Results of the motivation if the milk production target is reachable on industry-level before data

reduction … 109

IX

Abbreviations

AQSIQ: The General Administration of Quality Supervision, Inspection and Quarantine

BSE: Bovine Spongiform Encephalopathy (Mad Cow Disease)

CAAA: China Animal Agriculture Association

CNCA: Certification and Accreditation Administration of the People’s Republic of China

FAO: Food and Agricultural Organization of the United Nations

FYP: Five Year Plan for national economic and social development

FMD: Foot-and-Mouth Disease

GDP: Gross Domestic Product.

IMF: Infant Milk Formula

IFT: Infant Formula and Toddler

IPR: Intellectual Property Rights

MOA: Ministry Of Agriculture

MT: Metric Tons

NBS: Chinese National Bureau of Statistics

NFD: Non-Fat Dry (milk)

NDTIS: National Dairy Technology Institute System

R&D: Research and Development

RMB: RenMinBi, equal to Yuan (¥)

SEI: Strategic Emerging Industries

SMP: Skimmed Milk Powder

UHT: Ultra High Temperature (milk processing), Long shelf life

WMP: Whole (-fat) Milk Powder

1

1 Introduction

China has been a net dairy importer and is expected to continue importing dairy

products. However the Chinese aim to reduce these imports by increasing domestic milk

production and develop Chinese dairy farming. This study aims to provide an insight in the

feasibility of this aim, since constraints to this development are expected to appear.

Demand for dairy products is booming in China driven by several mutually reinforcing

factors including rapid income growth, promotion by the government and dairy industry,

changes in urban lifestyles and development of new and more sophisticated marketing channels

(Zhou et al., 2002; Fuller et al., 2008). This tremendous rise in dairy demand is expected to

continue given China’s current GDP growth rate of 7.7% (World Bank, 2015). In order to meet

dairy demand, the 12th Five-Year Plan on National Farming (2011-2015) delivered by the

Ministry of Agriculture sets the target of milk production to be 50 million tons in 2015. In April

2015, the MOA released China Agriculture Outlook 2015-2024 stating milk production to

reach 43.97 million tons in 2020 and 47.60 million tons in 2024. The ministry of agriculture

expects dairy consumption to reach 57 million tons in 2020 and 63 million tons in 2024,

resulting in net dairy imports of 22-24%. In this recent release MOA lowers its expected milk

production, since the target of 50 million tons (12th Five-Year Plan) might not be reached either.

The latest statistics available indicate a similar thought that the growth expectations should be

lowered. Chinese milk production in 2014 accounted for roughly 30 million tons, which still

means a 27 million tons absolute growth in milk production in seven years. Thus Chinese dairy

production should grow significantly, in this study the drivers of and constraints to this

ambition are identified and discussed.

1.1 Problem Statement

Figure 1.1 provides an overview of the development of Chinese dairy production between

1995 and 2014. By analyzing the growth of dairy production, four phases can be distinguished

based on three major events that took place over the last two decades.

2

Figure 1.1. Development of milk production between 1995 and 2014 in China (Source: NBS)

For decades Chinese dairy production was characterized by small-scale farmers with a

small number of dairy cows. Historically, the majority of Chinese considered milk as nutrition

supplement, particularly for infants and the elderly, but since late 1990’s the demand for milk

in urban areas has exploded due to an increasing perception of milk for regular consumption

(Zhou et al., 2002). At the beginning of the 21st century, Chinese dairy farming has expanded

driven by an increased demand for dairy products. In the late 1990’s and early 2000’s, under

government’s impulsion dairy production was scaled up and large dairy processors started to

develop a sophisticated supply chains for dairy processing (Zhou et al., 2002). Milk collection

centers were set up in rural areas, where afterwards dairy processors produced dairy products

for urban citizens. Yili and Mengniu, two large dairy processors, are good examples of this

past development. Their expansion strategies focused on collecting milk and process Ultra-

High Temperature (UHT) milk in mainly the Inner Mongolia province. The UHT milk was

distributed and sold in the urban areas mainly in the coastal regions. The growth in milk

production between 2000 and 2008 amounted for 247% increase (Figure 1.1)

In 2008 a rapid end came to this growth, due to the melamine crisis (Figure 1, NBS).

Several dairy processors added artificial protein melamine to milk powder in order to increase

the nutritional value of their product, as a result many infants fell ill due to the poisoned infant

formula and some even died (BBC, 2008). The melamine crisis resulted in a loss of consumers’

confidence in Chinese dairy products and the government announced a reform program

whereby the dairy supply chain faced significant restructuring with consequences for all actors

(Tolkamp, 2012). In general quality and safety were more emphasized at the expense of

quantity. This reform program was called ‘National Development Plan for Dairy Farming

3

(2009-2013)’ is developed by a combination of private and public actors. A combination of

market adjustment and government support was assumed to lead to healthy dairy development.

Market adjustment mechanism let to a strong decrease in backyard farms, since the new

safety and quality requirements could not be met by backyard farmers. Governmental support

and private investments led at first to the vertical integration of scale dairy farms with dairy

processors. Many investments in scale farms followed enhanced by high global dairy prices.

The government forced many backyard farmers to unite in dairy communities and supported

these newly formed units. In general, the loss in dairy production by the exit of backyard

farmers is just partly compensated by the introduction of large scale dairy farms. Therefore a

stable and slightly decreasing dairy production could be noticed after 2008 in Figure 1.1.

Despite governmental influence, the Chinese milk production has stagnated since 2008,

while the Ministry of Agriculture has a target to grow milk production significantly in order to

meet the growing dairy consumption. The drivers for milk production growth are found in

economic prosperity and a government avoiding dependency on food imports. However,

constraints to this development appear originating from the limited availability of required land

and water resources, increased food quality and safety requirements and growing

environmental concerns. Furthermore this dairy farming development should occur in an

environment with increasing global competition, in which Chinese dairy farming competitive

advantages might be limited.

1.2 Research Objectives and Research Questions

This study aims to identify drivers of and constraints to the feasibility of the milk

production target and to dairy farming development in general. Therefore the purposes of this

study are (1) to describe Chinese dairy farming and dairy value chain, (2) to identify the drivers

of and constraints to the growth of milk production and dairy farming development, (3) to

evaluate the development of Chinese dairy farming by seeking for sustainable competitive

advantages. This leads to the general research objective of providing an insight on how Chinese

dairy farming development will evolve in the future.

The research objective is boiled down to four research sub-questions:

I. How is Chinese dairy farming operated?

II. How is the Chinese dairy value chain constructed?

III. What are the constraints to the Chinese milk production development?

4

IV. What sustainable competitive advantages can be achieved in Chinese milk

production based on its resources to determine Chinese dairy farming development?

1.3 Methods and Materials

Limited academic English-written literature is available regarding the research topic. In

addition, the topic is very broad and rather explorative. These two reasons make qualitative

research methods more suited than quantitative models to answer the research question.

Interviews consisting of an unstructured part and a semi-structured part have been conducted

with Chinese dairy value chain actors serving the dual purpose of this research. The first

purpose relates to the understanding of Chinese dairy farming and industry (RQ1 and RQ2),

which has been met with the help of value chain mapping. Interview results, together with

available literature, serve as input for the value chain mapping analysis. This analysis is

required for the understanding of drivers and constraints to dairy farming development, which

is the second purpose of this research. Results from the semi-structured part of the interviews

have been used to identify these constraints on two different levels, namely farm-level and

industry-level. Furthermore China’s ideal dairy farming regions have been identified, to

indicate locations for dairy farming development and milk production growth. At last these

results have been evaluated based on the resource-based view to seek for competitive

advantages in Chinese dairy farming.

1.4 China and Dairy

After three decades of autocratic socialist rule, the regime of Deng Xiaoping started an

era of market-oriented economic development including trade with other nations (Tolkamp,

2012). This resulted in more economic freedom and prosperity, improving the living standards

of Chinese. However political influence and control is still present within the economy, which

makes the Chinese economy a free-market economy planned by the communist party.

Hofstede’s cultural dimensions (consulted July 2015) describe Chinese culture as high

in power distance (80), low individualism (20) and high in long-term orientations (87). This

means that Chinese society accepts inequalities among people and less powerful society

members accept formal authority. Since Chinese are optimistic about people’s leadership

capacities. The score of 20 for individualism indicates Chinese culture as highly collectivist,

where people obey to the interest of the group rather than individual gain. A score of 87 in

long-term orientation means that Chinese culture is very pragmatic, where people consider the

truth depending on the situation, context and time.

5

The People’s Republic of China is administered by the Communist Party China (CPC).

The government develops five-year plans to guide the economic, social and environmental

system with policies. The 12th five-year plan from 2011 to 2015 does not follow the ‘growth at

any cost’ strategy as developed in the previous five-year plan, but focusses on a more balanced

and sustainable growth with a long term focus (Tolkamp, 2012). The agricultural sector is

supported with subsidies. The dairy industry is subject to an additional reform plan during this

period, named “the National Development Plan for Dairy Farming”, which aims to achieve a

sustainable and healthy development by market adjustment, strengthened supervision and a

mechanism to ensure food quality and safety. In general, the policy focus has shifted from

increasing milk production to guaranteeing the safety and quality of dairy along the chain. In

practice, the Chinese government and the dairy industry have invested significantly in new

supply channels and modernization to achieve this development goal (Tolkamp, 2012).

China’s milk production is located in the geographical north due to a more-suitable

climate for dairy farming, while the majority of consumers reside in the Western and Southern

coastal provinces. Figure 1.2 presents a map with provincial dairy surpluses and deficits, which

implies that dairy products are transported from Northern provinces to Southern and Coastal

dairy deficit regions.

Figure 1.2: Geographical distribution of dairy deficits or surpluses on provincial level (Source: NBS

2012, 2013; FrieslandCampina)

6

Figure 1.3: Milk production and dairy consumption in China in 2012 (Source: NBS)

Figure 1.3 presents the consumption versus raw milk production on provincial level in

absolute terms. Inner Mongolia, Heilongjiang and Hebei are the three largest raw milk

producing provinces, of which Inner Mongolia and Hebei are visited as part of this research.

1.5 Academic and Practical Relevance

The practical relevance of this thesis can be found in the market potential that Chinese

dairy offers. The Chinese market is perceived as a growing export market for European, New

Zealand and other exporting dairy producing regions. A higher self-sufficiency rate resulting

from a growth in milk production will lead to a lower import potential, which means that

exporters have less opportunities to deliver to the Chinese market. This research is conducted

in close cooperation with FrieslandCampina and this research will contribute to their strategy

formulation. Secondly this research contributes by drawing attention to the most relevant

constraints in milk production growth and dairy farming development, which is relevant to all

Chinese dairy chain actors and the government.

The academic relevance of this thesis is found in the basis it provides for further in-

depth research. Several studies (Fuller et al., 2006; Waldron 2010) indicate a lack of academic

literature regarding the Chinese dairy farming and industry. Additionally during the initial

phase of this research project, the limited availability of English-written literature became a

burden to the preliminary research objective to identify constraints in dairy farming

development. This led to the addition of an explorative part of value chain mapping analysis.

Therefore this study aims to create a basis for further research in Chinese dairy farming by

giving a detailed value chain description. Additionally the identification of constraints serves

as a basis for further research in minimizing the effects of these constraints, construct farming

systems to dodge these constraints and develop policies to support dairy farms.

-

1

2

3

4

5

6

7

8Kg o

f ECM

(billions) Raw Milk Production (kg) Consumption (kg)

North SouthNorth-east

EastNorth-west

South-west

7

1.6 Structure

The structure of this thesis is unusual, due to the limited availability of literature. Therefore

the available literature is presented in two different chapters, namely chapter 2 and 4. In

Chapter 2 the theoretical framework is presented, with literature about international dairy

markets and the Chinese agricultural modernization process followed by an explanation of the

resource-based view. Chapter 3 elaborates on the methodology applied in this research. Chapter

4 answers sub-research question 1 and 2 with a value chain mapping analysis, based both

interview results and relevant literature. Chapter 5 answers sub-research question 3 and 4 by at

first presenting the results of the identified constraints on farm-level and industry-level.

Additionally the results of the ideal dairy farming location are presented. These results are

applied in the last section of chapter 5 to the resource-based view and its component the VRIN-

model. Chapter 6 concludes about the research and presents its limitations. Chapter 7 provides

practical recommendations and suggestions for further research.

Figure 1.4: Overview of thesis structure

8

2 Theoretical Framework

The theoretical framework is presented in this chapter. The limited available literature

is divided over two chapters in this thesis. At first literature regarding Chinese dairy farming

in an international context and the Chinese agricultural modernization process is presented in

paragraph 1 and 2 of this chapter. Literature beneficial to the value chain mapping analysis is

presented in chapter 4. In order to identify competitive advantages available to Chinese dairy

farming, the resource-based view theory will be applied in this thesis, presented in chapter 5.

However the resource-based view is explained in paragraph three and its implementation to

this thesis is explained in paragraph four.

2.1 Chinese Dairy Farming in an International Context

In recent years a trend of intensification and standardization has taken place in many

dairy regions, both in developed and developing countries (Alvarez et al., 2008). In a global

context these structural changes in global dairy farming systems, together with continuing trade

liberalization and the globalization of the world economy, could lead to a redistribution of

agricultural production across countries and regions (Isermeyer et al., 2003).

Consequences for dairy production are more volatile global milk prices, which affect

local milk prices quicker and have a strong impact (Alvarez et al., 2008). While input prices,

such as feed prices, are not moving with the same pace and probably in reverse direction (Li et

al., 2014). A more competitive market stimulates the focus on production with economies of

scale advantages, which again requires the structural changes in dairy farming production

systems (Hemme et al., 2014). Chinese dairy farming and its systems are subject to these trends

creating new challenges for Chinese dairy farms (Li, 2007). The structural change in Chinese

dairy farming sector and the emergence of large scale dairy farms creates challenges for policy

makers as argued by Wang (2005). Policy makers have aimed to combat these in ‘the National

Development Plan for Dairy Farming’ aiming to reform and restructure the dairy industry to

improve safety and quality along the dairy chain.

Cost of milk production is a key indicator for measuring competitiveness for sustainable

dairy farming (Van Chalker et al., 2005) in a local and international context (Thorne, 2004).

Koonawoontritriron et al. (2012) state that dairy farms should focus on cost reductions to

remain competitive. Hemme et al. (2014) found that average cost of milk production is 42 USD

per 100 kg globally, based on a study comparing 104 typical farms over 46 countries. The

analysis ranked feed costs as the largest contributor followed by labor costs (Hemme et al.,

2014), which accounts also for Chinese dairy farming (Li et al., 2014). Two typical Chinese

9

farms have been included, one with a herd size of 10 cows and one with a herd size of 340

cows, associated with a cost of milk production of 44 USD per 100 kg and 46 USD per 100 kg

respectively. However, there is a large difference in opportunity costs (Hemme et al., 2014)

between the two typical farms, since unpaid family labor is represented in opportunity costs.

The production costs derived from the profit & loss account and thus neglecting opportunity

costs, present a cost of production of 33 USD per 100 kg and 44 USD per 100 kg in the case

of 10 cattle and 340 cattle respectively. In short, when considering actual production costs

(deducting opportunity costs) then the smaller farm has lower cost of production, since they

have lower input costs. However this is partly compensated by a higher raw milk price. The

raw milk prices presented are 49 USD per 100 kg of milk and 56 USD per 100 kg of milk,

respectively.

Li et al. (2014) present the development of cost of milk production in the case of demo-

farms from NDISTS. The average cost of production have increased from 2.81 RMB per kg in

2010 to 3.67 RMB per kg in 2014, which is a 30.6% increase in cost of milk production. The

feeding cost varies between 2.80 and 4.00 RMB/kg in 2014. In conclusion, these studies give

basis to expect that Chinese cost of milk production has increased over time (Li et al., 2014)

and that smaller dairy farms have lower cost of milk production compared to larger scale farms

(Hemme et al., 2014).

2.2 Chinese Agricultural Modernization Process

Several leadership regimes, from Deng to Jiang to Hu, have stressed on agricultural

modernization (Tolkamp, 2012). In 2007 the Central Committee of the Chinese Communist

Party has published the Number One Document, which illustrates how quality improvement,

increasing economic returns and competiveness of Chinese agriculture is achieved by using

modern equipment, technology and science and management (Central Committee of the

Chinese Communist Party and the State Council, 2007). The development of the agricultural

sector in terms of modernization is studied by examining the drivers of and constraints to the

modernization process through supply chain analysis and budget analysis (Waldron et al.,

2010). This process for the livestock sector is studied by Fuller et al. (2006) on dairy, Fabiosa

et al. (2005) on pork and Waldron et al. (2007) on sheep meat.

Waldron et al. (2010) focus on the beef industry, which provides critique on the efforts

to construct high-value beef supply chain by interventionist policies, since these have perverse

outcomes. Hundreds of thousands of people generate rural incomes from the low-value beef

chain, which is ignored in the modernization process. More attention should be drawn on

10

developing mid-value supply chains, since evidence is provided of significant growth in

demand for mid-value beef (Waldron et al., 2010). Mid-value beef means safety-assured

products with some basic quality characteristics. Integrated budget analyses of participants in

the high-value and mid-value supply chain for processing and production are used to draw this

conclusion, supplemented by industry intelligence. In general, the process of modernization

leads to the expansion of large scale production location in all agricultural sectors, due to

technical and scale efficiencies, quality control systems and requirements from disease control,

food safety and environmental regulations (De Haen et al., 2003; Pingali, 2007; Delgado et al.,

2003). Thereby smaller household producers are crowded out, which has yet to occur in the

Chinese cattle sector (Waldron et al., 2010).

The modernization of the dairy sector is studied by Fuller et al. in 2006, which is

conducted before the accelerating effect of the melamine crisis on this process. This paper

analyzes empirical studies to identify factors explaining the growth in dairy consumption.

Dairy demand has risen tremendously driven by mutually reinforcing factors including

promotion by government and dairy industry, changes in urban lifestyle, rapid income growth

and marketing channel development (Fuller et al., 2006). Secondly the analysis of milk supply

is evaluated by the relative importance of herd expansion and efficiency improvements to

overall growth. Domestic milk supply grew to meet the increase in demand by an increasing

herd size and substantial increases in productivity through technology adaptation. However

inefficiencies are caught in the system, because infrastructure and institutions have not kept

pace with the changing environment. The appearance of the melamine crisis might be evidence

for this statement. Fuller et al. (2006) states that academic literature lacks research that clarifies

the recent rise of China’s dairy industry and its prospective demand and supply trends.

2.3 Resource-Based View

The resource-based view argues that a competitive advantage can be distracted from a

bundle of valuable tangible or intangible resources at the firm’s disposal (Wernerfelt, 1984;

Rumelt, 1984). The ultimate goal of the resource-based view is to achieve sustainable

competitive advantage and when this is achieved a firm is able to earn above average returns

(Wernerfelt, 1984). The resource-based view is named by Wernerfelt (1984), but the base of

the resource-based view can be found in earlier research, such as Coase (1937), Selznick (1957)

Penrose (1959), Stigler (1961) and Chandler (1962). Afterwards many scholars have added to

the theoretical framework of the resource-based view. Fahy and Smithlee (1999) state that the

11

basis of the resource-based view lies in the assumption that a sustainable competitive advantage

is the desired outcome of managerial effort.

In strategic management resources are defined as all tangible and intangible assets tied

permanently or semi-permanently to the firm, which lead to a strength or weakness for that

firm. Amit and Schoemaker (1993) make a distinction between resources and capabilities.

Resources are tradable and non-specific to the firm, while capabilities are firm-specific and are

used to engage the resources within the firm, such as implicit processes to transfer knowledge

within the firm (Makadok, 2001; Hoopes et al., 2003).

An overview of the resource-based view to achieve sustained competitive advantage is

presented in figure 2.1, the numbers in the following text relate to this figure. Firms can obtain

sustainable above average profits if its resources are valuable (3), rare (4), difficult to imitate

(5) and non-substitutable (6) (Barney, 2001; Grant, 1991). The VRIN (Valuable; Rare; difficult

to Imitate and Non-substitutable) –model summarizes these indicators. At first a resource must

be valuable in a way that it utilizes opportunities or neutralizes treats in the environment of the

firm (Barney, 1991; Schoemaker, 1993). Secondly the resource must be rare among the firm’s

current and potential competitors (Barney, 1986; Dierickx and Cool, 1989). Thirdly, the

resource must be costly or difficult to copy because of social complexity, causal ambiguity or

path dependency. This relates to the term isolating mechanism introduced by Rumelt (1984),

which explains why a firm is unable to copy a resource to the same level as the valuable

resource owned by a competitor (Peteraf, 1993; Barney 1986). Causal ambiguity is a term

explaining when a resources origin is unknown, which is more likely to appear when a resource

is socially complex or path dependent (Peteraf, 1993; Mahoney and Pandian, 1992). At last the

resource must be non-substitutable meaning that no strategically equivalent substitute exists

among competitors. Otherwise the firm’s value creating strategy will lead to average returns,

since competitors are able to counter the same competitive advantage with a substitutable

resource (Barney, 1986; Dierickx and Cool, 1989).

After conducting the VRIN-model analysis for each resource, a competitive implication

can be derived in the environment. There are five competitive implications to determine the

resource’s position in the competitive environment, namely competitive disadvantage,

comparative parity, temporary competitive advantage, sustainable competitive advantage ad

sustainable competitive offer (Barney, 1991; Grant, 1991; Schoemaker, 1993). If a resource is

not valuable, it will lead to a disadvantage in the competitive environment. Competitive parity

occurs when a resource is valuable but not rare, since most competitors will possess the same

resource. A competitive advantage is temporary when a resource is valuable, rare, but not

12

difficult to imitate, since competitors will copy the resource leading to a temporary advantage.

When a resource is also difficult to imitate then and it is not substitutable with other resources

then the resource will lead to a sustainable competitive offer to the firm(s), otherwise it will be

a sustainable competitive advantage possessed also by others however by applying other

resources.

Preliminary resource heterogeneity (1) and resource immobility (2) are two critical

assumptions of the resource-based view (Peteraf, 1993; Barney, 1991). Resource heterogeneity

means that different firms have different resources and resource immobility relates to limited

spreading of resources from firm to firm and it may be costly for firms without certain resources

to acquire or develop them.

Figure 2.1: Overview of the resource-based view (Source: Extracted from Mugera and Bitsch, 2005)

According to the resource-based view manager’s task is to identify, develop and deploy

key resources to acquire sustainable competitive advantage, which leads to superior profits.

Besides this cognitive ability, scholars have identified other required capabilities for managers

to make right decisions, namely (1) work creatively with the raw material presented to the firm

and its environment (Quinn, 1978; Mintzberg, 1987), react adequately if their firm’s

organizational structure acknowledges proper strategies (Burgelman, 1994) and design and

apply decisions frameworks that allow their firm to respond adaptively react to its environment

(Bower, 1974; Levinthal, 1974).

The resource-based view has been tested empirically in two studies to indicate if

individual firm resources explain a variety in profitability. In the United States a four-year

longitudinal study of 2800 firms provided an explanation of 4% and 44% in profitability

13

variation across firms by respectively industry conditions and individual firm resources (Data

Systems International, 2007). A study involving 1642 firms in Spain showed that a variability

in performance across firms was explained for 36% by firm resources and 3% by industry

conditions. Although many researches state that no satisfactory empirical tests for the resource-

based view exist such as Arend (2006).

2.4 The Resource-Based View in Dairy Farming Development

The development of Chinese dairy farming is assessed by analyzing the attractiveness

of the industry and the resources actors bring in, which is defined by a set of drivers and

constraints. The resource-based view implies to be a sufficient framework to fulfil the research

objective, due to its application in strategic management (Kozlenkova et al., 2014) leading to

industry development. The focus in this study relates to the identification of drivers of and

constraints to growth in milk production and dairy farming development, which are derived

from the interview results.

The interview results will be evaluated based on the resource-based view. The resource-

based view has limitedly been used to small enterprises, especially under unique agricultural

circumstances (Mugera and Bitsch, 2005). In Mugera and Bitsch (2005) the application of the

resource-based view is applied to US dairy farming in the context of human resources, they

conclude that the resource-based view is a useful theoretical framework to understand how

resources are a source of competitive advantage in dairy farming.

The resource based view is constructed and based on ‘western’ strategy theory with

striving for competitive advantage leading to profitability as underlying assumption. Chinese

economy is still a plan economy under strong governmental influence, which could suggest

that profitability might not be the ultimate goal in China (Orr, 2008). Therefore Orr (2008)

concludes: “The most successful companies in China actually combined eastern and western

strategic approaches, but focused on the development of relationships to create and maintain

competitive advantage, instead of focusing on the development of actual resources as

recommended by the resource-based view.” These limitations should be taken into account

when applying the resource-based view in this study.

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3 Methodology

The nature of this study is explorative, employing qualitative research methods, since

the research topic is relatively unexplored. Limited in depth English-written academic studies

are conducted about the Chinese dairy farming development in relation to driving and

constraining factors. This qualitative approach is applicable, since it studies a contemporary

phenomenon, namely dairy farming development, and seeks for an in depth insight of this

phenomenon within a framework and involved actors (Westgren and Zering, 1998). The main

drawback of qualitative research is the lack of representativeness. Here, the objective is not to

provide general results but rather highlight the diversity of dairy farming systems, industry

characteristics, driving and constraining factors.

Since academic literature is limited available, the four sub-research questions serve two

distinct underlying purposes. The first purpose relates to a better understanding of the Chinese

dairy value chain demanded by sub-research question 1 and 2. This is required for the second

purpose, namely to identify drivers of and constraints to future development of this value chain

demanded by sub-research question 3 and 4. At first the dairy chain has to be analyzed, before

the nature of driving and constraining factors (RQ3) can be understood and what sustainable

competitive advantages can be achieved in Chinese dairy farming (RQ4).

3.1 Value Chain Mapping

Value chain mapping is conducted to fulfil the first purpose related to the first and

second sub-research questions of how Chinese dairy farming and dairy industry are operated.

Kaplinsky and Morris (2001) emphasize on the importance of mapping the value chain as part

of conducting research about production. The combined coordination system, implemented

strategies of actors and power relationships between actors can better be understood after a

thorough value chain mapping analysis (Kaplinsky and Morris, 2001). The functions of a value

chain are among others input supply, production, collection, processing, wholesale and retail

(Kaplinsky and Morris, 2001). After the identification of actors involved in a value chain

function, they are analyzed and placed according to its function in schematic overview.

Additionally support markets can be identified. These support actors with services and products

to enable them to fulfil their value chain activity. In this study the analysis of the value chain

is carried out based on available literature and interviews with representative value chain

actors.

15

3.2 Participant Recruitment

Participants for the research are recruited based on the snowball sampling method,

which is a non-probability sampling method where current interviewees are requested to recruit

future interviewees among their acquaintances (Heckathorn, 1997). The preselected criterion

of ‘value chain actors in Chinese dairy’ is used, when recruiting new participants. To prevent

a bias, representatives from all value chain functions are recruited to participate. Snowball

sampling is often used to find and recruit groups which are not easily accessible to researchers

(Heckathorn, 1997). Which applies to this study, since cultural and language barriers make it

difficult to recruit participants. A total of 26 participants are recruited for the interviews, who

represent all value chain functions; Input Supply (3 participants), Dairy Farming (13

participants), Dairy Processing (6 participants), Research (3 participants) and Government (1

participants). All interviews have been conducted individually with the help of an interpreter

with an interview length varying between forty-five minutes and two hours. Except in the case

of interview 21, where a focus group interview has been conducted with a group of experts

from a dairy processor. Upon arrival, multiple experts were recruited for the interview at the

same time enabling a focus group interview to question the relation between dairy processors

and dairy farms.

3.3 Interview Design

The interview design is based on two interview types, since two distinct underlying

purposes have to be fulfilled. The first part has a focus on the understanding of the Chinese

dairy value chain, which is used as input for the value chain mapping. The second part aims to

identify constraints in Chinese dairy farming development. The first part constitutes of

unstructured interview design, where the interviewer has a clear plan in mind regarding the

focus and goal of the interview with open-ended questions to allow the interviewees to express

themselves freely using their owns words (Matthews & Ross, 2010). This technique is applied

to bring preliminary subjects to the surface that can be used for further in-depth research

(Sekaran & Bougie, 2009), which applies to this research topic since limited information is

available and this study aims to serve as basis for further research. During the interview the

researcher’s understanding of the topic is improving, which is allowed by the unstructured

nature of the interview design (Mortelmans, 2007). The focus is to understand the practices,

dynamics and mechanisms in the Chinese dairy chain, which was achieved by (1) general

questions about the respondent’s background and dairy industry experience, (2) questions

16

about their contribution to dairy farming inputs and process, (3) questions about their

contribution to dairy farming output and (4) questions about the faced challenges.

The second part of the interview is based on a semi-structured interview method

(Mortelmans, 2007), with a set of open questions preferably in a particular order. Since drivers

for dairy farming development could be derived from the literature (Fuller et al., 2006), the

focus of this part of the interview lies on the identification of constraints. However provided

drivers are verified during this research. The questions asked related to (1) their opinion about

the development of Chinese milk production to a set target in 2020, (2) their ideal dairy farming

province and (3) their ideal dairy herd size. Additionally, when visiting and interviewing dairy

farm managers, a guided tour over the farm was requested to get a practical understanding of

the matter. These observatory results served as a tool during the interviews to get a better

practical understanding of the matter. The designed interview questionnaire is attached in

appendix E.

The interviews have been recorded, because the open-ended questions in both interview

parts tend to lead to discussions and diverge from the intended interview design (Yin, 2003).

During most interviews it was possible to take notes, which was of significant help when

transcribing the interviews. All conducted interviews are transcribed with the aim to provide a

literate transcription. However the language barrier in the recordings turned out to be

significant, which resulted in incomplete sentences and many disruptions in the transcription.

In order to improve the readability and analysis, the sentences are completed by merging

sentences and remove the disruptions with the help of information based on non-verbal

communication and visual observations on farms. An overview of the transcribed interviews

and their identification number (ID) can be found in appendix G. All transcribed interviews are

annexed and organized according to their ID.

3.4 Interview Analysis

The transcribed interviews were handled using qualitative data analysis software

(Nvivo), which has the advantage of structuring data by themes and code. After a preliminary

exploration phase of the data, the codes were developed (Mortelmans, 2007). The codes of the

first part of the interview were related to different themes describing the dairy farming system

and the dairy value chain. In the next phase, these themes were analyzed and paraphrased or

summarized in the value chain mapping along with existing literature. The codes of the second

part of the analysis were related to themes of driving and constraining factors. With data

17

reduction the mentioned answers are summarized under one comprehensive code. The data

before and after data reduction is presented in appendix F.

The data analysis provided identified drivers and constraints on two different levels,

namely farm-level and industry-level. The constraints on farm-level are collected from

interviews with dairy farming representatives, based on the question: “What are the largest

challenges you are currently facing at your farm?” The drivers and constraints on industry-

level were collected from interviews with all value chain actors, based on the question: “What

is your thought about the target of roughly 60 million MT of raw milk production by 2020 and

what are the largest drivers or constraints to this growth?”. Additionally the interviewees’

opinions about the feasibility of this target will be analyzed. Furthermore the results about the

ideal dairy farming location aiming to identify in which regions the intended growth in milk

production should occur will be derived from the question: “Suppose you would get 1000 cows

tomorrow and money to build a farm, in which Chinese province would you build it? What

factors do you take into account?” The different interviewees’ responses were compared to

identify similarities and differences based on interviewees’ characteristics (Mortelmans, 2007).

The results were then organized and counted to indicate the relative importance of each

identified factor.

3.5 Evaluation with Resource-Based View

At last, the results of the interviews will be applied to the resource-based view and the

component of VRIN-model. The literature (Mugera and Bitsch, 2005; Orr et al., 2008;) states

that it is questionable based on the limited usage in agriculture and an uncertain fit of

underlying assumptions to Chinese circumstances. Therefore this research additionally aims to

explore if the resource-based view fits to Chinese dairy farming, although this is not defined in

the research objective.

The analysis will conducted for the case of Chinese scale dairy farming and no other

farming system types in order to narrow the analysis for simplification reasons and the fact that

Chinese scale farming had a competitive advantage over other systems in the past. The first

step in this analysis is to identify the bundle of resources responsible for the competitive

advantage that scale farming obtains, similar to Mugera and Bitsch (2005). The second step is

to identify if which resources of this bundle could be a sustainable competitive advantage in

the current competitive environment, with the help of the VRIN-model.

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4 Value Chain Analysis

In this chapter the dairy value chain is discussed by a value chain mapping analysis, which

is demanded by sub-research question 1 and 2. Note that this is based on existing literature as

well as the results from all interviews conducted. Figure 4.1 presents a simplified overview of

the different functions existing in the Chinese dairy value chain; input supply, farming,

processing and consumption. The focus in this research is on the farming function of the value

chain and the connection with the input supply and processing functions, since we aim to

understand how Chinese dairy farming will evolve. Therefore the last part of the value chain

of trading, wholesale, retail and consumption is simplified and brought together under

consumption.

Figure 4.1: Overview of simplified Chinese dairy farming value chain with four distinct functions of

input supply, farming, processing and consumption. Farming represents the production function of

the value chain and its analysis is divided over inputs, process and output.

The structure of Figure 4.1 is followed along this chapter, starting with dairy farming

inputs and ending with consumption. However the first paragraph provides an overview of the

existing identified farming types. Then the second paragraph illustrates the identified dairy

farming inputs, such as feed, animal and machinery, as well as the supporting inputs, land,

water, financial capital and labor for Chinese dairy farming. The third paragraph presents a

short overview of the processes occurring at dairy farms followed by the outputs of dairy

farming in paragraph four. The fifth paragraph describes the processing activities taking place

in the dairy chain, followed by the link between processing and farming. The seventh paragraph

illustrates the Chinese dairy consumption patterns and the dairy products involved. The last

paragraph aims to provide an extensive overview of the dairy value chain and concludes about

different development phases.

4.1 Dairy Farming Systems

In recent years a trend of intensification and standardization has taken place in many

dairy regions, both in developed and developing countries (Alvarez et al., 2008). This trend

occurs also in China, where intensive dairy farming systems have emerged in a dairy sector

traditionally characterized by backyard farmers. Over the past years three distinct dairy farming

19

systems have developed in China according to Li et al (2014). These dairy farming systems of

backyard farm (A), dairy community (B) and scale farm (C) are presented in figure 4.2.

Figure 4.2: Overview of the farming function in the Chinese dairy value chain with three different

farming systems (Backyard farms, dairy community farms and scale farms) and the inputs used,

processes occurring and outputs produced.

Backyard Farms

The number of backyard farms, with a herd size of less than 20 cattle, decreased by

6.5% between 2011 and 2012 (NBS), since backyard farming systems not preferred or even

unwanted in the Chinese dairy chain after the melamine crisis. Figure 4.3 represents the

decrease of smaller farms and increase of larger farms. Backyard farms are operated and owned

by rural households, selling surplus milk for additional income. Their model is based on a low-

input/low-output model meaning that lower quality and cheap farming inputs result in lower

milk outputs. The dairy cows are milked in a nearby milk collection station where farmers pay

a fee over the milk yield. These stations are owned by processors or individual investors (Li et

al., 2014). There is limited perspective for backyard farms in the Chinese dairy sector, which

can be concluded based on the literature (Li et al., 2014) and conducted interviews.

20

Figure 4.3: The number of cattle distributed over farm size in 2011 and 2012 (Source: NBS)

Dairy Communities

After the melamine crisis, selling raw milk produced at backyard farms became difficult

which, combined with rising production cost in feed and labor, forced many backyard farms to

exit the market (Li et al., 2014). To counteract this development the MOA stimulated backyard

farmers to unite in dairy communities and raise their cattle centrally which leads to benefits

from economies of scale, improved quality control and a strengthened position towards dairy

processors according to interviewee 11. The ownership of the dairy cattle belongs to the

individual farmers while the stables, equipment, milking parlor and other facilities belong to

the dairy community owner. Dairy community members pay a fee to the dairy community

owner for the service, which is roughly 10% of the raw milk price in the visited dairy

communities (interview 12, 13, 14). In the dairy communities visited, the members could opt

to participate in a system where feed procurement and feed management was organized by the

community owner. Cattle are milked in the communal milking parlor operated by independent

farm workers. They accordingly have the responsibility of taking raw milk samples on

member-level used to trace abnormal values in cases of raw milk rejection by the processor.

This illustrates one of the challenges within the development of dairy communities to “unified

breeding, unified milking, unified management and unified vaccination” (Li et al., 2014).

According to the governmental officer (interview 15), dairy communities will disappear within

10 years since the government considers dairy communities as a transitional form between

backyard farms and scale farms. The dairy community owner in interview 16 noticed this

pressure on his community to convert to a scale farm, where he would buy out his members by

purchasing the cattle or give them shares in the farm in return for the cattle. In this model the

members could switch from member farmer to employee on the dairy farm (Li et al., 2014).

0%

20%

40%

60%

80%

100%

2011 2012

1-19 heads 20-99 heads 100-499 heads 500> heads

21

Scale Farms

Scale farms with generally larger herd sizes are the third farming type owned by private

farmers/investors, dairy farming groups or vertical integrated processors. These farms possess

a herd size exceeding 200 dairy cattle, where the cows are bred, grouped and managed

according to their ages and physiological cycle (Li et al., 2014). Standard Operation Processes

(SOP) are often mentioned as an ultimate tool to manage large herds and employees effectively.

SOP are unified scientific management methods relating to breeding, feeding, milking, disease

control and farm design. SOP in combination with a high mechanization rate, results in higher

output performances both in yield and quality, compared to dairy communities (Li et al., 2014).

Interviewee 5 is responsible for the development of SOP within a vertically integrated dairy

processor and explains that it is important for employees to work according to the SOP to

achieve the highest results. The focus group (interview 21A-D) explains that these SOP serve

as guidance to all their raw milk suppliers including dairy communities and some SOP are even

financially rewarded (see paragraph 4.6). The difference in ownership of scale farms is tracked

down to the relation with the dairy processor. A privately owned farm (in interview 2, 10, 11,

22) has limited negotiation power with the processor, while an independent dairy farming

group (in interview 1) has more power due a higher the raw milk quantity it represents. A

vertical integrated farm (in interview 3, 6, 7) is owned by the processor in order to supply its

own raw milk needs. Centralized management exists in the last two models, which generates

advantages in economies of scale such as the acquisition and application of new equipment and

technology and implementing quality control systems (Li et al., 2014).

Literature on Chinese Dairy Farming Systems

Another distinction is made in a study conducted by Zhou et al. (2002) presenting three

different dairy farming systems based on the area’s characteristics; (1) Pastoral area production

system, (2) Cropping area production system and (3) Suburban area production system. The

first system developed at China’s pasture lands in the North and Northwest, where ethnical

minorities herd cattle for self-consumption of meat and milk and apply limited market-oriented

production activities due to the remoteness. The second system is located in cropping areas,

where farmers are allowed to develop a multi-enterprise farming system with animal husbandry

and crop production after a loosened policy to choose best suitable farming activities on their

farm. The third system features large scale farms using high-yield animals and intensive

feeding systems with a high degree of market orientation and vertical integration. This division

will be further elaborated on in paragraph 4.5.

22

Ma et al. (2012) has provided a productivity performance study of Chinese dairy

farming based on herd size between 2003 and 2008 to English-language literature. It concludes

that changes in technology and not efficiency resulted in increased productivity on Chinese

dairy farms. Furthermore Ma et al. (2012) provides an insight in productivity differences

among herd sizes and regions.

4.2 Dairy Farming Inputs

Land & Feed

A large variety in feed input exists among different farming types based on its

procurement, nutritional values and origin. Most of Chinese dairy cow rations consist of a

forage component and a corn silage component supplemented with concentrated energy and/or

protein feeds, in order to fulfill the cow's physiological needs (Li et al., 2014). However among

regions and farm type differences exist in inputs used depending on cost and quality. The

quality of Chinese forage and corn silage and other feed inputs is low and often varying, caused

by a low mechanization level in planting and harvesting and a high degree of fragmentation in

land plots (Li et al., 2014). In scale farming the forage component is often replaced by imported

alfalfa, given its higher nutritional value (Li et al., 2014).

Figure 4.4: Increase in Chinese alfalfa (and pellets) imports after melamine crisis (Extracted from

Rabobank, 2014)

Interviewee 1, employee of a scale farm, explains that the fluctuations in feed quality

of Chinese inputs leads to a preference of importing alfalfa or oat hay from countries like

United States and Australia. This growth in alfalfa usage is illustrated in figure 4.4. In

contrast dairy communities are unable to afford expensive high quality imports and depend

more on domestic feeds despite quality fluctuations. Figure 4.3 represents the rapid increase

in alfalfa imports after 2008.

23

Figure 4.5 illustrates the development of feed input prices between 2001 and 2015 in

the case of corn. Interviewee 23 explains that Chinese corn prices are increasing with 4% to

5% annually and in 2008 the corn prices in the US and China were similar around 1600 RMB,

while today US farmers pay 1000 RMB and Chinese farmers pay 2200 RMB. China is

stimulating corn production by setting support prices, as indicated in figure 4.5, in order to

achieve a certain level of self-sufficiency. Assuming that corn prices and corn silage prices are

connected, this development affects Chinese dairy farmers negatively. Furthermore Li et al.

(2014) identifies increased cost of harvesting as another reason for increasing corn silage prices

as it states.

Figure 4.5: Chinese and US corn prices between 2001 and 2015 (Source: Dimsums Blogspot)

Chinese dairy farming is not land based, meaning that a poor link between land and

feed production exists. Animal grazing is even not allowed in many Chinese provinces, because

the government considers it as an inefficient food production method according to interviewee

9. A table of available feed inputs is presented in appendix A, including the application and

origin. Most feed inputs are sourced irrespective from the distance to the farm except corn

silage is sourced within a relative short distance from the farm location. Local corn farmers

supply dairy farms with corn silage located on a distance varying between 10 kilometer

(Interview 10, located in Hebei) and 300 kilometers (Interview 6, located in Beijing) in the

sample of case study farms.

Private land ownership is not allowed by the communist system, forcing also dairy

farms to maintain good relationships with the local government to acquire and sustain land

lease contracts. Dairy farms must have a land grant contract, in which they obtain land use

rights for certain duration (10-30 years), but not the ownership of the land or any resources

under the surface1. These contracts are signed with the land administration of the local

government and in most cases fees are paid prior to the start of the contract (interview 10).

1 Chapter II, Article 8 of Land Administrate Law of People’s Republic of China

24

Interviewee 22 stressed the importance of a good relation with the local government, which is

essential if you want to set up a dairy farm. Some local governments use land grant contracts

to attract dairy farming investments in their municipality (interview 23).

Li et al. (2014) has investigated the amount of farmland resources of dairy farms

exceeding 50 dairy cattle in Shijiazhuang city, which ranges between 20-60 mu (1.3-4 ha). This

could provide corn silage to 5-20 dairy cows, resulting in a serious constraint for farm

development. This applies in a context of an increasingly important issue in China of

competition for land resources. China accommodates almost 20% of the world population,

while according to World Bank the United States, for example, has six times more arable land

per capita compared to China, respectively 0.49 and 0.08 ha/capita.

Genetics and Machinery & Technology

In the early 2010’s, a strong increase in imported cattle has been reported (figure 4.6),

explained by large investment in dairy farming according to interviewee 23. Although it is

questionable if this trend will sustain due to a decrease in raw milk price. The company of farm

1 has also major activities in cattle importing and interviewee 1 explained that many cattle

import orders have been cancelled or postponed due to the low raw milk price. Interviewee 3

explained that at her farm the last batch of cattle was cancelled in 2014 because of the low raw

milk price and decided to grow by natural expansion.

The main breeds of dairy cattle in China include Holstein, Jersey, Simmental, and

Xinjiang Brown as well as San-he (Li et al., 2014). Currently, over 80% of dairy cattle bred in

China are Chinese Holstein cattle and their crossbreeds (Li et al., 2014). All case farms visited

in this research had Chinese Holstein breeds or crossbreeds. Regarding genetics, most scale

farms are using imported semen to improve their dairy herd, while due to large costs dairy

communities use local semen of lower quality. Dairy community owner (interview 16) explains

that the government subsidizes dairy herd improvement programs. However the genetic value

and quality of semen is lower, so if farmers prefer to use a higher genetic bull or imported

semen they have to pay a premium. Additionally the MOA aims to develop the Chinese system

for dairy herd improvement by registering genetic high quality cattle and develop the state-

owned bull stations (Li et al., 2014).

25

Figure 4.6: Chinese dairy cattle imports and its destination between 2009 and 2013 (Source: NBS)

Scale farming has adapted modern dairy machinery and technology in their operations

and imported these from advanced dairy farming region, mainly United States. Investments in

dairy technology and machinery were required to receive higher output performances. Most

scale farms in this study possessed modern imported technology for milking and feeding.

However the dairy communities visited were often lacking these advanced technology and

machinery. The governmental officer (interview 15) explains that dairy communities are

subsidized to purchase modern machinery and technology as part of the transition towards scale

farming.

Water

Water is scarce in China. China’s Northern provinces, which happen to be the major

dairy producing regions, are facing significant and increasing water shortages. These only have

19.7% of internal renewable surface water resources (World Bank, 2006). Figure 4.7 illustrates

that three of the visited provinces use more water than water resources available, which means

they borrow water from other provinces (Economist, 2014).

Figure 4.7: Overview of provincial water data; agricultural water use (AgWU), total water use

(TotWU) and total water resources (TotWR), where total water resources are set as 100% (Source:

NBS)

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40

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Beijing Hebei Inner Mongolia Tianjin

AgWU TotWU TotWR

26

Water is an essential input for milk production. A fully productive cow, producing 30

kg/day, requires 120 L of water on a daily basis (Huang et al., 2014). Dairy cattle needs water

to maintain norm physiological functions and activities in addition to digestion, absorption and

metabolism of nutrients (Li et al., 2014). Secondly, water inputs are used for other dairy

farming processes, such as flushing, disinfecting milk equipment and cleaning. Huang et al.

(2014) found that on large-scale dairy farms in the province of Heilongjiang around 11 L of

H2Oe (H2O-equivalents) are required to produce 1 KG of fat-protein-corrected milk (FPCM).

This compared to milk production in dairy farms in California (USA) and New-Zealand, which

require respectively 461 and 0.01 L H2Oe kg-1 FPCM.

Interviewee 1, 6 and 7, all located in Beijing, stressed the importance of water and water

quality on their farm and both noticed the increasing attention of the government on water

scarcity and quality. Interviewee 1 mentioned that the government is increasingly sampling the

water quality of the farm’s waste water and interviewee 6 received a subsidy to treat waste

water. In Hebei province, the government officer (interview 15) and dairy community owner

and members (interview 12, 13, 14) explained the enforcement of water saving policies by

forcing farmers to relocate and move out of water saving areas. Li et al. (2014) stresses that

water resource limitations would severely restrict the development of the dairy sector in China.

Financial Capital

An overflow of financial capital has been provided to the dairy sector after the

implementation of the dairy industry reform enhanced by high raw milk prices according to

many interviewees. As of 2010, investors noticed the developments occurring in the dairy

industry and perceived the industry as attractive. Especially investors active in mining

switched, for unknown reasons, in large number to the dairy. Potentially due to high returns

achieved by dairy processors when they vertically integrated with dairy farming, according to

interviewee 5. The investments accelerated the modernization process, since new dairy farming

projects were developed and existing farms could expand their businesses with modern

technologies and equipment.

Labor

Chinese dairy farming is labor intensive and skilled farm managers are scarce,

explained by the relative recent development of the sector and short period to educate

employees. Dairy farming requires two types of labor inputs, namely skilled and unskilled

labor. Labor is relatively cheap in China, especially in rural areas. Farm employees (in the case

27

of interview 7), located Beijing, receive a salary of 3,500 RMB per month. In more rural areas

wages are rising quickly accordingly, as interviewee 22 was explaining that the wages on his

farm rose from 2,000 RMB per month to 3,000 RMB per month in four years. Farm managers

with comprehensive farm management skills are scarce and these skills are difficult to acquire

in a short period. A lack of skills in corn silage processing explained by interviewee 22 is

illustrative: “At the start of the farm the quality of our produced corn silage was very low,

because nobody had experience or skills in corn silage making.”

4.3 Dairy Farming Processes

Feeding

Chinese feed management practices result from backyard farming, which are based on

traditional extensive dairy farming methods and local available feed inputs (Li et al., 2014). In

scale farming and dairy communities more modern feed management practices are applied,

based on imported (mainly US) feeding knowledge and technology such as Total Mixed Ration

(TMR) (Li et al., 2014). TMR is defined as “the practice of weighing and blending all feedstuffs

into a complete ration which provides adequate nourishment to meet the needs of dairy cows”

(Haugen and Swenson, 2014). TMR is an intensive strategy resulting in higher yields, but the

complexity and risk exposure may lead to severe problems. Sufficient knowledge of cow

nutrition is essential, next to the special equipment for blending and feeding (Li et al., 2014).

However more risk is found in the constant availability of quality feed and forage, like scale

farm owner (interviewee 2) states: “I would prefer to pay a premium to my supplier in order

to get better quality corn silage.”

The feed management in dairy communities is different due to its scale, lack of financial

resources and the responsibility of every farmer to feed his own cattle. In practice the dairy

community owner is responsible for the feed procurement and ration formulation and the

members pay a fee per used kilogram. This practice is favored by the government since it

stimulates communities to operate as scale farms.

The continuing rise of scale farming with modern feed management practices increases

demand for high-quality feed inputs, which is already scarce in China. Therefore significant

feed imports will continue, since local feeds do not meet the required quality standards, which

are stated in SOP. In short, Chinese dairy farms have to find a new optimum in feed

management under local Chinese circumstances and local available feed inputs, because

current feed management practices are derived from US practices under US circumstances.

28

Breeding

Breeding practices at dairy farms are determined by the level of farm management, type

of farming system and the breeding values. The fertility rate is currently very low in China (Li

et al., 2014). This leads to a minimal growth of total Chinese dairy cattle and the need to import

costly cattle. On farm-level, the low fertility rate leads to less lactation per cow and thus lower

economic benefits, which creates another incentive for fertility improvement (Li et al., 2014).

Many interviewees have indicated that fertility is a major reason for culling cattle.

Until this moment China has not established a system of raising and selecting elite bulls,

which makes most bulls used for breeding and herd genetic improvement to be imported (Li et

al., 2014). A system of markets, infrastructure and data collection for breeding purposes needs

to be developed, for example with dairy expositions held annually, with intensive selection

procedures (Li et al., 2014).

The above is confirmed by genetics inputs supplier (interview 6): “It is hard to define

the ideal Chinese dairy cow, because compared to the US there is minimal data available,

which makes it more difficult to monitor the herd and find the best performing cows and select

these genetics. The undeveloped system and infrastructure in China for data collection

decreases the chances of finding good genetics significantly.” Furthermore interviewee 6

explains that Chinese dairy farmers doubt between using American breeds, known as large and

high productive cows, or European breeds, known as smaller cows with high quality milk

regarding fat and protein content. Clients perceive both breeds as applicable to the Chinese

conditions, although smaller volume cattle are better to prevent heat stress according to

interviewee 6.

Milking

Backyard farms tend to have simple milking equipment, where scale farms have

modern imported milking parlors. Dairy communities share milking equipment among

community members or provided by the community owner. In the case studies a variety of

milking systems ranging from modern rotary systems and swing-over system to stanchion

systems, where cattle was milked two or three times per day by employees. Interviewee 22

decided to milk the cattle three times a day to increase milk production. In one dairy

community, members had to milk their own cattle, while in the other two cases employees were

hired and the members were responsible for bringing their cattle to the central milking parlor.

29

Manure Treatment

Manure treatment pollutes the environment because the capacity of installations is often

too low and the installations are not rain- and seepage-proof, which causes outflow to the

environment (Li et al., 2014). But the main challenge is to find a suitable place to dispose the

waste and reduce environmental degradation, which is linked to the scarcity of Chinese land

resources.

Environmental pollution by dairy farming is relatively new in China as the dairy sector

has developed recently although rapidly. Therefore the government is developing policy to

limit pollution from manure waste. However this is a time-consuming process, due to the

complexity of the matter and the involvement of at least three different government

departments according to a professor in manure treatment (interview 19). Recently four

suggestions for manure treatment are proposed to Chinese dairy farmers by the national

government. Local governments have to apply these based on local conditions.

1. Centralized plant for manure treatment; this model could be implemented in a region with

several small farmers. The investment for an individual farmer is too high, so within an

area they could together invest in a system to collect and process the manure. The case site

is located in Beijing.

2. Reusing manure treatment; this model is currently already implemented on large farms. In

this model in the first step the manure is separated in a solid and liquid part. The liquid part

is treated to make it suitable for cleaning the farm. The solid part is fermented and

afterwards used as bedding for the cows. The case site is located in Shaanxi, where 90% of

the manure production is reused.

3. Manure disposal on land; this model could be implemented in regions where there is more

land and less people, like regions in west China. The idea is to close the nutrient cycle and

combine animal husbandry with crop production. In this model there are calculations for

the relation between land and manure disposal provided. The case site in in Ningxia.

4. Comprehensive model; the model is suitable for sub urban regions, with very strict

standards regarding environmental pollution. The aim is to close the nutrient cycle and

manage the waste better with advanced technologies, such as a biogas installation. The case

site is in Shanghai.

This summary, provided by interviewee 19, illustrates how underdeveloped policy

regarding this topic is, since many of these suggestions are already common standard in

advanced dairy countries. Additionally the Chinese are aiming to perceive manure as valuable

input for energy production, which creates another difficulty.

30

Traditionally, manure treatment practices consisted of environmentally friendly and

sustainable concept of nutrient cycle, where manure is fermented and composted and used as

fertilizer for crops (Li et al., 2014). Large-scale dairy farms with numerous dairy cows are not

able to apply this traditional system, due to the amount and limited land resources used for

manure disposal. Some scale farms visited, mainly in suburban areas, were forced to implement

a system of manure treatment by their dairy processor. Dairy processors demand complete

safety over the chain and thus also contamination from manure in the chain. The most common

manure treatment is currently a manure separator, but biogas installations are also used

(interviews 3 and 16). After separation a solid manure part and liquid manure part remains. The

solid part is dried in the open-air and used as bedding in the cubicles and the liquid part is sold

to nearby farmers or spread on the farmland. On the case study farms the price of (liquid)

manure varies between 0 – 30 RMB per M3, although interviewee 11 adds that this price is

highly seasonal.

4.4 Dairy Farming Output

Dairy farming has three outputs, namely milk as revenue-generating output, meat as

side-revenue and manure as waste-product. Table C.1 in appendix C presents an overview of

the variety milk production performances of the dairy farms visited. Meat is a by-product of

dairy farming. Chinese dairy farms start to acknowledge the value of meat production as side

revenue, especially scale farms are an increasingly interesting partner for the beef industry due

to a high number of male calves that could be supplied. Lastly manure is a waste product of

dairy farming, although some farmers manage to sell the manure after treatment.

4.5 Dairy Processing

Dairy processing started in the early 1980’s with the production of milk powders from

locally produced milk (Zhou et al., 2002). Milk powders were the main dairy products because

of its long shelf life, convenient storability and high demand. When consumer incomes

increased milk powder based dairy products became less preferred by urban consumers

strengthened by the availability of fresh milk and imported brand milk products (Zhou et al.,

2002). Many of these small factories closed down, while the survivors expanded with dairy

products like, yogurt, ice cream and UHT milk (Zhou et al., 2002).

Currently three different types of dairy processors can be identified based on their

origin, geographical expansion and market coverage, which is presented in table 4.1.

Furthermore an overview of major Chinese dairy processors can be found in appendix H. A

high dairy farm density in the north and northeast of China results in a surplus of raw milk

31

production. This surplus is processed into UHT milk and sold nation-wide by B-category

processors.

Table 4.1: Thee distinct types of dairy processors based on related farming system, geographical

expansion, market coverage, dairy trade balance and main products. Furthermore examples of dairy

processors are presented for each category

In contrary, in the south and coastal regions a low dairy farm density exists resulting in

a deficit of raw milk. C-category processors serve local markets with mainly pasteurized milk

and yogurts. The A-category contains the first tier cities (Beijing, Shanghai), where milk

production meets dairy demand precisely. Also, the raw milk quality will in general be higher

because of a high degree in governmental regulation and support according to interviewee 20.

Zhou et al., (2002) mention the close proximity to consumers in large cities to overcome the

challenges regarding the underdeveloped cold chains and the promotion of dairy consumption

in urban areas by the governmental programs such as the ‘School Milk Program’ as drivers for

this dairy development in this category. Interviewee 19 added the growing number of

consumers and the increasing purchasing power in these cities as another driver.

Figure 4.8: Produced volume of dairy products in four provinces between 200-2012 based on three

distinct categories, namely (1) fluid milk production (VolLiq); representing both UH-milk and

pasteurized milk, (2) dry dairy products (VolDry); representing value-added products like cheese,

butter and ice cream and (3) milk powders (VolMP); representing milk powders (Source: NBS)

Type Farming System (Zhou et al., 2002)

Main Geographical Expansion

Market Coverage

Dairy Trade Balance

Examples Main products

A Suburban area system

Beijing, Shanghai and other first tier cities

National Urban areas

Equal Sanyuan, Bright Dairy

Pasteurized milk, yogurts

B Pastoral area system

North, Northeast and Northwest

National Surplus Yili & Mengniu

UHT milk, yogurts

C Cropping area system

South and Coastal regions

Regional Deficit Local dairy processors


0

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VolLiq VolDry VolMP #DairyCom

32

Figure 4.8 provides an insight of the dairy products produced per province, where

Beijing and Tianjin processors belong to category A, Inner Mongolia to category B and Hebei

mostly to category C although due to the proximity of Beijing it has also characteristics of

category A. In all provinces the fluid milk production is the largest category with a strong

increase between 2000 and 2005 in Hebei and Inner Mongolia. This growth is explained by

expansion strategy of B-category processors in those years (Zhou et al., 2002). The production

of fluid milk production is more stable in A-category provinces (Beijing and Tianjin), since

their focus on pasteurized milk dates back earlier.

The output of higher value products has grown over the years and is expected to grow

rapidly in the upcoming years, while the milk powder production has been more stable

according to the interviewee 18. Except milk powder production in Inner Mongolia, which

increased due to surplus milk converted into milk powder and shipped elsewhere to serve as

input according to interviewee 5. At last the number of dairy enterprises has decreased after

the melamine crises due to the reform program. This policy focused on the improvement of

dairy processors by implementing strict requirements and closing a group of small dairy

processing enterprises given their low management capacities and poor productivity (Li et al.,

2014).

In conclusion, in which region the milk is produced relates to its final dairy product,

given the underdevelopment of the connecting cold chain. In general, UHT milk and milk

powders require no cold chain (see paragraph 4.7) and are therefore produced in Inner

Mongolia. This link between dairy production location and dairy product portfolio is enforced

in ‘Industrial Policy for Dairy Processing Industry (revised in 2009)’ by indicating five dairy

producing areas as priority for development (Li et al., 2014). Table 4.2 shows the five areas

and the link between production systems and final dairy product (Li et al., 2014). Again,

provinces located far from the major consumer markets are assigned with easy transportable

and storable products, like milk powder and UHT milk in the first and third area. Areas closer

to major consumer markets (4 and 5) should focus on i.e. pasteurized milk and yogurt

production. Northern China, including Hebei, is once again an exception, which is assigned

with high and low perishable products.

33

Dairy Producing Area Provinces Farming System Dairy Product

Northeast China and Inner Mongolia

Heilongjiang, Jilin, Liaoning and Inner Mongolia

Large dairy communities and medium-sized scale farms

Milk powder, dry cheese, cream and UHT milk

Northern China Hebei, Henan, Shandong and Shanxi

Large Scale Farms Milk powder, dry cheese, UHT milk, pasteurized milk and yogurt

Northwestern China Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang and Tibet

Large Scale farms and dairy communities

Milk powder, dry cheese cream and casein (products suitable for long distance transport)

Southern China 13 southern provinces Medium-sized scale farms Pasteurized milk, dry cheese and yogurt

Suburban areas Beijing, Tianjin, Shanghai and Chongqing

“Increase the dairy genetic improvement level and promote standardized production”

Pasteurized milk and yogurt

Table 4.2: Five dairy producing areas based on “Industrial Policy for Dairy Processing Industry” and

there provinces with associated farming system and dairy product (Source: Li et al., 2014)

4.6 Link between Dairy Farming and Dairy Processing

Raw Milk Delivery

Unlike other dairy chains, such as the Dutch dairy chain, the raw milk delivery to the

processor in the responsibility of the dairy farm and should occur within 20 hours after milking.

In the case of Mengniu all the farms are located within a radius of 200 km of the factories.

When the milk is received in the plant it will be collected in a dispatch center, where a sample

is taken from all individual farmers. This sample tests the quality and safety of the milk and it

also serves as the basis for the payout to the farmer.

Contracts between dairy farms and dairy processors exist, although these are not

enforced nor lived after by both parties. There is no price negotiated in the contract, but the

price is determined by the market according to many interviewees. According to interviewee

1, belonging to an independent dairy farming group, all dairy processors are willing to receive

their milk, since the group represents a large volume of high quality milk. The contract terms

vary a lot among processors, so they will choose the processor with the most beneficial contract

terms. They have switched multiple times between processors from category A and B and even

an international processor, which he prefers as they live up to the contract terms and prices,

while Chinese processors cannot be trusted. When they have to choose between Chinese

processors preference is given to a category B processor, since a national coverage allows the

processors to mitigate the risk of fluctuations in demand resulting in price volatility.

However in cases of privately owned scale farms the negotiation power was completely

opposite. Interviewee 2 and 10 elaborated by stating that no options to switch between dairy

processors exist. Interviewee 10 accuses processors in their region to communicate and set a

34

raw milk price together. Only in case of raw milk shortage they will compete and offer

competitive prices. Illustrative for the low negotiation power of individual farms is the fact that

the processor lowered the allowed deliverable quantity by 11% unilateral or the farmer was

forced to pay for the cost of processing the raw milk into milk powder and store it in the case

of interviewee 2.

Dairy processors set thee different types of requirements to their raw milk suppliers,

based on milk quality, quantity and farm management practices. The latter shows the high

commitment of processors to dairy farming (more under ‘raw milk price’). For example a dairy

community owner (interviewee 12), who was forced to switch from nearby input supplying

farmers to certified feed companies with higher prices because of safety issues. Minimum

requirements regarding raw milk quality and safety are set by the government, which is %fat

(>3.1%), %protein (>2.8%) and TBC/micro-organisms (< 200.000) (Li et al., 2014). However

dairy processors often apply stricter minimum requirements, than national standards.

According a category A-processor (interview 20), state-owned processors have higher internal

standards because the government financially supports them to achieve a high-quality milk for

its citizens. Another farm manager (interviewee 10) suggests that dairy processors are misusing

this tool to reject milk, when they have enough raw milk supplies. The last requirement

mentioned relates to a daily minimum quantity varying between 1,000 and 3,000 kg of

delivered milk, which forced many individual (backyard) farmers to group together in dairy

communities.

In conclusion, dairy farmers are complaining a lot about the role of dairy processors on

their farm. On the other hand processors are complaining that farmers are neither complying

with the contract terms. Raw milk collection director (interview 5) explains that long term

contract relations are not possible in China: “If a farmer can receive a better price at another

processor, the farmer will easily switch”.

Li et al. (2014) concludes that raw milk quality has improved after the melamine crisis,

based on study results where raw milk quality has been investigated between 2008 and 2013.

Additionally this study shows that the raw milk quality of backyard farms and dairy

communities is lower than for scale farms. Fat and protein levels have increased on average to

3.81% and 3.13% respectively, while before the melamine crisis the levels of protein and fat

were respectively 3.62% and 2.94% for scale farms. The raw milk safety measured by bacteria

count and sematic cell count was 208,000 cfu/mL and 345,000 cells/mL, or 26.5% and 5.1%

lower compared to 2010.

35

Raw Milk Price

Chinese raw milk price is subject to several influencing factor originating from the

external and internal environment. Firstly, China joined WTO resulting in a stronger

correlation with global dairy prices. Secondly seasonality in demand and supply is present in

China. Lastly the internal environment provides influencing factors from dairy processors and

governments, both indirect and direct.

China has been subject to major dairy product imports from dairy surplus regions after

the melamine scandal (see figure 4.9) and the recent simplification of trade barriers with New

Zealand. China is part of the World Trade Organization since 2001, which indicated the

obligation to reduce its tariff rates for dairy imports and other non-tariff barriers (Li et al.,

2014). In 2008 a free trade agreement (FTA) between China and New Zealand was validated,

which resulted in 60% of total dairy imports originated from New Zealand in 2013 (Li et al.,

2014). The FTA with New Zealand has caused more price volatility on the Chinese dairy

market and a reduction in input costs for dairy processors (Li et al., 2014). Figure 4.9 shows

the increase in dairy imports with an annual growth rate of 25.1%, which has been accelerated

after the melamine crisis in 2008. As a result of these trade liberalization, Li et al. (2014)

concludes that domestic dairy producers have no competitive advantage since 2009.

Figure 4.9: Chinese dairy imports for whey powder, milk powder and liquid milk between 2001 and

2013 (Extracted from Li et al., 2014)

Dairy prices have been decreasing since mid-2014, which has and influence on the

results of this research. Figure 4.10 presents global dairy prices as well as Chinese dairy prices

and New Zealand dairy prices as the largest exporter to Chinese market. Chinese raw milk

prices are higher than global prices and these are fluctuating due to volatility on the world

market.

36

Figure 4.10: Global, New Zealand and Chinese raw milk prices between 2006 and 2015 based on

NDITS (MOA) and IFCN. IFCN2, which composes dairy prices based on a weighted average of three

IFCN world milk price indicators, namely (1) SMP & butter (35%), (3) Cheese & whey and (3) WMP

(20%). Additionally average raw milk prices provided by the Chinese Ministry of Agriculture are

enclosed for cross-checking purposes. Note that a currency difference applies to this figure.

Since the melamine crisis Chinese dairy prices have diverged from world market prices.

This rapid increase ended in February 2014 with an average price of 4.27 RMB/kg of raw milk,

which was at that time 42% higher compared to global prices. At that time the Chinese were

massively purchasing milk powders on the world market as they expected prices to increase to

even higher levels. The result of large milk powder stocks is still repressing prices both in

domestic and international markets. Chinese farms mentioned that processors are less likely to

receive their milk, since raw milk shortages, which have been present since 2008 have turned

into a surplus, strengthened by high milk powder stocks. Furthermore Chinese dairy processors

have invested in offshore raw milk procurement to find other input channels. For example

Mengniu has started a milk powder processing plant in New Zealand (interview 21) and Yili

started acquired offshore processing assets by the acquisition of Oceania Dairy in New Zealand

to produce milk powders (Annual report Yili, 2013). According to interviewee 4 this trend has

resulted from an availability of cheap and more important safe raw milk in other countries.

Chinese processors are leveraging the quality and safety of i.e. New Zealand’s raw milk to

serve the domestic market.

Seasonality applies to raw milk prices in China depending on a varying production and

consumption in different seasons. According to interviewee 5, in periods prior to Chinese

festivals the raw milk price is higher, because milk boxes are a common gift to friends and

2 IFCN is a research institute focused on dairy aiming to create a better understanding of

the dairy word by providing comparable data, knowledge and inspiration.

(www.ifcndairy.org)

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ECM

World (IFCN in USD) New Zealand (IFCN in USD) China (IFCN in USD) China (MoA in RMB)

37

relatives during these festivals. On the other hand the raw milk supply varies depending on the

season, since climate changes affect the cattle and feed production.

Raw Milk Price System

Internally, the raw milk price system has a large influence on the raw milk price

received by farmers. A base price which is adapted regularly to meet market circumstances

forms the basis for raw milk price determination adjusted with additional bonuses and penalties

based on individual quality performances, safety penalties and farming type. This information

is gathered based on the focus group interview (interview 21A-D) and thus applies in the case

of Mengniu. However based on results from other interviews, it is concluded that a similar

system applies within all dairy processors. The four components of raw milk price composition

are explained here:

1. Base Price

The base price is adjusted to the market circumstances, such as competitive raw milk prices,

world dairy prices and demand forecasts. Mengniu (interview 22) says to adjust the base

price at least every three months, but in practice they adjust the base price more frequently,

depending on market circumstances.

2. Dairy Farming System

Scale farms are the favored raw milk suppliers by processors, since scale farming is

assumed to provide higher quality and safe milk. Furthermore the director of raw milk

collection (interview 5) explains that associated monitor and control cost are lower, since

fewer suppliers have to be monitored with more large suppliers. Table 4.3 presents a table

with the four implemented categories. Moving upward to another category results in a

significantly higher raw milk price, dairy community owner (interviewee 16) expects his

raw milk price to increase by 0.40 to 0.60 RMB in the future, when the transition process

towards a scale farm has finalized. However interviewee’s 21A-D mention that a dairy

processor has to accept this transition before entering another category. Additionally a

processor gives bonuses when certain farm management tools are implemented, at the time

of research TMR application was rewarded with an additional payout. In short, dairy

processors have a large stake in determining future dairy development given these

rewarding policies. Even if a dairy community or backyard farm deliver a milk with similar

features than a scale farm their payment is lower.

38

Type Description Additional Payment Distri-bution (2015)

Distri-bution (2010)

Distri-bution (2020-F)

A Scale farms with additional certification (organic or Global Agricultural Practices (GAP))

+1.00 RMB 0,05 0,01 0,2

B Scale Farm +0.60 RMB (TMR: +0,80 RMB)

0,45 0,19 0,6

C Dairy Community +0.20 RMB (TMR +0.40 RMB)

0,45 0,4 0,2

D Backyard Farm +0.00 RMB 0,05 0,4 0

Table 4.3: The distinction of raw milk suppliers within Mengniu and their additional payments. The

distribution of milk volume over these categories is presented in 2010, 2015 and (expected) 2020

based on the case of interview 21. However this system applies in Mengniu, a similar system is

expected to exist within other processors since many interviewees mentioned this.

3. Quality Bonus

Additional bonuses are paid to raw milk suppliers if their milk contains a higher fat or

protein content. The bonus is adjusted to every single daily delivery of milk, based on the

test result of the taken sample. Since protein is more valuable than fat to Mengniu,

interviewee’s 21A-D state: “we apply the ratio of fat:protein with 1:1.8. So for example for

every 0.1% additional of fat in raw milk, the farmer receives 0.05 RMB/kg extra. While for

every additional 0.1% protein, the farmer receives 0.09 RMB/kg extra.” Table B.1 in

appendix B presents the quality performance bonuses applied within Mengniu which is in

line with statements of farmers regarding their raw milk price and raw milk quality.

4. Safety Penalty

The past part of the raw milk price consists of a safety penalty when the bacteria count or

sematic cell count drop below a certain level. Furthermore a test to determine presence of

antibiotics is conducted. The farmer will receive a penalty if this is below standard. If it is

below the minimum requirement the raw milk will be rejected.

Regarding farm management, dairy processors have the mandate and obligation to

develop Chinese dairy farming to a higher level. Therefore all dairy processors have developed

a dairy farming guidance with advises for farmers about farm management practices. On top

of that dairy processors occasionally choose a farm management practice, which they would

like to promote among their suppliers by installing a bonus if applied. (TMR-application was

rewarded at the time of research by Mengniu, table 4.3). Examples from the interview with

farm mangers are farm design, cubicles, grouping in feed management, TMR ration and air-

conditioning systems. Sometimes farmers doubt the effectiveness and importance of these

practices, but they implement them because the bonuses associated are significant. The bonus

system is very effective, since almost all farmers now apply TMR. Mengniu might add

39

additional requirements to this bonus in the future to improve the feeding management by

requiring certain ration formulation practices and introducing quality minimums for corn

silage. Furthermore interviewee’s 21A-D state: “In the future we might install other bonuses

in our raw milk price composition to stimulate other farm management practices in order to

improve the dairy farming.”

Lastly provincial governments construct a reference raw milk prices every quarter.

These reference price meetings are organized by the Animal Husbandry Bureau belonging to

the Ministry of Agriculture. Director of this bureau in Hebei province (interview 15) explains

that dairy farm representatives and dairy processors are invited to discuss current market

circumstances and decide about a reference price, which is nearly always neglected by dairy

processors. Therefore interviewee 15 states that dairy processors have the power in the dairy

value chain, which corresponds with many other interviewees’ statements. The director of raw

milk collection (interview 5) says that Yili and Mengniu collect about one third of the total raw

milk supply, which makes them price setters. Other dairy processors will follow these initiated

prices. Therefore the government has little influence on this price, but in some provinces

Mengniu follows these reference price. In Heilongjiang province, for example there is strong

competition among dairy processors for raw milk, partly caused by the presence of Nestlé.

Another example is Shanghai, where state-owned processor, Bright Dairy, pays higher prices

to guarantee a high quality raw milk supply. Although interviewee 5 states that governmental

influence is not sustainable, because in the long term processors will search for other channels

in other provinces (or countries) to procure their raw milk.

4.7 Dairy Consumption

Dairy consumption is relatively new to Chinese, which is stimulated by growing

welfare, urbanization and the influences of Western food cultures (Zhou et al., 2002). Zhou et

al. (2002) state that dairy consumption was minimal before the economic reforms, especially

in rural areas. However in China’s pasture areas, located in the north and Northwest, dairy

products have been consumed for thousands of years, but the Han people (91.6% of total

population) are not familiar with dairy consumption. They perceive milk as a supplement for

breastfeeding or nutritious food for the sick and elderly and dislike the taste and smell of dairy

products. Wang and Fan (1999) conducted a research investigating the acceptance of dairy,

where (dis-)taste was ranked number one for people disliking milk (above 90%). Furthermore

limited milk supply and low consumers income did not help to encourage Han people to

consume milk (Zhou et al., 2002).

40

Final Dairy Products

China’s most consumed dairy product is Ultra-Heat-Treated (UHT) milk. UHT milk is

preferred over pasteurized milk because it has the perception that all harmful bacteria are killed

in the heating process (Kilsby, 2014). The shelf life of UHT grade milk is six months, which

creates opportunities for transportation across China, storage at home and in shops. For

consumers there is no need for a fridge and shops can store and sell without cooling systems,

which has led to a large variety in selling points, like supermarkets, convenience stores and

local shops. UHT milk is divided in three categories, imported product UHT milk, premium

grade UHT milk and standard grade UHT milk. Domestic produced UHT-milk can only be

produced from domestically produced raw milk according to the law, meaning that imported

milk powder cannot be used for the reconstitution of UHT milk or it has to be clearly stated on

the packaging (Kilsby, 2014). The returns on UHT milk are lower than for other dairy products,

like infant formulas, ice cream, etc. (Kilsby, 2014). Since 2013, the trend of lower grade UHT

milk not being available in supermarkets is emerging (Kilsby, 2014), because dairy producers

prefer to sell premium UHT-milk from the shortage of raw milk. Thus, they are forcing

consumers to buy higher priced products. Mengniu and Yili have the largest share of UHT milk

market. An overview of different dairy processes can be found in appendix H.

Pasteurized milk is gaining popularity caused by a trend towards more fresh products

consumption (Kilsby, 2014). Pasteurized milk has a shelf life of only 7 days, which causes

limitations in transportation and storage. Therefore pasteurized milk is only available in larger

cities in retail channels with a cooling chain. Raw milk inputs are supplied from nearby farms

and safety and quality requirements are important, leading to a short supply chain with few

actors (see paragraph 4.5)

Yogurt is another category of dairy products which is important to the Chinese dairy

value chain. Chinese consumers have more trust in the safety of yogurt products than liquid

milk (Kilsby, 2014). Yogurts are popular among all population groups and it is often drunk

with a straw. Yogurt production accounts for a large proportion of imported whole milk powder

(Kilsby, 2014). A product category related to yogurts is dairy based beverages, which are

becoming increasingly popular. Many processors have introduced this product at similar price

levels of dairy products, while the cost of production is mostly lower (Kilsby, 2014).

Milk powders are produced in the milk surplus regions in the north (interview 5)

relating to seasonality, when raw milk delivery is exceeding demand then raw milk is converted

into milk powder (interview 5). Consumers, particularly elderly, use water to recombine

41

powders in liquid milk. While dairy processors use milk powder as ingredient for the

production of other dairy products such as i.e. yogurts or dairy based beverages.

Butter and Cheese production is minor in China. The market for butter is growing

because of usage of butter and cream in the bakery sector, which makes most of the butter

consumption out of homes (Kilsby, 2014). Cheese is mainly consumed in western-style fast-

food restaurants, but most of cheese is imported as processing grade cheese (Kilsby, 2014).

Developments in Dairy Consumption

Pure milk represents the largest part in terms of value as presented in figure B.1 in

appendix B, followed by milk powders followed, yogurts and finally other dairy products.

Added to this figure are the regional gross products per capita, where is noticed that the two

regions with the most wealthy people results in the highest dairy expenditure. On the other

hand the two regions with the lowest regional gross products (Northwest and Southwest) have

a higher dairy consumption than the Northeast and South region, possibly explained by the fact

that ethnic minorities with dairy consuming habits are residing in these provinces.

A large difference exists between rural and urban dairy consumption explained by a

lower rural purchasing power and underdeveloped market infrastructure (Zhou et al., 2002) as

shown in figure B.2 in appendix B. However the differences are minimizing over the years,

since urban consumption levels are generally decreasing, while rural consumption levels are

generally increasing. The largest change has been reported in Hebei province where the

difference decreased by 42.9% between 2005 and 2012.

Figure B.3 in appendix B shows that the consumption of pure milk has decreased

between 2005 and 2010 in most provinces, probably caused by the distrust in dairy products

after the melamine crisis. This trust is slowly restoring, since in all provinces, except

Beijing, pure milk consumption is slowly increasing. As a strategic manager (interview 20)

stated that nowadays all dairy processors deliver safe products with high quality. The

consumption of yogurts shows a similar trend and the marginal consumption of milk powders

is also slowly increasing.

In contrast, figure B.4 in appendix B presents a growth in dairy consumption in terms

of value, while volume was decreasing. On national level the dairy expenditure increased from

138.62 RMB/capita to 253.56 RMB/capita between 2005 and 2012, which represents a growth

of 9.0% (CAGR) annually. This contrary conclusion is explained by the dairy analyst

(interview 23), since dairy processors have focused on premiumization of dairy products,

42

which means that higher-added value products with higher prices are sold. Consumers are

prepared to pay a higher price in return for a higher safety.

Figure B.5 in appendix B shows that a shift has taken place in dairy expenditure towards

milk powders and other dairy products such as ice cream and other high value products. This

at the expense of mainly pure milk expenditures. Most likely explained by a developing

Chinese dairy market towards more added value products, which is stimulated by income

growth and changing consumer habits.

4.8 Dairy Supply Chain Development

Past Supply Chain Development

The melamine scandal turned out to be the start of a new phase of supply chain

development in Chinese dairy. Dairy processors and government officials realized that quality

and safety in the dairy chain were not guaranteed with the existing state of dairy farming. The

farming function of the value chain was underdeveloped. Coordinated action of both the

government and dairy processors upgraded and modernized dairy farming to achieve higher

productivity and decrease the number of value chain actors. The latter simplified the process

of monitor and control along the entire chain to guarantee food safety and quality. The

government took its responsibility and announced an industry reform for the dairy chain in

2012 including the instruction for dairy processors to guide the process of supply chain

development towards guaranteed safety and higher quality. The government has shares in many

dairy processors and some are even fully government owned which simplifies this process.

These government actions are the beginning of a long process of regaining consumers trust in

dairy.

Dairy processors are convinced that scale farms are better capable of producing high

quality milk encompassed with guaranteed food safety. Therefore they have implemented an

additional payment for each farming system, where scale farms receive higher prices.

Additionally the transaction costs decreased in terms of monitor and control costs, since fewer

raw milk suppliers deliver raw milk. The start of this phase was characterized by the investment

of dairy processors directly in scale dairy farms (vertical integration), which turned out to be

profitable and attracted other investors in dairy farming. This occurred in a period of global

high raw milk prices and a scarcity of raw milk due to the implementation of the industry

reform. Where the Chinese dairy industry was highly dependent on backyard farms in the

before-2008 era, these farmers are facing a disadvantage in the current system. Lower raw milk

payments, higher raw milk requirements and a government demanding to unite in dairy

43

communities led to the exit of many backyard farms from the industry. Figure 4.11 indicates

this process schematically.

Additionally figure 4.11 provides a summary of the value chain analysis conducted in

this chapter. Note that the arrows in this figure only present the major or dominant product

streams in order to simplify the figure. In other studies regarding Chinese agricultural

modernization processes a clear distinct was made between high-value, mid-value and low-

value value chains within a sector (Waldron, 2009). Regarding the Chinese dairy sector this

impossible because a weak link between dairy farming and consumption exists. There is a link

between the area characteristics of dairy farming and the processors which have developed in

that area, but this cannot be linked to the different Chinese dairy farming systems of backyard

farming, dairy community of scale farming. The interviewee’s 21A-D have confirmed this

conclusion by stating that milk from a B, C or D-category supplier is processed together within

the plant. They added that in theory a D-category farmer can deliver better quality milk than a

B-category farmer. The link between processing and consumption does exist, which relates to

the proximity to the market with the majority of consumers. In contrast to B-category

processors, A-category processors are located closely which enables them to deliver highly

perishable products.

44

Figure 4.11: Overview of Chinese dairy value chain with the value chain functions of input supply,

farming, processing and consumption. Within farming two distinct bases are presented, namely a

development base and organizational base. Where the latter explains the dairy farming systems

applied within the chain and the development base relates to the different areas of where farming

has developed in distinct ways.

45

Future Supply Chain Development

When evaluating the development of the Chinese dairy value chain in detail by looking

at the upgrading of distinct value chain functions, it could be concluded that the input supply

function is the sole function which is still underdeveloped. Chinese dairy development started

with a growth in demand for dairy products from domestic consumers in 1990’s. Both national

and international dairy companies recognized this demand and developed themselves to be able

to serve the market. These companies started to develop and deliver respectively fresh milk

and branded dairy products to the Chinese consumers in the late 1990’s, where before many

small underdeveloped factories produced milk powders to the local market. The melamine

crisis has drawn the attention to the need to develop the production function of dairy farming

accordingly. Chinese dairy farming has been upgraded by modernizing farming practices based

on international (mainly US) experience. This process required the usage of comparable (US)

dairy farming inputs, which are unavailable in China. Illustrative are the massive alfalfa

imports from United States to Chinese dairy farms. Furthermore cattle and other genetic inputs

as well as machinery and technology are sourced internationally. The Chinese cost of milk

production has risen because of this development (Li et al., 2014; Hemme et al., 2014). In

conclusion the next phase of development should be the input supply function, but as indicated

in the next chapter many constraints to this particular development are foreseen. Figure 4.12

illustrates this development schematically. In the next chapter, constraining and driving factors

are identified and presented to define future supply chain development in depth.

Figure 4.12: Schematic overview of Chinese supply chain development by upgrading functions in

succession

46

5 Results and Discussion

This chapter presents the results of the conducted interviews regarding the third sub-

research question about the constraints (and drivers) of Chinese dairy development. Constraints

are identified on two different levels, namely dairy-farm level and industry level. Since this

study has its focus on the development of dairy farming, the farm-level constraints are directly

affecting dairy farming development and the industry-level constraints indirectly affect this.

The first paragraph deals with the identified constraints at dairy farm level, while the second

paragraph presents the identified drivers and constraints at dairy industry level. Additionally

the ideal farming location according to the interviewees is presented in paragraph 3. The last

paragraph answers the fourth sub-research question about what sustainable competitive

advantage can be achieved in Chinese dairy farming. The results from the first three paragraphs

are applied within the framework of the resource-based view (Wernerfelt, 1984).

5.1 Constraints at Dairy Farm Level

In table 1 of appendix D, an overview of the characteristics of thirteen interviewed farm

managers and owners is presented. Note that only interviewees involved in dairy farming were

asked about their faced challenges at dairy farm level. Seven interviewees are working on a

scale farm, five are working in a dairy community, of which three are members and two owners,

and one (interview 11) owns both a scale farm and two dairy communities. The interviewees

are spread over four provinces, Beijing (3), Tianjin (2), Hebei (7) and Inner Mongolia (1). All

dairy communities are located in Hebei province. Generally, when herd sizes are larger the

interviewees get more specialized responsibilities, like feeding or milking manager. Note that

on average 50-60% of the total the herd size consists of milking cattle. Furthermore a large

variation exists in production performances and returns in raw milk prices. The variation in

raw milk price received is about ¥1.00 per kg, where the largest scale farms receive the highest

price and dairy communities the lowest. Dairy communities have lower annual production

results associated with lower fat and protein contents. As presented in paragraph 4.6, lower

quality performances partly explain this lower raw milk price.

These 10 constraints are presented in table 5.1. The underlying data before data

reduction grouped based on quotes is presented in appendix F. The most mentioned constraint

is a low raw milk price (61.5%). Interviewees motivated this constraint often by difficulties to

maintain margins on dairy farming to remain profitable. Note that the results might be biased

due to a decreasing raw milk price, nationally and globally at the time of research. Nevertheless

the interviews give the impression that farmers were confronted with lower margins for the

47

first time after a period of high internal raw milk prices. Furthermore, two interviewees mention

as well the constraint of increasing global competition (G), and refer to the free trade agreement

with New Zealand as cause. Both constraints lie outside the sphere of influence of Chinese

dairy farming. Many interviewees acknowledge they have to adapt to a new era with low prices

more aligned with global price levels and volatility. In other words Chinese dairy farming is

more competing with dairy farms in other regions, like New Zealand than before.

Code Explanation of Constraint Times Mentioned (absolute) Times Mentioned (relative)

A Low Raw Milk Price 8 61.5%

B Additional Financial Capital Requirements 3 23.1%

C Improve Milk Yield 3 23.1%

D Unequal Power Distribution in Dairy Value Chain 3 23.1%

E Environmental pollution 2 15.4%

F Feed Procurement 2 15.4%

G Increasing Global Competition 2 15.4%

H Labor Inefficiency 2 15.4%

I Improve Genetics 1 7.7%

J Risk of Higher Cost of Production 1 7.7%

Table 5.1: Overview of identified farm-level constraints in Chinese dairy farming as indicated by

interviewees representing dairy farming. The absolute number in column three relates to the number

of times the driver or constraint is mentioned, while the relative number (column 4) represents

which percentage of the interviewees mentioned this driver/constraint. An overview of the data

before coding can be found in appendix F.

The constraint of additional financial requirements (B) solely occurs at dairy

communities, motivated by the force of governments to switch their farming model to scale

farms with private ownership, which requires financial capital. The community owner needs

to invest in among others housing, technology and machinery and buy the cattle from the

members. The constraint of the unequal power distribution in the dairy value chain (D) was

only mentioned by interviewees privately owning a farm. They supported this by certain

distrust in the intentions of their dairy processor, especially in the current period of raw milk

surpluses. Interviewee 10 said: "I am afraid that Mengniu might do dirty things – add water -

to our milk in order to test lower fat contents" and interviewee 2 explained: "I have a contract

to deliver 10,000 kg of milk every day, but with the new rules of the dairy processor I can only

deliver 9,000 kg". It is remarkable to note that especially these scale farms who were used to a

system in which their high quality and safe raw milk was highly demanded by processors

during an era with raw milk shortages are now complaining about the role of the dairy processor

in the chain in an era with raw milk surpluses. Other scale farms, who mostly belong to a

vertical integrated group are in essence not faced to this challenge and dairy communities (or

48

backyard farms) have not been in a position where their produced milk was highly demanded

by processors.

The constraint of environmental pollution (E) was mentioned in two cases which were

facing problems with the local government regarding environmental pollution. The dairy

community of interviewee 13 was located in a water saving area. Interviewee 1 mentioned that

water contamination caused by his farm has drawn the Beijing government’s attention. Two

interviewees, who happen to represent the two largest and most advanced dairy farms and both

part of larger corporations, mentioned the constraint of feed procurement (F). Interviewee 1

explains: "I need a lot of ingredients for different herd groups, which makes it difficult to get

constant good quality feeds". Larger scale farms require larger quantities of quality feed, which

suggests that these farms, although part of a large corporate with shared feed procurement, are

facing challenges sourcing feed needed. Combatting labor inefficiency (H) is mentioned two

times, where in both cases the machinery and technology was below average. The farm of

interviewee 1 dated from 1958 with outdated machinery and interviewee 22 perceived

improving labor efficiency as key solution to save costs, by investing in new machinery.

Improving genetics (I) and the risk of higher cost of production (J) were both mentioned

once by dairy community owners. Interviewee 16 was convinced to improve his productivity

by investing in better genetics. Interviewee 12, owner of both a scale farm and dairy

community, mentioned the consequence of a higher cost of production, when dairy

communities are forced to transform into scale farms. The management costs are lower in a

dairy community, because cattle is taken care of by someone who is directly affected by the

performance of these cows, according to interviewee 12. However a dairy community member

of another community, who used to work at a scale farm states that he prefers a scale farm

production system, since access to more expensive higher quality inputs will result in a higher

farm productivity and profitability. This discussion relates to the question if higher inputs will

pay off by a higher output.

Overall dairy communities face different constraints than scale farms. Generally

constraints regarding labor and feed belong to large scale farms, where dairy communities are

facing constraints to improve productivity, which requires financial capital that has been put

available to scale farms already.

49

5.2 Ideal Farm Location

Table 2 of appendix D shows the results about the ideal farming location for the development

of Chinese dairy farming. In other words which province is most suitable to achieve the growth

in milk production and what factors are taken into account by the interviewees.

Figure 5.1 shows the ideal dairy farming provinces of twenty-two interviewees. The

responses are divided over eight different provinces, which are all geographically located in

the north. This is in line with the current distribution of farms over China, with a large density

in Northern provinces. When analyzed more in detail, two distinct groups of ideal dairy farming

provinces could be made. The first ‘resource-oriented’ group (green boxes in figure 5.1)

consists of provinces located far from the market but relatively close to production resources

is chosen by 71.4% of the interviewees, representing Ningxia, Heilongjiang, Inner Mongolia

and Gansu.

Figure 5.1: Ideal dairy farming provinces geographically represented in a map with provincial

population densities. In the boxes the name of the province is given with in between brackets the

number of times mentioned.

The second ‘consumer-oriented’ group (blue boxes in figure 5.1) consists of provinces

close to the market but far from production resources is chosen by 23.8% of the interviewees,

representing Beijing, Tianjin and Shandong. This division is in accordance with the literature

(Zhou et al., 2002) of pasture land production systems and sub-urban production systems.

However one exception is present namely Hebei province, motivated by interviewee 12 as a

combination of best worlds. Note that interviewee 16 is excluded in this analysis, since he

answered to quit dairy farming, because dairy farming is too risky with low profitability.

50

Code Explanation of Factors Considered Mentioned Times (absolute)

Mentioned Times (relative)

a Climate 9 42.9%

b Land Availability 9 42.9%

c Market Proximity 7 33.3%

d Population Density 5 23.8%

e Soil Quality 5 23.8%

f Governmental Approval 4 19.0%

g Processor Proximity 2 9.5%

h Labor Availability 2 9.5%

i Cost of Feed Input Sourcing 1 4.8%

j Environmental Pollution 1 4.8%

k Water Availability 1 4.8%

Table 5.2: Overview of factors considered in the ideal Chinese dairy farming region. The absolute

number in column three relates to the number of times the driver or constraint is mentioned, while

the relative number (column 4) represents which percentage of the interviewees mentioned this

driver/constraint. An overview of the data before coding can be found in appendix F.

In table 5.2 the factors taken into consideration by the interviewees when deciding

about the ideal dairy farming province in China are presented. The factor of climate (a) is

mentioned by almost half of the interviewees, which results in the choice of a province located

in the north. The southern climate zones have higher temperatures and higher humidity, which

causes heat stress and other less favorable conditions for dairy farming. The availability of land

for feed production (b) in accordance with high quality soil for feed production (e) relate to the

feed procurement for dairy farming, which is relatively important to the interviewees. The

provincial population density is assessed in two ways, where seven interviewees consider the

presence of citizens and thus market proximity (c) as advantageous, five other employees look

at the down-side of populous provinces (d) given the fact these citizens might complain about

nuisance of dairy farming activities. Consumer-oriented provinces are preferred by the first

group and vice versa. Governmental approval (f) turns out to be a relatively important factor

which is considered by almost 20% of the interviewees, of which most belong to dairy farming.

The distance to a processing plant (g) is mentioned two times in order to guarantee market

access by looking at the processing function of the value chain instead of the consumption

function. Labor availability (h) is mentioned twice as well motivated by the need to have skilled

employees (interview 20) and unskilled laborers (interview 15) available. Furthermore three

factors are mentioned once, namely cost of feed input sourcing (i); which is lower in Ningxia

province because of less demand and more supply, environmental pollution (j); which is less

in Heilongjiang because of fewer degraded resources, and water availability (k); which is

sufficient in Ningxia because of river basins.

51

In conclusion, interviewees consider two categories when deciding about their ideal

dairy farming province, namely resource availability and population density. However in both

decisions favorable climate and governmental approval are required. Both decisions could lead

in two distinct ways to a successful dairy farm, potentially defined as profitability. Note that,

besides profitability, other indicators to determine successfulness in China. Interviewees

indicate to be profitable by producing at lowest cost due to resource availability in the resource-

oriented provinces, while interviewees reach profitability in the consumer-oriented provinces

by selling dairy at a premium price to the market in order to financially compensate for the

higher input costs (elaboration is given in paragraph 7.2).

5.3 Feasibility of Production Growth and Drivers & Constraints at Industry

Level

Table 3 in appendix D provides an overview of the characteristics of the experts

interviewed for this analysis. The second part dealt with the development of the Chinese dairy

industry as a whole. The twenty-two interviewees represent all functions of the dairy chain.

The experts are located in five different provinces, namely Beijing (9), Tianjin (2), Hebei (5),

Inner Mongolia (5) and Shanghai (1), but apart from the dairy farming interviewees, most are

active nationwide. The fifth column of table presents the interviewees’ years of experience in

dairy, which indicates their experience and expertise to value their opinion. The median years

of experience is 9.5, with a minimum of 4 years of experience and a maximum of 31 years of

experience.

Seven of the total nineteen interviewees (36.8% of the interviewees) indicate, based on

their expertise, that a growth in dairy production to the set target is feasible. When analyzing

the characteristics the interviewees responding that production growth to the targeted level, it

is remarkable that only one dairy farming representative (ID 22) and all interviewees represent

dairy processing answer positively. Note that the production target is set by the government,

which makes it a delicate topic to question. This could be the reason for answering positive,

while motivating with constraints (interview 5, 8, 21, 22) and the fact that one interviewee

representing the government (interview 15) has no motivation for his positive answer. An

individual set of drivers and constraints as presented in table 5.3 for each interviewee to decide

if the production target is feasible. Therefore constraints mentioned must be interpreted as

challenges to overcome by the interviewees who responded positive and as insurmountable

constraints for the others. Additionally all motivations are categorized based on their position

of influence along the value chain, presented in the fourth column of table 5.3 and graphically

presented in figure 5.2.

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Table 5.3: Overview of feasibility of 2020’s production target, presented as 3 drivers and 15

constraints to this development. The absolute number (column 3) is the number of times mentioned,

while the relative number (column 4) represents which percentage of the interviewees mentioned

this driver/constraint. An overview of the data before coding can be found in appendix F.

Figure 5.2: Overview of identified constraints and drivers along the value chain based on its category.

Furthermore interlinked relationships between constraints are shown in this figure.

Code Explanation Times Mentioned

Times Mentioned

Category

Driver

1 Increasing Chinese Dairy Consumption 3 13.6% Consumption

2 Room for Improvement of Productivity 2 9.1% Production

3 Climate Change in Other Dairy Producing Regions 1 4.5% Market

Constraint

A Land Shortage for Feed Production 5 22.7% Input

B Underdeveloped Chinese Dairy Market 5 22.7% Consumption

C Poor Chinese Competitiveness on World Market 5 22.7% Market

D Lack of Feasible Manure Disposal Solutions 4 18.2% Output

E Lack of Effective Farm Management 3 13.6% Production

F Expensive Consumer Milk 3 13.6% Consumption

G Low Raw Milk Price 3 13.6% Market

H Short-Term Thinking of Processors 3 13.6% Market

I Water Shortage 2 9.1% Input

J Exit of Backyard Farmers 2 9.1% Production

K Weak Investment Climate 2 9.1% Production

L Farmers’ Inability to Innovate 1 4.5% Production

M Growing Awareness for Environmental Concerns 1 4.5% Output

N Chinese Consumers Distrust in Dairy Products 1 4.5% Consumption

O High Cost of Milk Production in China 1 4.5% Market

53

Three different drivers for dairy development are identified based on the interviews,

which are ordered in relative importance, a growth in dairy consumption (1), improving

productivity (2) and a less advantageous production circumstances in other dairy regions (3)

(New Zealand). The growth in dairy consumption is line with the drivers identified in the

literature (Fuller et al., 2008). Two experts located in Inner Mongolia province indicate the

room for productivity improvement, possibly explained by a high number of dairy communities

and backyard farms in that province compared to other visited provinces. Inner Mongolia is a

pasture land production system where extensive dairy farming methods were practiced

associated with lower productivity by backyard farmers, meaning that the road to standardized

farming practices and thus higher productivity is longer.

Weak competitiveness (C), the underdeveloped Chinese dairy market (B) and land

shortage (A) are mentioned most by interviewees, which makes them the most important

constraints. Shortage of land (A) and water (I) and a weak investment climate (K) are

constraints relating to the input supply function the dairy value chain. Land shortage and water

shortage is mentioned by more knowledgeable interviewees with a good oversight over the

chain, namely dairy processors and a dairy industry analyst. Beside land shortage is mentioned

by two interviewees representing the largest scale farms, which implies that only these larger

scale farms notice the boundaries of dairy farming regarding land in China. The weak

investment climate is inter connected with the current low raw milk price, which leads to a

delay or cancellation of some scheduled investments and difficulties in acquiring new financial

capital in dairy farming. Note that financial capital has been the driver of recent dairy farming

development, which makes it questionable what influence this weak investment climate might

have on dairy farming development.

Three constraints are associated with the dairy farming process of which the exit of

mainly smaller farms (J) is a direct result of the policies pursued and the other two constraints

relate to in the future required farm management skills. The rapid exit of small scale farmers

results in less raw milk produced, which endangers the achievement of the set production

target, since the rise of scale farming might not compensate this production loss entirely.

However milk produced by smaller dairy farms is not genuinely wanted by dairy processors,

since it is perceived to be of lower quality. The lack of effective farm management (E)

constrains the technical efficiency of the dairy farm, which means that difficulties are

encountered by improving the ratio between quantities of inputs required versus quantity of

output produced because of a lack in farm management. One interviewee indicates also that

Chinese farmers lack the ability to innovate (L) to improve technological change, meaning that

54

the innovation process of new technologies is considered to be constraining. This could relate

to the fact that Chinese dairy farming copies US dairy farming practices while the internal and

external environment, especially regarding feed inputs, is significantly different. This

interviewee states that Chinese dairy farming lacks the ability to invent, develop and

commercialize new technologies within a context of Chinese dairy farming limitations.

The constraints of manure solutions (D) and growing awareness of environmental

concerns (M) relates to the (undesired) output of dairy farming. The interviewees mention that

practical manure disposal solution are not yet found in China and the government starts to

develop policy regarding the environmental degradation as result of large manure quantities

produced by scale farms on a relative small area. The link with land shortages is often

motivated by the growing discrepancy between available land and herd size.

In accordance with the literature about poor Chinese dairy consumption habits,

interviewees doubt if future demand for dairy products will require such a growth in milk

production. Interviewee 10 states: “we are currently unable to find markets for our milk so why

should we grow to this production level?” The underlying constraint of the high-priced dairy

products (F) is identified, which makes dairy products to be perceived as luxury products

available to consumers with higher disposal incomes and for many Chinese consumers

unaffordable. Another underlying constraint relates to the melamine crisis which still affects

the trust in dairy products negatively. Interviewee 4 explains that distrust in Chinese dairy

products is deeply rooted in the consumer’s perception and therefore not visible to at the

surface. It will take many years to regain this trust, which delays the dairy development process.

The last category of constraints relates to the (international) market, which is exogenous

to the Chinese dairy value chain. The four identified constraints related to these market

circumstances are all derived from influences of an increasing global competition, which makes

them interlinked. The weak competitiveness is related to interview statements of New Zealand

always being more capable of producing cheaper dairy in the form of milk powders. New

Zealand farmers have competitive advantages, which enables them to produce dairy at lower

costs, compared to China having high cost of production (O). In contrast, some interviewees

(interview 5 and 23) define this as a given fact for Chinese dairy farming and state that farms

have to adapt by applying strategies to avoid influences, such as a low raw milk price (3). Dairy

processors have a short-term perspective (H), which is reflected by dairy processors procuring

milk powders internationally instead of preferring domestically produced raw milk. This

constrains the development of the domestic dairy sector and resulted in the exit of many small

farmers (J). Interviewee 16 states: “Employees of dairy processors only think about profit, they

55

will never prefer domestic produced milk.” and interviewee 9 states: “While many farmers had

to quit their business, Yili and Mengniu had a profit of 50 billion RMB.” In general, the profits

are not distributed fairly along the value chain.

5.4 Resource-Based View in Chinese Dairy Farming

The last paragraph of this chapter aims to analyze which competitive advantages could

be sustained in the current competitive advantage. Chinese scale farms are chosen as case for

this analysis in order to narrow the analysis, since this farming system used to have major

competitive advantages in the past competitive environment over backyard farms and dairy

communities. In the first step a bundle of resources responsible for the competitive advantage

of scale farms is identified, based on the results of the interviews and the value chain mapping.

A bundle of eight resources are identified as responsible for this competitive advantage of scale

farms. The identified eight resources are feed procurement system, genetics, technology and

machinery, natural resources, human resources, financial resources and organizational

resources. The second step analyzes based on the VRIN-model, which resources, part of the

identified bundle, can be sustained by Chinese scale farming in today’s changing competitive

environment.

Changes in the competitive environment of scale farms have been noted due to an

increasing influence of global competition in the Chinese market for raw milk. This influence

is caused by the imports of milk powders, which serve as a substitute for domestic produced

raw milk. This affects Chinese scale farms more, since after a period of high-quality raw milk

shortages, the market for raw milk is more saturated with lower returns. Simultaneously dairy

processors have found other national and international channels to procure their inputs and new

scale farms have entered this market. Therefore this analysis considers the competitive

environment to consist of backyard farms and dairy communities in the past. However

regarding the future a more global competitive environment should be considered in the

Chinese market.

Existing Bundle of resource available to scale farms

Scale farms in China have experienced a competitive advantage in the past years, which

resulted in an expansion of scale farms after the melamine crisis event. Hereafter the bundle of

eight identified tangible and intangible resources is presented, which have jointly contributed

to the competitive advantage of scale farms in a market of increased requirements set by the

industry.

56

1. The access to natural resources, such as land and water, is essential for scale farms in order

to obtain a competitive advantage. The setup of scale farms requires approval and support

of governments, which is practically given by land grant contracts. Access to groundwater

on scale farms led to a more secured water provision compared to backyard farms and dairy

communities.

2. The upgrading of technology and machinery at scale farms in feeding, milking and housing

ensured a competitive advantage over other Chinese dairy farming systems, like backyard

farms. Since this upgrading is required to guarantee high quality production and housing

practices.

3. Human resources, both skilled and unskilled laborers have contributed in achieving a

competitive advantage by scale farms. Skilled laborers, like dairy farm managers, possess

the capabilities to manage large numbers of cattle and employees to produce high quality

and safe milk. The availability of cheap unskilled labor to scale farms enabled this

competitive advantage.

4. Strong investments in dairy herd genetics by acquiring dairy cattle globally and importing

high quality genetic material, like semen and embryo’s, have resulted in good genetic

resources to produce high quality milk.

5. The created system of feed procurement with feed input sourcing globally and domestically

has resulted in a competitive advantage regarding the usage of high quality feed required

for producing high quality and safe milk. As high quality and safe milk was the requirement

of the market.

6. The introduction of Standard Operation Processes (SOP) for processes taking place on scale

farms and the effort of managers and employees to live after them is the capability or

organizational resource putting the competitive advantage into practice.

7. Scale farms benefited almost solely from the abundance of financial resources as result of

the industry attractiveness after the announced industry reform. These resources allowed

scale farms to implement their strategy of modernization to produce high quality and safe

milk.

Sustainable Competitive Advantages

The VRIN-model analysis as part of the resource-based view, is summarized in table 5.4.

The identified drivers and constraints at both farm- and industry-level as well as the value chain

mapping analysis serve as input for this analysis. As it turns out only two resources provide a

sustainable competitive offer to scale farms.

57

Table 5.4: Application of VRIN-model determining the competitive implication of the eight identified

resources in the case of scale farming regarding the future competitive environment.

Land and water resources (no. 1) are not enabling scale farms to employ a value-

creating strategy, since they are not outperforming their competitors nor reducing the

weaknesses. Scale farms have limited access to land which is often just enough to build the

farm, but never suitable for producing sufficient feed or manure disposal. Feed inputs are

imported from other countries, which makes dairy farms located in those countries to have a

competitive advantage. For example the dairy industry analyst (interview 23) says that the cost

difference of alfalfa per tons is about 100-150 US$ between US and Chinese famers. The water

deficits in regions where scale farms are mainly located, bring in a competitive disadvantage

over other dairy producing regions in a global context.

Chinese dairy farming is facing poor efficiency in mainly milking and feeding. The rise

of scale farms has solved these problems to a large extent, which makes technology and

machinery a valuable resource (no. 2). This resource is not rare in an environment with

increasing global competition given the fact that many machines and technologies are imported

and thus used in other countries. Similar to technology and machinery, the strong genetic

resources (no. 4) of Chinese scale farms are valuable, because it outperforms the competitors

and reduce the weakness of low milk yield. However in a more global context the resource

leads to a competitive parity, because it is not rare given the fact that much genetic material is

imported. The skills of Chinese dairy farm managers represented in human resources (no. 3)

are valuable in a Chinese competitive environment, but in a more global context these skills

are not rare. Many of these skills are copied from dairy farming practices occurring in other

countries and implemented exactly the same in Chinese dairy farming, often without

adjustments to local conditions. Therefore this resource leads to a competitive parity.

VRIO-MODEL Valuable? Rare? difficult to Imitate?

Non-substitutable

Competitive Implications

1.Land Resources No Competitive Disadvantage

1.Water Resources No Competitive Disadvantage

2.Technology and Machinery

Yes No Competitive Parity

3.Human Resources Yes No Competitive Parity

4.Strong Genetics base Yes No Competitive Parity

5.Feed Procurement System

Yes Yes No Temporary Competitive Advantage

6.Organizational Resources

Yes Yes Yes YES Sustainable Competitive Offer to firm(s)

7.Financial Resources Yes Yes Yes Yes Sustainable Competitive Offer to firm(s)

58

Due to a shortage of quality feed production within Chinese borders, the (international)

feed procurement system (5) including the infrastructure, markets and actors, creates value for

Chinese scale farms, since it reduces the weakness of quality feed shortages. In the past Chinese

value chain actors have put much effort to create advanced and well-organized systems for feed

procurement, which makes the system rare. However the system is hard to sustain, because it

is not difficult to imitate. If other (global) dairy farms are offering similar prices to involved

actors and invest to duplicate this strategic asset perfectly, then the competitive advantage

cannot be sustainable. This resource delivers only a temporary competitive advantage.

The organizational resources (no. 6) in terms of the compliance with standard operation

processes (SOP) are similar to the evaluation of human resources in this analysis. However this

resource does provide a sustainable competitive offer, since it is difficult to imitate and not

substitutable in a global context. Where the human resources in terms of dairy farming skills

are not rare in a more global competitive environment, the implementation and compliance

with SOP is rare by definition. Scale farm managers and employees have the ability to live

precisely after the dictation op SOP, which defines the organization resources. In other words

mastering dairy farming skills (human resources) is not rare, while the way of organization

(organization resources) in which these skills are acquired by is rare in a global context. The

organizational resource of Chinese scale farms is difficult to imitate, partly explained by casual

ambiguity, which is more likely to occur when the resource is knowledge-based or socially-

complex. This is the case, since this resource could stem from the idiosyncrasy of the Chinese

culture, such as the low score on individualism and high score on power-distance in Hofstede’s

cultural dimensions. This culture is present in Chinese scale farms, where employees and

managers are precisely living after instructions, like SOP, of their superiors and cooperate in a

group as the SOP dictates. Lastly, this organizational resource is non-substitutable, because the

only resource which could potentially substitute this resource is even more-advanced

technology, but even if this same technology is applied within Chinese scale farms the

advantage of organizational resources continues to contribute.

The financial resources (no. 7) are valuable to the organization because they allow the

scale farms to implement their strategy of modernization and additionally they are rare for both

other Chinese farming systems and global dairy farms. It is costly to imitate the strong

investments in Chinese scale farms and the resources are not substitutable by other resources.

However the assumption is made that financial resources remain available to Chinese scale

farms. But if the raw milk price remains low and the weak investment climate sustains, this

resource might even not be applicable for Chinese scale farms.

59

6 Conclusion and Limitations

6.1 Conclusion

The implications of growth in economic freedom and the melamine crisis were two

major events determining a new era in Chinese dairy farming. The conclusion from the value

chain mapping is summarized in four unique characteristics of the Chinese value chain

influencing dairy farming development. At first, the fact that dairy consumption is relatively

new to Chinese consumers leads to an underdeveloped market for dairy products, which is not

beneficial to the development of Chinese dairy farming. Secondly the governments gave

processors the mandate to guarantee food safety and quality in dairy, which resulted in a

preference of scale farming system over other dairy farming systems. Even financial incentives

are distributed to apply a scale farming system and/or other preferred farm management

practices, which have far-reaching implications along the chain and therefore strongly

determines dairy farming development. Thirdly, farmers are exiting the sector in big number,

especially backyard farmers which results in production losses where production growth in

farming systems partly compensates for. And lastly, the processors, which have the power in

the dairy chain, have increasingly been looking for other channels to procure their inputs, both

in international raw milk procurement and milk powders imports. This trend will not be

beneficial to domestic dairy farming development.

Furthermore drivers of and constraints to Chinese dairy farming development are

identified. Two distinct drivers for dairy farming development were identified. The growth in

welfare of Chinese consumers accompanied with urbanization resulting in changing diets

including more dairy products is a major driving factor of dairy farming development (Fuller

et al., 2006). Secondly the dairy industry reform program is accelerating the development of

Chinese dairy farming towards modern and advanced farming practices.

Constraints to dairy farming development are identified at farm-level and industry-

level. On farm-level the low raw milk price is constraining all dairy farms and challenges them

to remain profitable in times of bear markets. Another important identified constraint relates to

the increasing requirements of processors and their behavior to achieve this, which leads to

distrust in the chain.

On industry-level many different constraints are identified along the chain, which can

basically be grouped under (1) lack of resources, (2) environmental pollution, (3)

underdeveloped markets and (4) growing international competition. The lack of resources

derives from China facing land and water shortages, which constrains dairy farming

60

development and thus a growth in milk production. The second group relates to the growing

awareness of environmental pollution, which is an uncertainty to Chinese dairy farming, since

it could constrain dairy farming development when restrictive policies are implemented. The

third group relates to Chinese consumers still learning to consume dairy and this process is

slowed down after the melamine crisis. As long as the consumption remains underdeveloped,

production will be constrained. The last group of constraints relate to global dairy markets

being increasingly related to the Chinese dairy market, resulting in price volatility which

Chinese farmers have limitedly experienced in the past. The global competition is currently

considered as a constraint, although Chinese farmers realize the need to adapt to this new

competitive environment.

However, looking at past dairy farming development, it should be noted that Chinese

dairy farming has shown an impressive capability to manage constraints, such as improve the

safety and quality along the chain. In the past the effects of natural constraints, such as limited

land availability, have been minimized at high cost by importing feeds. It is questionable if this

solution is sustainable for the future, since the raw milk price is not able to compensate for

additional cost at all times. Chinese dairy farmers are more likely to focus on adapting their

dairy management practices to local circumstances in order to find the optimum between milk

production and production cost. An opportunity raised from the value chain mapping analysis,

since all value chain functions have been developed over the past decades except input supply.

However many constraints are identified in this value chain function, such as natural resource

shortages, creating a burden to the development of value chain function. Value chain actors

should consider if the benefits of input supply development compensate for the efforts to

minimize the constraints.

The resource-based view evaluation has presented two resources with a sustainable

competitive advantage, namely organizational resources and financial resources. Of which the

latter is questionable if it remains available given its relation with raw milk prices. In contrary,

organizational resources, which are expected to stem from Chinese culture, gives basis for

successful dairy farming development. However the resource-based view is limitedly suitable

under Chinese circumstances, since striving for good relations with the government to earn a

right of existence is dominant over striving for profitability to earn a right of existence.

In conclusion Chinese dairy farming development will evolve driven by consumer

demand and directed by governmental policy. Chinese milk production will not grow to the

targeted level in 2020 given the identified constraints. However Chinese dairy consumption is

expected to increase and this could accelerate if (1) consumer prices for dairy decrease

61

allowing lower income consumers to afford dairy, (2) dairy becomes a more essential part of

Chinese diets and (3) consumers’ trust in diary is regained quick. If Chinese dairy farming

focusses on minimizing the effects of the identified constraints then dairy farming development

could benefit from the growth in domestic dairy consumption and become an even more

modern agricultural industry. Major benefits could be derived from investments in the

development of dairy input industries, since technological improvements and technical

efficiency in this part of the chain offer significant opportunities for the entire value chain. The

focus of these investments should be on how to utilize the limited domestic natural resources

effectively and efficiently in the dairy chain.

6.2 Limitations

Results presented in this study cannot be generalized over the entire Chinese dairy

chain, since the nature of this study is explorative with qualitative methods. Therefore this

study should be perceived as a basis for further research, since it aims to provide insights in the

Chinese dairy value chain.

Furthermore a bias exists due to the chosen snowball sampling method. The

participating interviewees might not be representative for their value chain function, since they

could belong to one social group. Additionally the cultural and language barriers turned out to

be significant during the research, which could have led to the loss of valuable information,

since an interpreter was in most cases unable to translate directly. This implies also a biased

view from the interpreter. Afterwards during the transcription of the interviews, literal

transcription was impossible due to incoherent texts. This required the researcher to apply his

interpretation of the results by recalling non-verbal communication and notes taken during the

interviews in order to prepare the results for analysis. This leads to a researcher’s bias along

this research.

The resource-based view has been applied in this study even though some major

limitations to the fit to this study were pre-identified. This theory evaluates the relation between

resources and competitiveness, which relates to the objective of this study. The resource-based

view is mainly looking internally at resources to provide competitive advantages (Wernerfelt,

1984), while Porter (1980a) says that competitive advantages can be met when fulfilling

opportunities or avoid threats provided by the outer environment. The Five Forces framework

(Porter, 1980a) is not applied to this study due to a lack of valuable information about the five

forces and the nature of this study regarding the lack of resources and milk production growth.

62

7 Practical Recommendations and Further Research

This chapter represents practical recommendations to dairy companies serving the Chinese

market and dairy exporting countries in the first paragraph. The second paragraph elaborates

on some thoughts gathered during the research, which is presented to indicate opportunities for

actors in Chinese dairy value chain and researchers to conduct research regarding these topics.

7.1 Practical Recommendations

Chinese dairy farming has limited competitive advantages, therefore it is not

recommended to become involved in Chinese dairy farming activities as international diary

company. The strength of companies, like FrieslandCampina, lies in the strong relationship of

trust with Chinese consumers. Therefore high-value dairy products will always find markets in

China. Lower-value milk powders like SMP and WMP can be produced at lower cost in

(exporting) countries, which creates competitive advantages over domestic produced raw milk.

Therefore China will remain a net importer of milk powders and thus market opportunities

remain.

7.2 Opportunities for Further Researchers and Value Chain Actors

Policy objectives

The strong effect of policies has been emphasized in the conclusion and is slightly

noticed throughout this thesis. The government will merely determine the next era of dairy

farming, just as it determined past dairy farming development. There are three types of policy

objectives identified, namely competitiveness, food safety and environmental control (Figure

7.1). These are conflicting to each other, meaning that the policy pursued will a consensus

between the three objectives.

Figure 7.1: Three identified policy objectives in China

Food

Safety

Environ-ment

Competi-tiveness

63

Food safety has been the most important policy objective since the melamine crises in 2008.

As a result the safety and quality along the dairy chain have improved to acceptable levels,

with the rise of modern scale farms and exit of backyard farmers enhanced by high raw milk

prices. This development had an effect on the competitiveness of Chinese dairy farming, since

this modernization process increased cost of production due to strong investments. Note that

Hemme et al., (2014) provides lower cost of production for the small farm. In addition the food

safety focus had an effect on the environmental pollution, since large scale farming has a larger

impact on a small surface, especially manure production results in pollution. Policies to force

farms to apply manure treatment solutions are currently developed, but it is questionable to

what extent local governments will enforce these policies, since it has an effect on the

competitiveness of farms. Manure treatment will lead to additional costs and local governments

perceive dairy farming as an attractive source of rural employment and investments according

to interviewee 23.

Different governmental departments represent different policy objectives and according

to the governmental official (interview 15) this results in competition between these

departments. The MOA is responsible in the value chain until raw milk collection, the dairy

processors are under the control of the Food and Drugs Authority. The Food and Drugs

Authority apply the viewpoint of food safety regardless the consequences for the

competitiveness of farmers and exit of backyard farmers. The environmental department

advocates avoiding environment pollution and resource degradation regardless the

consequences for competitiveness and food safety control. The policy pursued will be a

combination of these viewpoints.

At the moment the major focus on food safety and the consequences for

competitiveness and environmental damage are realized among value chain actors in China.

The first signs regarding a policy shift are already noticeable with the manure treatment policy

developing and governmental programs to support domestic forage production to decrease cost

of production. The main question is what does China want to accomplish, a competitive dairy

farming sector to decrease dependency on imports, implement limitations to (large) scale dairy

farming to prevent resource degradation or continue the policy trend towards higher food safety

to regain consumers’ trust? Further research regarding these themes should be conducted with

a focus on mapping the effects of dairy farming on the different topics.

64

Profitability

The profitability is currently under pressure in Chinese dairy farming, since market saturation

combined with growing global competition leads to lower margins in dairy farming. The

analysis of the ideal dairy farm location has resulted in a distinction between resource-oriented

and consumer-oriented dairy farming. Two generic strategies (Porter, 1980) can be applied to

these distinct dairy farming location respectively cost leadership and

Figure 7.2: Two generic strategies combined with the factors considered of the ideal dairy farming

location in chapter 5, added with the factor of access to global feed procuring (dotted line).

differentiation. In the differentiation strategy a firm aims to develop products to serve a unique

customer segment, where the cost leadership strategy aims to produce at lowest cost in the

industry (Porter, 1980). The consumer-oriented dairy farming can apply the differentiation

strategy to serve a niche market of wealthier urban consumers willing to pay a premium for

added-value dairy products, such as high-quality milk, organic milk or even pasteurized milk.

Additionally it has the advantage of being located near ports and other developed infrastructure

to have access to (imported) high-value dairy farming inputs and a developed cold supply

chain. The resource-oriented dairy farming should focus on the cost-leadership strategy to find

an optimum between cost of inputs and output revenues under Chinese circumstances. This

objective is different from the currently dominating objective to achieve maximum milk

production. This thought is combined with the results from the ideal farm location in chapter 5

and presented in figure 7.2.

65

Furthermore literature (Li et al., 2014) provided that cost of production have increased

in China over the past years. Most likely this has resulted in additional revenues. In other words

Chinese scale farming uses more expensive inputs but is rewarded with higher raw milk prices.

Research similar to Ma et al. (2012) should be conducted to indicate to what extent higher

value inputs result in higher value outputs. Furthermore a distinction should be made between

costs of milk production among different dairy farming systems. Hypothetically could be stated

that dairy communities operate more efficiently than scale farms, since some literature states

that small farms are more efficient than large-scale farming (Chism and Levins, 1994);

Horrigan, 2002; Gorelick and Norberg, 2002). Dairy communities could have lower labor costs

and save on managing and control costs since member farmers directly impacted by lower

performances. Note that the current policy prefers to transform these communities into scale

farms.

Suggestions to decrease costs of production

Chinese dairy farming practices are relatively underdeveloped and stem from imported

dairy farming practices. Further research could study how these dairy farming practices should

be optimized under Chinese circumstances. Hereafter some research objectives are

summarized:

How to increase quality and quantity of Chinese forage production to achieve

economies of scale?

How to develop a low-cost optimal dairy ration with domestically available feed inputs?

What dairy breed with which breeding values is suitable for Chinese dairy farming

under Chinese climate and available feed inputs?

How to improve farm management practices with focus on improving longevity or

sustainability of dairy herd?

What is the optimal Chinese dairy herd size, based on cost management, environmental

impact and food safety?

66

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72

Appendixes

Table of Contents in Appendix A. Feed Inputs B. Tables and Figures related to Chapter 4

- Raw milk quality rewarding table - Dairy consumption figures

C. Tables and Figures related to Chapter 5 - Interviewee characteristics ‘Constraints at farm-level’

- Interviewee characteristics ‘Ideal dairy farming location’ - Interviewee characteristics ‘Drivers and Constraints at industry-level’

D. Summary table of all interviewees E. Interview Designs F. Data before data reduction

- Codes of constraints on farm-level - Codes of factors considered for ideal-farm location

- Codes or drivers and constraints at industry-level G. Interview Transcription

- Overview of all conducted interviews - Transcribed interview no. 1 - Transcribed interview no. 2 - Transcribed interview no. 3

- Transcribed interview no. 4 - Transcribed interview no. 5 - Transcribed interview no. 6 - Transcribed interview no. 7 - Transcribed interview no. 8 - Transcribed interview no. 9 - Transcribed interview no. 10

- Transcribed interview no. 11 - Transcribed interview no. 12 - Transcribed interview no. 13 - Transcribed interview no. 14 - Transcribed interview no. 15

- Transcribed interview no. 16 - Transcribed interview no. 17

- Transcribed interview no. 18 - Transcribed interview no. 19 - Transcribed interview no. 20 - Transcribed interview no. 21 A-D - Transcribed interview no. 22 - Transcribed interview no. 23

73

Appendix – A

Name Nutrient Source

Main Usage

Procure-ment

Origin

Cotton seed

Protein High productive ration

Domestic import

Xinjiang, China

Oat Protein High

productive ration

Locally

produced

-

Skin of soy

beans

Protein High

productive ration

Domestic

import

South China

Sheep grass

Structure, dry matter

Dry cows, high productive

cows

Domestic import

Inner Mongolia

74

Alfalfa

Structure,

protein, dry

matter

high

productive cows

Global

import

United

States

Corn Flakes Energy high productive cows

Domestic import

Different regions China

Corn Silage Energy high productive

cows, dry cows

Locally produced

Radius between 10-

300 km around farm

Beet Pulp Energy high productive cows

Locally Imported

Table A.1: This table represents a selection of the variety of feed inputs used at the visited case

study farms.

75

Appendix – B

- Raw milk quality rewarding table

Table B.1: Raw milk quality performance bonus expressed in RMB/kg (source interview 21) *Above

3.6% fat and 3.5% protein, there is no additional bonus anymore.

- Dairy consumption figures

Figure B.1: Urban consumer dairy expenditure per capita and regional GDP per capita in RMB in

2012 (Source: NBS)

Figure B.2: Regional rural and urban pure milk consumption per capita in 2005, 2010 and 2012

(Source: NBS)

protein fat

2.8% 2.9% 3.0% 3.1% 3.2% 3.3% 3.4% 3.5% 3.6%

3.1% BASE +0.09 +0.18 +0.27 +0.36 +0.45 +0.54 +0.63 Max.

3.2% +0.05 +0.14 +0.23 +0.32 +0.41 +0.5 +0.59 +0.68 Max.

3.3% +0.1 +0.19 +0.28 +0.37 +0.46 +0.55 +0.64 +0.73 Max.

3.4% +0.15 +0.24 +0.33 +0.42 +0.51 +0.6 +0.69 +0.78 Max.

3.5% +0.2 +0.29 +0.38 +0.47 +0.56 +0.65 +0.74 +0.83 Max.

3.6% +0.25 +0.34 +0.43 +0.52 +0.61 +0.7 +0.79 +0.88 Max.

3.7% Max. Max. Max. Max. Max. Max. Max. Max. Max.

148 157

97 82

133 142

46 46

2720

32 24

4873

4364

39 57

37

31

27 28

2622

0

10

20

30

40

50

60

70

80

0

50

100

150

200

250

300

350

North East Northeast South Northwest Southwest

RBM

/Capita (

000)

Dairy E

xpenditure

(RM

B)

Pure Milk Yogurt Milk Powder Other RMB/Capita

0

5

10

15

20

25

30

35

2005 2010 2012 2005 2010 2012 2005 2010 2012 2005 2010 2012


Kg/C

apita

VolPureMilk VolPureMilkRural

76

Figure B.3: Urban dairy consumption per capita in volumes in 2005, 2010 and 2012 (Source: NBS)

Figure B.4: Urban dairy consumption per capita in value in RMB in 2005, 2010 and 2012 (Source:

NBS)

0

5

10

15

20

25

30

35

2005 2010 2012 2005 2010 2012 2005 2010 2012 2005 2010 2012 2005 2010 2012

Beijing Hebei Inner Mongolia National Tianjin

VolPureMilk VolYog VolMP

0

50

100

150

200

250

300

350

400

450

2005 2010 2012 2005 2010 2012 2005 2010 2012 2005 2010 2012 2005 2010 2012


ValPureMilk ValYog ValOthDairy ValMP

77

Figure B.5: Proportional urban dairy consumption per capita in terms of value in 2005, 2010 and

2012 (Source: NBS)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2010 2012 2005 2010 2012 2005 2010 2012 2005 2010 2012 2005 2010 2012


ValPureMilk ValYog ValOthDairy ValMP

78

Appendix - C

ID Function of Interviewee

Province Farm Type Ownership Structure

Total Herd Size

Annual Production (kg/cow)

Fat Content (%)

Protein Content (%)

SSC Raw Milk Price (RMB/kg)

Challenges on Farm

1 Feeding Manager

Beijing Scale Farm Independent Dairy Farm Group

4,000 9,500 4.20 3.20 UN ¥4.30 A, E, F

2 Farm Owner

Tianjin Scale Farm Private 720 9,150 3.70 3.20 UN ¥3.70 A, D

3 Milking Manager

Tianjin Scale Farm Vertical Integrated Farm

3,300 9,800 3.80 3.25 130,000 ¥4.20 F

6 Vice Farm Manager

Beijing Scale Farm Vertical Integrated Farm

1,500 11,000 3.70 3.10 200,000 ¥4.00 A, G

7 Vice Farm Manager

Beijing Scale Farm Vertical Integrated Farm

1,100 10,600 3.60 3.10 250,000 ¥3.50 H

10 Farm Owner

Hebei Scale Farm Private 1,080 11,000 3.45 3.10 150,000 UN A, D

11

Scale Farm and Dairy Community Owner

Hebei Scale Farm and Dairy Community

Private N/A UN UN UN UN ¥4.5 and ¥3.8***

B, J

12

Dairy Community Owner and Member*

Hebei Dairy Community

9 members 520 UN 3.39 3.04 qualified ¥3.60 A, C, G

13 Dairy Community Member*


Private 100 UN 3.39 3.04 qualified ¥3.30 A, C, E

14 Dairy Community Member*


Private 100 UN 3.39 3.04 qualified ¥3.30 B

16

Dairy Community Owner and member**


5 members 400 5,100 3.60 3.00 250,000 ¥3.35 A, B, D, I

17 Dairy Community Member**


Private 60 5,100 3.60 3.00 250,000 ¥3.35 A

22 Farm Manger

Inner Mongolia

Scale Farm Private 840 10,000 3.67 3.09 140,000 ¥3.90 C, H

Table C.1: Dairy farming interviewees and their characteristics their farm performances and raw

milk price at the time of research (May and June 2015) and mentioned challenges. * Interviewees

belong to one dairy community, ** Interviewees belong to one dairy community, *** raw milk price

of scale farm and dairy community respectively. (UN= Unknown and N/A = not applicable)

79

ID Function Interviewee Value Chain Function

Province Years of Experience

Q3: Ideal Dairy Farming Province

Q3: Factors Considered

1 Feeding Manager Dairy Farming

Beijing 6 Inner Mongolia b, f

2 Farm Owner Dairy Farming

Tianjin 11 Heilongjiang a, d, e

3 Milking Manager Dairy Farming

Tianjin 29 Tianjin c

4 Farm Design Supplier Input Supply Beijing 6 Beijing c

5 Director of Raw Milk Collection

Dairy Processing

Beijing 14 Ningxia a, b, c, e, f, k

6 Vice Farm Manager Dairy Farming

Beijing 15 Heilongjiang a, e, f, i

7 Vice Farm Manager Dairy Farming

Beijing 6 Shandong a, d

8 Breeding Specialist Input Supply Beijing 16 Ningxia d, e

9 Nutritionist Input Supply Beijing 8 Ningxia a, c

10 Farm Owner Dairy Farming

Hebei 11 Ningxia e

11 Scale Farm (1x) and Dairy Community (2x) Owner

Dairy Farming

Hebei 15 Ningxia b, d

12 Dairy Community Owner and Member

Dairy Farming

Hebei 10 Hebei a, b

15 Local Government Officer Government Hebei 31 Gansu a, b, h

16 Dairy Community Owner and member

Dairy Farming

Hebei 13 N/A N/A

18 Professor in Dairy Processing

Research Beijing 6 Heilongjiang b, j

20 Strategy and Investment Manager

Dairy Processing

Beijing 5 Beijing a, c, h, b

21A Senior R&D Manager Dairy Processing

Inner Mongolia

7 Beijing b

21B Senior Farm Assessment Manger

Dairy Processing

Inner Mongolia

15 Ningxia b

21C Raw Milk Quality Manager Dairy Processing

Inner Mongolia

5 Inner Mongolia a, b, g

21D Farm Relations Manager Dairy Processing

Inner Mongolia

7 Ningxia c

22 Farm Manger Dairy Farming

Inner Mongolia

4 Inner Mongolia g, f

23 Dairy Analyst Research Shanghai 6 Inner Mongolia b, c, d

Table C.2: Interviewees and their characteristics in relation to their identified ideal dairy farming

province and their factors considered. *These interviewees were part of the focus group interview

and but have different answers to question 3, because this question was asked separately (UN=

Unknown and N/A = not applicable)

80

ID Function Interviewee Value Chain Function

Province Years of Experience

Q1: Target Reachable?

Q1: Motivation

1 Feeding Manager Dairy Farming Beijing 6 No C, D

2 Farm Owner Dairy Farming Tianjin 11 No C, F, J

3 Milking Manager Dairy Farming Tianjin 29 No A, O

4 Farm Design Supplier Input Supply Beijing 6 No J, N

5 Director of Raw Milk Collection Dairy Processing

Beijing 14 Yes A, D, I

6 Vice Farm Manager Dairy Farming Beijing 15 No G

7 Vice Farm Manager Dairy Farming Beijing 6 No A, G, K

8 Breeding Specialist Input Supply Beijing 16 Yes E, G, L

9 Nutritionist Input Supply Beijing 8 No C, H

10 Farm Owner Dairy Farming Hebei 11 No B

11 Scale Farm (1x) and Dairy Community (2x) Owner

Dairy Farming Hebei 15 No B, H

12 Dairy Community Owner and Member

Dairy Farming Hebei 10 No B, C

15 Local Government Officer Government Hebei 31 Yes -

16 Dairy Community Owner and member

Dairy Farming Hebei 13 No C, H

18 Professor in Dairy Processing Research Beijing 6 Yes 1

20 Strategy and Investment Manager

Dairy Processing

Beijing 5 Yes 1, 3

21A Senior R&D Manager* Dairy Processing

Inner Mongolia

7 Yes 2, A, D, E, F, M

21B Senior Farm Assessment Manger*

Dairy Processing

Inner Mongolia

15 Idem idem

21C Raw Milk Quality Manager* Dairy Processing

Inner Mongolia

5 Idem idem

21D Farm Relations Manager* Dairy Processing

Inner Mongolia

7 idem idem

22 Farm Manger Dairy Farming Inner Mongolia

4 Yes 2, B, K

23 Dairy Analyst Research Shanghai 6 No 1, A, B, D, E, F, I

Table C.3: Interviewees and their characteristics in relation to their opinion about reachability of

milk production target set by government in 2020 and their motivation interpreted as drivers of and

constraints to dairy farming development. *These interviewees were part of the focus group

interview and have therefore similar answers to question 1 (UN= Unknown and N/A = not applicable)

81

Appendix – D

This appendix represents the total overview of all interviewees spread over two tables. The first tables shows the interview details and the characteristics of the interviewees. The second table represents the interviewees’ identifications numbers and their challenges on farm-level (if applicable), their opinion about the feasibility of the production target in 2020 and their factors considered when choosing the ideal farm location.

82

ID Date Value Chain Function

Function Interviewee

Institution Province Other Farm Type Years of Exper-ience

# cows Annual Produc-tion per cow

% fat

% protein

SSC Raw Milk Price -current

1 14/5/2015

Dairy Farming

Feeding Manager

Zhong Di Farm

Beijing In-dependent Dairy Farm Group

Scale Farm 6 4000 9500 4,20 3,20 unknown 4,30

2 14/5/2015

Dairy Farming

Farm Owner

Private Dairy Farm

Tianjin Private Owned Dairy Farm

Scale Farm 11 720 9150 3,70 3,20 unknown 3,70

3 14/5/2015

Dairy Farming

Milking Manager

Bright Dairy Group Shanghai

Tianjin Vertical Integrated Farm (3300 cows)

Scale Farm 29 3300 9800 3,80

3,25

130.000 4,20

4 15/5/2015

Input Supply

Vice President

East Rock Farm Design

Beijing Dairy Farm Design and Equipment Supplier

6

5 18/5/2015

Dairy Processing

Director of Raw Milk Collection

Mengniu Beijing Mengniu, plant Beijing

14

6 19/5/2015

Dairy Farming

Vice Farm Manager

Sanyuan Beijing Vertical Integrated Farm (1500 cows)

Scale Farm 15 1500 11000 3,70 3,10 200.000 4,00

7 19/5/2015

Dairy Farming

Vice Farm Manager

Sanyuan Beijing Vertical Integrated Farm (1100 cows)

Scale Farm 6 1100 10600 3,60 3,10 250.000 3,50

8 20/5/2015

Input Supply

Managing Director

CRI Beijing Xiangzhong Biotechnologies

Beijing Breeding company for semen, embryo's and fertility treatment

16

9 20/5/2015

Input Supply

Nutritionist Nutreco - Trouw Nutrition

Beijing Ruminant Feed Input Supplier

8

10 21/5/2015

Dairy Farming

Farm Owner

Private Dairy Farm

Hebei Private Owned Dairy Farm (1080 cows)

Scale Farm 11 1080 11000 3,45 3,10 150.000 unknown

11 21/5/2015

Dairy Farming

Farm Owner

Private Dairy Farm, Dairy Community (2x)

Owner of two dairy communities and a private owned scaledairy farm

Scale Farm and Dairy Community

15 N/A unknown

unknown

unknown

unknown 4.5 and 3.8

12 22/5/2015

Dairy Farming

Dairy Community Owner and Member

Dairy Community Shijiazhuang (1)

Hebei Dairy Community Owner with 520 cows of which 200 milking cows and 9 farmers

Dairy Community

10 520 unknown

3.39 3.04 qualified 3,60

13 22/5/2015

Dairy Farming

Dairy Community Member

Dairy Community

Hebei Dairy community member with 100

Dairy Community

10 100 unknown

3.39 3.04 qualified 3,30

83

Shijiazhuang (1)

cows, including young stock

14 22/5/2015

Dairy Farming



Hebei Dairy community member with 100 cows, including young stock

Dairy Community

9 100 unknown

3.39

3.04

qualified 3,30

15 22/5/2015

Government

Director of Dairy Farming Shijiazhuang city

Animal Husbandry Bureau - Ministry of Agriculture

Hebei Department of MOA responsible for dairy farming support

31

16 23/5/2015

Dairy Farming

Dairy Community Owner and member


Hebei Dairy community owner with 400 cows (170 milking cows) and 5 farmers

Dairy Community

13 400 5100 3,60 3,00 250.000 3,35

17 23/5/2015

Dairy Farming



Hebei Dairy community member with 400 cows (170 milking cows) and 5 farmers

Dairy Community

12 60 5100 3,60 3,00 250.000 3,35

18 26/5/2015

Research Professor in Dairy Processing

China Agricultural Univeristy

Beijing Associate professor specialized in diary processing technology

6

19 27/5/2015

Research Professor in Manure treatment

China Agricultural Univeristy

Beijing Associate professor specialized in environment enhancing energy

7

20 28/5/2015

Dairy Processing

Strategy and Investment Junior Manager

Sanyuan Beijing Strategy and Investment department of Sanyuan Group

5

21A

6-5-2015

Dairy Processing

Senior R&D Manager

Mengniu Inner Mongolia

Mengniu, Headquaters Hohhot

7

21B

6-5-2015

Dairy Processing

Senior Farm Assessment Manger



15

21C

6-5-2015

Dairy Processing

Raw Milk Quality Manager



5

84

21D

6-5-2015

Dairy Processing

Farm Relations Manager



7

22 6-5-2015

Dairy Farming

Farm Manger

Private Owned Dairy Farm

Inner Mongolia

Private Owned Dairy Farm

Scale Farm 4 380 10000 3,67 3,09 440.000 3,90

23 6-8-2015

Research Dairy Specialist

Rabobank, Food&Agri Research and Advisory

Shanghai Dairy Specialist, Rabobank FAR

6

85

ID Challenges on farm-level Production Target feasible? Motivation for Production Target Most suitable province? Factors Considered in Ideal Farm Location

1 E, F, A No C, D Inner Mongolia b, f

2 A, D No C, F, J Heilongjiang a, d, e

3 F No A, O Tianjin c

4 No J, N Beijing c

5 Yes A, D, I Ningxia a, b, c, e, f, l

6 G, A No G Heilongjiang a, e, f, Ii

7 H No A, G, K Shandong a, d

8 Yes E, G, L Ningxia d, e

9 No C, H Ningxia a, c

10 A, D No B Ningxia e

11 B, J No B, H Ningxia b, d

12 G, C, A No B, C Hebei a, b

13 E, C, A - -

14 B - -

15 Yes - Gansu a, b, h

16 B, I, A, D No C, H Quit farming k

17 A - -

18 Yes 1 Heilongjiang b, j

19 - -

20 Yes 1, 3 Beijing a, c, h, b

21A Yes 2, A, D, E, F, M Beijing b

21B Yes idem Ningxia b

21C Yes idem Inner Mongolia a, b, g

21D Yes idem Ningxia c

22 C, H Yes 2, B, K Inner Mongolia g, f

23 No 1, A, B, D, E, F, I Inner Mongolia b, c, d

86

Appendix – E

In this appendix three developed interview designs are presented for different value chain actors,

namely input supplier, farm manager and dairy processor. These are in this order presented in this

appendix. Note that the initial interview design differs from the layout of the conducted interviews,

since this has changed during the research.

MSc-thesis Chinese Dairy Production Development Objective: to predict how Chinese dairy development will evolve in the future by investigating the relative importance of several production constraints Introduction: Roel van de Ven (Luo Wan Wun) > Ghent Univeristy > Collaboration with FrieslandCampina > Master thesis about the future development of the Chinese dairy production.

Notes:

- Anonymous: Your name will not be disclosed in the results or report - Independent research - Ask to record the interview

Interview details:

Date:

Institution:

Function:

Years of experience:

Provinces active:

Other:

Part 1: Semi-Structured Interview: Understand Chinese dairy

production

A. General

1) Can you tell me a little bit about yourself and your background?

Career: Personal: Function in Dairy processors:

2) Can you give me a general overview of your company?

History:

Location: Ownership:

B. Present

3) What kind of services/products do you provide to your dairy farm customers?

4) How do you create value for these dairy farms?

5) What type of dairy farms according to their farm size do you supply?

C. Past

1) What kind of changes took place in the past regarding demand for certain products and why

did they occur?

INPUT SUPPLIER

87

2) How did the processes taking place on your place in your company change over the years?

3) What kind of changes took place in the past regarding the marketing of your product(s)?

D. Future 1) What are the biggest challenge(s) you are facing at the moment?

2) How could you overcome these challenges and who could help you to achieve this?

3) What type of products will you mainly supply in the upcoming years?

Part 2: In depth interview: Focus on constraints of dairy

development

Figure 1: The Chinese expected milk production according to the government

1) What are your thought about this expected milk production?

2) What are the largest challenges for the total Chinese dairy sector to increase production to

60 million MT of raw milk?

3) According to my desk research, I have identified the following constraints. What are your

thoughts about these? Could you rank these constraints according to their constraining

influence on Chinese diary development?

- Land & Feed:

- Water:

- Labor:

- Financial capital:

- Waste management:

- Productivity:

- Global competition:

4) Suppose you would get 1000 cows tomorrow and money to build a farm, in which Chinese province would you build it? What factors do you take into account?

5) What type of farm according to farm size could best be used to achieve the growth in milk production?

0

10

20

30

40

50

60

70

Millio

n M

T Growth in Milk Production

2022

88

MSc-thesis Chiese Dairy Production Development Introduction: Roel van de Ven (Luo Wan Wun) > Ghent Univeristy > Collaboration with FrieslandCampina > Master thesis about the future development of the Chinese dairy production. Notes:

- Anonymous: Your name will not be disclosed in the results or report - Independent research - Ask to record the interview

Interview details:

Date:

Institution:

Function:


Provinces active:

Other:


production

E. General

6) Can you tell me a little bit about yourself and your background? Career: study/ experience in dairy farming

Personal: wife/ children/ income

7) Can you give me a general overview of your company/farm?

History:

Location: Ownership: Finance #Cows:

#Employees: background employees / former farmers / seasonal contract

F. Present

1) What kind of inputs do you use on your company/farm? Animal Inputs:

Feed Inputs: imported/ domestic production/ own production + prices of feed Machinery Inputs:

2) How are the processes on your company/farm taking place?

Feeding process:

High productive ration % of total ration

Corn pellet

Corn silage

Alfalfa

Oat grass

FARM MANAGER

89

Sheep grass

Cotton seed

Soybean meal

Milking process:

Annual production kg/year/cow

% fat

% protein

Breeding process:

Fertility rate

Calving interval

Conception rate

Services per conception

Renewable rate

Culling rate

Main reason for culling

Manure treatment: role of the government Disease control: main diseases

3) How do you market the products of your company/farm?

Buyer:

Collection: Governance structure: type of contract/ terms of contract

4) How is the price of raw milk constructed? Quality issues: Depending factors:

5) In an ideal situation, what would be the role of the government?

a. What is the current role of the government?

b. What should happen to reach an ideal situation?

G. Past

4) What kind of changes took place in the past regarding input sourcing and why did they

occur?

5) How did the processes taking place on your place in your company/farm change over the years?

6) What kind of changes took place in the past regarding the marketing of your product(s)?

H. Future

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4) What are the biggest challenge(s) you are facing at the moment?

5) How could you overcome these challenges and who could help you to achieve this?


development








- Land & Feed:

- Water:

- Labor:


- Waste management:

- Productivity:


4) Suppose you would get 1000 cows tomorrow and money to build a farm, in which Chinese province would you build it? What factors do you take into account?

5) What type of farm according to farm size could best be used to achieve the growth in milk

production?

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20

30

40

50

60

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MSc-thesis Chinese Dairy Production Development Objective: to predict how Chinese dairy development will evolve in the future by investigating the relative importance of several production constraints Introduction: Roel van de Ven (Luo Wan Wun) > Ghent Univeristy > Collaboration with FrieslandCampina > Master thesis about the future development of the Chinese dairy production. Notes:

- Anonymous: Your name will not be disclosed in the results or report

- Independent research - Ask to record the interview

Interview details:

Date:

Institution:

Function:

Function description:


Provinces active:

Other:


production

A. General

1) Can you tell me a little bit about yourself and your background? Career:

Personal: Function in Dairy processors:

2) Can you give me a general overview of your company?

History: Location: Ownership:

B. Raw Milk Collection

1) In an ideal situation how would the raw milk collection process be organized?

2) How is raw milk collection currently organized?

3) What are the largest challenges to create this ideal situation?

4) What is the role of the government in raw milk collection?

C. Raw Milk Price Construction

1) How is the raw milk price within dairy processors determined?

Quality issues: Safety issues: Milk Price Depending factors:

2) Why are there regional differences in raw milk price?

DAIRY PROCESSOR

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Local Governmental influence:

Local Market influence:

D. Dairy Value Chain: China 1) Can you draw together with me the most important flows of products?

2) Production: What would be an ideal distribution for Mengiu regarding raw milk collection

based on farm size? How does it currently look? What are the challenges for Dairy processors to achieve this?

3) Collection: What do you think of the position of middleman and MCC in the future?

4) Processing: Where would ideally the plants of Dairy processors be located?

5) Processing: What is the link between farm size and processed product?

6) Retail: How do you see the future Chinese dairy consumption?

93


development








- Land & Feed:

- Water:

- Labor:


- Waste management:

- Productivity:


4) Suppose you would get 1000 cows tomorrow and money to build a farm, in which Chinese

province would you build it? What factors do you take into account?

5) What type of farm according to farm size could best be used to achieve the growth in milk

production?

0

10

20

30

40

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60

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Appendix – F

Farm-level Challenge

Interview

Additional Financial Capital

Requirements

11. Farm owner and dairy communities owner Hebei

One of the major challenges is to standardize the community farms towards the level of scale farms, because more investments are needed and this will drive the costs for milk production. 14. Dairy community member

Dairy farming requires a lot of financial capital. 16. Dairy community owner and member Hebei Ideally I would buy the cows from the other farmers, but he is unable to

do so because he doesn’t have the financial capital.

Environmental Pollution

01. Feeding Manager at Zhong Di Dairy Farm Environmental pollution: There is not enough land to dispose the manure on in Beijing. The government is enforcing the legislation around environmental pollution. The dairy farm is also using a lot of water, which is polluting the ground water around the farm. The government is recently sampling more frequently the water quality of the farms waste

water. Access to clean water is not a problem according to him. 13. Dairy community member We maybe have to relocate our dairy farm, because we are in a water saving area. This probably can mean quit dairy farming.

Feed Procurement 01. Feeding Manager at Zhong Di Dairy Farm

The land in Beijing is too expensive, so he has to keep importing feed. In five years I expect to still import a lot of feed, because it is still relatively cheap. Although the quality of wheat grass is rapidly increasing. Wheat grass is produced in Inner Mongolia and Guangxi, so

it might be possible to source more feed inputs domestically. But dairy ration composition is hard, he needs a lot of different ingredients for different herd groups, which makes it hard to get constant good quality from own-produced feed or domestically produced feed. He expects that feed imports will increase in the future. 03. Milking manager Bright Dairy Group Shanghai

The cost of feed imports are high, although locally sources feed is also expensive given the quality provided. In general feed costs are high; 2.34 RBM per kg. The breakeven point of milk production is 3.6 RMB.

Global Competition 06. Vice Farm Manager at Sanyuan Dairy Farm Group

It is very difficult for Chinese dairy farms to survive, because the competition with other parts of the world such as New Zealand, Australia and Europe is very strong. Luckily my farm is not impacted too much, because the production results are very good. 12. Dairy community owner and member Hebei

Imported milk powder, this is often cheaper and causes competition for our raw milk.

95

Improve Genetics 16. Dairy community owner and member Hebei

could be improving the genetics on his farm to improve productivity.

Improve Milk Yield 12. Dairy community owner and member Hebei Improvement of milk yield 13. Dairy community member

The business is not so stable, meaning that profit varies a lot. A few years ago the profit was way better, but currently there are very low profit margins. At the moment even 0% profit. The milk yield of his cows (23kg/day/cow), is low compared to the other communities 22. Farm Manager in Private Dairy Farm

Our milk gets sometimes rejected because of a too high sematic cell

count. We have to find ways to decrease the mastitis and cell count with our cows.

Labor Inefficiency 07. Vice Farm Manager at Sanyuan Dairy Farm Group

The efficiency in this farm is very low, especially the labor efficiency. In other newly build farms with better equipment this has already improved a lot, in this farm we have to do everything twice which requires a lot of labor.

22. Farm Manager in Private Dairy Farm We have too many laborers on our farm. The owner of the farm wants to replace labor by technology, for example the new TMR machine and the construction of a new modern milking parlor. With the stationary TMR machine we needed 3-4 people for feeding, we have managed to decrease employees needed for feeding to 1. The salaries for wages have

increased a lot and also we needed more labor over time. In 2011, the monthly salary in this area was about 2000 RMB and the laborers would work every day. Currently we will pay the laborers 3000 RMB/month and the laborers will work one day and then one day off. The work is hard and heavy, for example in milking we started to milk 3 times/day which requires more from the employees.

Low Milk Price 01. Feeding Manager at Zhong Di Dairy Farm 2011 was the golden age for Chinese dairy farming, the sky was the limit. In 2012 the milk price was very good, we could choose from all dairy processors. Nowadays the milk price is low, some periods there milk cannot be marketed so it is turned into milk powder, where after it

can be stored for 6 months. 06. Vice Farm Manager at Sanyuan Dairy Farm Group The biggest challenge for our farm is to deal with the currently low raw

milk price while the costs of feed are at the same level or even higher.

This affects the margin negatively.

10. Private Dairy Farm Owner Hebei Low Raw milk prices

12. Dairy community owner and member hebei A low raw milk price, if the milk price will decrease even further we will not survive

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13. Dairy community member1

The business is not so stable, meaning that profit varies a lot. A few years ago the profit was way better, but currently there are very low profit margins. At the moment even 0% profit. The milk yield of his cows (23kg/day/cow), is low compared to the other communities 16. Dairy community owner and member Hebei

Currently the dairy community is not profitable. If there is no change in the situation I might quit dairy farming. A higher raw milk price is essential in this, 17. Dairy Community Member Shijiazhuang, Hebei

Currently his dairy farm is facing a very low raw milk price which makes

it hard to be profitable.

Risk of Higher Cost Price

11. Farm owner and dairy communities owner Hebei The cost price for a dairy community is lower than a scale farm, because the management costs are lower for scale farms. The cattle on the

communities have an individual farmer who looks after the cows and is directly affected by the performances of these cows. Because there is a low investment in dairy communities the risk is lower for these farms.

Unequal Power Distribution

02. Farm Owner Tianjin

I have a contract to deliver 10,000 kg of milk every day, but with the new rules of the dairy processor I can only deliver 9,000 kg. 10. Private Dairy Farm Owner Hebei Large power of dairy processor

16. Dairy community owner and member Hebei I heard that Junlebao is sourcing their raw milk for 70% from scale dairy farms owned by the Junlebao group. The government is supporting this development, but the risk for dairy communities like me is that our milk will be rejected by the dairy processors and we will be out of the supplier network.

Table F.1: Results of the challenges on farm-level before data reduction and its codes

Ideal Farming Location Factors

Interview

Climate 03. Milking manager Bright Dairy Group Shanghai I say Tianjin has the best climate for dairy production. 05. Director of raw milk collection Mengniu - Beijing

climate 06. Vice Farm Manager at Sanyuan Dairy Farm Group environment is getting worse. Desertification is a problem in Inner Mongolia, which decreases the quality of feed produced.

07. Vice Farm Manager at Sanyuan Dairy Farm Group climate 09. General Manager Nutreco - Trouw Nutrition

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climate

12. Dairy community owner and member hebei climate 15. Director of dairy farming Animal Husbandry Bureau (MOA)

Gansu, because there is a good climate the humidity is low. 20. Strategy and Investment Manager in Sanyuan But I would also take the climate and the land resources into consideration, so I think within a radius of 300-400 km around a big city is the best. Then I have enough access to land and close to the market.

21 A,B,C,D. Group Interview Raw Milk Procurement in Mengniu Raw Milk Quality Manager: If the province has a good climate for dairy cows

Cost of Feed Input Sourcing

06. Vice Farm Manager at Sanyuan Dairy Farm Group It is easier to cultivate your own feed required to feed the cattle at a lower price. Sheep grass, corn and soy will be cheaper than if purchased here in Beijing, because demand is lower. Additionally the province is located near Russia, where many crops are produced, which could be

easy to import these crops.

Market Proximity 03. Milking manager Bright Dairy Group Shanghai In general I think that it is better to locate a farm closer to the consumer than closer to land and feed production.

04. Vice President East Rock Farm Design In this decision there are two ways of reasoning possible, either you look at cost saving strategy or you look at your consumer and try to get a premium price for your product. If I would decide to build a farm I would choose the second option. If I would build my farm close to the consumer

and use a good marketing strategy I can easily get a price of 18 RMB per kg, like Wonder Milk is achieving in Anhui province. Marketing efforts are rewarded very well by Chinese consumers. For example if you would show a short commercial of 30 seconds on WeChat about the Dutch dairy sector, I would assure you that all consumers want Dutch milk. Additionally the distance between the farm and the consumer should be

as short as possible, because this is the only way to win the trust of the consumer.

05. Director of raw milk collection Mengniu - Beijing It is relatively close to Beijing and other markets, compared to other regions.

09. General Manager Nutreco - Trouw Nutrition The second type is driven by resources such as land and natural conditions. If you look at China’s coastal regions, there is a high population density, a deficit in milk supply and most of the wealthy consumers live there.

Most of the milk is produced in the north therefore the surplus of milk is

98

in the north, so actually it might be better to build the farm in the middle

to benefit from both situations.

20. Strategy and Investment Manager in Sanyuan I would build the farm around the big city, because the market is close. 21 A,B,C,D. Group Interview Raw Milk Procurement in Mengniu

Every consumer is demanding for a customized dairy product, so I will build my farm close to the consumer in first tier cities (CBD) to offer a large variety or products. Also in these cities there is good infrastructure to have cheap transport to supermarkets but also to get alfalfa from the US. 23. Dairy Specialist at Rabobank FAR

It also depends on the population density of the area, the distance to the market and the suitability of the land. It is key for Chinese dairy farms to find a balance between these concepts. The cold chain is a problem in China, because in many regions the cold chain is still developing which makes it costly to use the cold

chain and increases the cost for consumers in the end. For example it took Singapore 30 years to become an entire milk market on pasteurized products, while Singapore is a small country.

Processor Proximity 21 A,B,C,D. Group Interview Raw Milk Procurement in Mengniu Raw Milk Quality Manager: If the province has presence of factories to process my milk

22. Farm Manager in Private Dairy Farm

First of all because Mengniu and Yili are close, this makes it possible to find a market for the raw milk produced.

Environmental Pollution

18. Professor in Dairy Processing China Agricultural University So if the land and water is contaminated it will be difficult to meet the safety and quality standards. In the north there are more resources and these are less polluted.

Governmental Approval

01. Feeding Manager at Zhong Di Dairy Farm Inner Mongolia, in the future it will not be possible to build new farms in Beijing area. The government will not support more farms in Beijing,

although existing locations can remain in the area. 05. Director of raw milk collection Mengniu - Beijing

Setting up a farm in Beijing is not possible anymore because the government will not allow this because of the high population density and the risk of animal diseases and environmental pollution. 06. Vice Farm Manager at Sanyuan Dairy Farm Group

That land is only suitable for grass production and not for higher value crops like corn or wheat. If you would locate farms close to the cities, this will be impossible because of new regulations from the local

99

government regarding environmental protection. Six farms of Sanyuan

have to relocate because of this law, since they are located too close to residential areas or polluting the environment.

22. Farm Manager in Private Dairy Farm Also the local government is supporting dairy a lot here, which helps to build the farm.

Soil Quality 02. Farm Owner Tianjin Heilongjiang, because that area is rich in natural resources, like good quality land. It has a lot of corn and wheat production. 05. Director of raw milk collection Mengniu - Beijing

Feed sourcing is not a problem, because of the fertile land and much

grassland. 06. Vice Farm Manager at Sanyuan Dairy Farm Group I would build the farm in Heilongjiang, because of the availability of

fertile land. 08. Managing Director CRI Beijing Xiangzhong Biotechnologies because the forage is of better quality,

10. Private Dairy Farm Owner Hebei because the environment is very suitable especially for corn production. In Ningxia it is possible to achieve dry matter percentages of 38% in corn, while here we have only reach a DM-level of 30%. Feed production is the most important consideration for me.

Labor Availability 15. Director of dairy farming Animal Husbandry Bureau (MOA) good labor costs 20. Strategy and Investment Manager in Sanyuan

There are also better educated people to work on the farm, and with support of universities.

Land Availability 01. Feeding Manager at Zhong Di Dairy Farm

Inner Mongolia has the advantage of less land scarcity, so more feed inputs can be produced locally. 05. Director of raw milk collection Mengniu - Beijing

Feed sourcing is not a problem, because of the fertile land and much grassland.

11. Farm owner and dairy communities owner Hebei Additionally it should be easy to source corn silage. 12. Dairy community owner and member hebei

North of Hebei province, there is good climate and enough land. 15. Director of dairy farming Animal Husbandry Bureau (MOA)

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A lot of grassland and silage production,

18. Professor in Dairy Processing China Agricultural University So if the land and water is contaminated it will be difficult to meet the safety and quality standards. In the north there are more resources and these are less polluted.

20. Strategy and Investment Manager in Sanyuan But I would also take the climate and the land resources into consideration, so I think within a radius of 300-400 km around a big city is the best. Then I have enough access to land and close to the market. 21 A,B,C,D. Group Interview Raw Milk Procurement in Mengniu

Senior Farm Assessment Manager: I will build my farm in West Inner Mongolia or Ningxia. There is a famous dry land plateau where a lot of grass is growing which is very feasible for dairy cows. Mengniu also has plants there so that is not a problem, but mainly there is a lot of forage available.

Raw Milk Quality Manager: If the province has enough forage from the local area. Farm Relations Manager: I will also choose Ningxia because of the large availability of forage.

23. Dairy Specialist at Rabobank FAR land availability and thus opportunity for forage and silage production and manure disposal.

Population Density 02. Farm Owner Tianjin Additionally the population density is low, so I can raise my cattle far from the residential areas. 07. Vice Farm Manager at Sanyuan Dairy Farm Group

The city is expanding and the surrounding villages are growing, so there is less land to divide over more people and farms. 08. Managing Director CRI Beijing Xiangzhong Biotechnologies there less environmental problems because it is far away from residential

areas.

11. Farm owner and dairy communities owner Hebei Anywhere is possible as long as the farm is setup far from the villages in a more desert like environment.

23. Dairy Specialist at Rabobank FAR It also depends on the population density of the area, the distance to the market and the suitability of the land.

Water Availability 05. Director of raw milk collection Mengniu - Beijing

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And the yellow river is streaming through this province, so water is also

not a problem.

Table F.2: Results of the identified factors considered regarding the ideal dairy farm provinces before

data reduction and its coding.

Motivation (Driver/Constraint)

Interview

Climate Change in

other Dairy Producing Regions

20. Strategy and Investment Manager in Sanyuan

Additionally because of global warming, there will be less rain in New Zealand and Australia leading to lower milk production, so less imports from those regions.

Increasing Chinese Dairy Consumption

18. Professor in Dairy Processing China Agricultural University

I think it is possible; the consumption of milk is limited. Mainly liquid products, not value added products. If Chinese consumers start to

consume more of these products, enhanced by economic development then this production growth is possible. I think the first challenge is to solve lactose intolerance for Chinese consumers. Add some lactose enzyme in the products. The second relates to the government, which

has made for more than 10 years promotion to drink milk in the primary school. Supply one box of milk to the students during school time. If more milk is given to primary school kids then the milk consumption and production will grow. Currently this only happens more in big cities. And the third thing is to create more market for elderly and pregnant women. The company can design different types of milk powder products for these people. More and more fragmentation drinks (probiotics), the

market is will grow better and more. Also cheese will grow as well. 20. Strategy and Investment Manager in Sanyuan The consumption will grow fast, because compared to other Asian

countries the average milk consumption of China is very low. Additionally other tier city citizens will get more access to dairy products. I expect

the growth in diary consumption mainly to be increase because of UHT milk, pasteurized milk and yogurts. Also IFT consumption will grow, because Chinese citizens are allowed to have a second child. 23. Dairy Specialist at Rabobank FAR

Dairy is indeed not a stable food for Chinese, but it is becoming more and more. Although I expect the growth in dairy consumption to happen in yogurt, ice cream and food service, where dairy is used as an ingredient for other products, rather than an increase in liquid milk consumption on a daily basis.

Room for improvement of Productivity

21 A,B,C,D. Group Interview Raw Milk Procurement in Mengniu Currently the annual raw milk production is 5000-6000 kg/cow/year. If

we can increase this to 10.000 kg/cow/year then the aim of growth is possible. The total number of farms will decrease, the number of cows will remain equal and the efficiency and production of the farms will increase.

22. Farm Manager in Private Dairy Farm Yes it is possible, because of a growth in yield per cow and expansion of farms. For example our farm is currently delivering 10.000 kg per day, but in two years I expect to grow to 15.000 kg a day.

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Growing Awareness

for Environmental Pollution

21 A,B,C,D. Group Interview Raw Milk Procurement in Mengniu

Waste water treatment and manure production are getting more

awareness by the Chinese government and they start to realize it is a

big problem. In the future there might be subsidies to install more and

better manure treatment technologies, provided by the government.

Chinese Consumers Distrust in Dairy Products

04. Vice President East Rock Farm Design Another thing is the scandal of 2008, although many people think that the problems are solved while actually the consumers still don’t trust the safety of the products and are uncertain about the quality of the products

The market for dairy products decreased by 20% in 2008. The industry has to regain the trust of the consumers, which is a very slow and costly process. Advertising and campaigning for the safety of dairy products is very important. The three largest dairy producers have failed in this melamine scandal, but the government is really to blame for the weak control on the sector because all the companies were having the permits

to produce dairy products. There is a trend where we see the government withdrawing from the industry and opening the market for businesses to have independent laboratories to test food safety and quality, such as milk and dairy products. In conclusion, why do we have to grow our dairy production while the consumers are not ready yet to receive the products?

Poor Chinese Competitiveness on

World Market

01. Feeding Manager at Zhong Di Dairy Farm

To remain competitive on the world market. 02. Farm Owner Tianjin

At the moment the Chinese dairy market is open for other countries, but the domestic production will not grow. Chinese farmers cannot compete against low cost milk production countries in other parts of the world. 09. General Manager Nutreco - Trouw Nutrition

The main problem is global competition. If we would open the door for dairy products then all the dairy products will be imported. If China wants to accomplish a sustainable and steady growth, we should find a way to compete with the world not just internally. 12. Dairy community owner and member hebei

current market circumstances and low raw milk prices a lot of dairy

farmers will quit farming.

16. Dairy community owner and member Hebei The total Chinese milk production will definitely grow, but not by 40%.

China will always import milk powder from New Zealand.

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Exit of Backyard

Farmers


Many farmers, especially backyard farmers, have culled their cattle in

2014 and/or threw away the milk. It is very risky to produce milk as backyard farmer, because the dairy processors are increasing the requirements for sematic cell count and quality for milk delivery. In combination with low yields it led to the culling of animals. In the nearby village this has happened in many cases. In one year the total number of cattle has decreased from 60,000 to 40,000 in Tianjin district.

04. Vice President East Rock Farm Design The size of the Chinese total dairy herd was estimated to be 13 million in 2013, which is a lot if you think that only 0.19% of the Chinese population has a dairy farm. They could only milk 4.5 million cows, more is simply not possible. The current stock is 4.3 million cows. In conclusion

I think it is not possible to reach this number, because of restrictions in

laborer capacity. For East Rock it became clear that it does not matter how large your farm is but it is important how to optimize the yield per cow.

Expensive

Consumer Milk


The problem is that milk will never be cheap for Chinese. 21 A,B,C,D. Group Interview Raw Milk Procurement in Mengniu Market; 5-10 years ago there were high profits for the farmers, because

of large margins. Nowadays it is a big challenge to be profitable with lower margins. Maybe the price of milk in the supermarket will become more reasonable, not low, to attract more consumers. 23. Dairy Specialist at Rabobank FAR

The prices of consumption milk in supermarkets are high, because of a

quick process of premiumization.

Lack of Feasible Manure Disposal Solutions**

03. Milking manager Bright Dairy Group Shanghai land shortages for feed production and manure disposal

05. Director of raw milk collection Mengniu - Beijing manure 21 A,B,C,D. Group Interview Raw Milk Procurement in Mengniu

Manure production are getting more awareness by the Chinese government and they start to realize it is a big problem. In the future there might be subsidies to install more and better manure treatment

technologies, provided by the government. 23. Dairy Specialist at Rabobank FAR

manure production,

High Cost of Milk Production in China

03. Milking manager Bright Dairy Group Shanghai high cost of milk production in China.

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Lack of Effective

Farm Management

08. Managing Director CRI Beijing Xiangzhong Biotechnologies

The second challenge is improving the farm management, because at

the moment there is a big difference between large scale and small scale management practices. 21 A,B,C,D. Group Interview Raw Milk Procurement in Mengniu Guidance/strategy; A guidance will help the farms to have better

practices to manage the cows and obtain a higher production. This guidance should be provided by the government or dairy processors. 23. Dairy Specialist at Rabobank FAR but also farm management skills are important.

Farmers’ Inability to

Innovate

08. Managing Director CRI Beijing Xiangzhong Biotechnologies

The third thing is innovation; farmers should be open for new techniques to manage their farms better, although this is improving because many students and young people are now working in dairy farming.

Land Shortage for Feed Production

03. Milking manager Bright Dairy Group Shanghai land shortages for feed production 05. Director of raw milk collection Mengniu - Beijing

feed resources grass to feed the cows 07. Vice Farm Manager at Sanyuan Dairy Farm Group

Additionally there is a shortage of land, which makes it difficult to produce enough feed and find vacant land to setup dairy farms. 21 A,B,C,D. Group Interview Raw Milk Procurement in Mengniu we have to secure sufficient amount of high quality feed.

23. Dairy Specialist at Rabobank FAR land competition,

Low Raw Milk Price 06. Vice Farm Manager at Sanyuan Dairy Farm Group

the raw milk price is too low. If there is no financial support this aim will be reached.

07. Vice Farm Manager at Sanyuan Dairy Farm Group because the raw milk price is too low.

08. Managing Director CRI Beijing Xiangzhong Biotechnologies I think this is possible, but there are challenges. First of all is the raw milk price, which is fluctuating significantly. The government should install policies to prevent such volatility, because farmers aren’t able to

manage their cows stable.

105

Short-Term

Thinking of Processors

09. General Manager Nutreco - Trouw Nutrition

The main challenge is not the forages or roughages, but the short term

thinking of dairy processors like Yili and Mengniu. While many farmers had to quit their business, Yili and Mengniu had a profit of 50 billion RMB. In my opinion the main challenge is to distribute the profits better over the chain. 11. Farm owner and dairy communities owner Hebei

The dairy processors should invest more in the marketing of the dairy products and especially the marketing for the mid segment of supermarket milk. Currently a lot of advertisements promote the high quality milk, but they should promote the 9 RMB/kg milk. If you compare the milk price with the price for eggs, the price for milk is too high for consumers.

16. Dairy community owner and member Hebei Employees of dairy processors only think about profit, they will never prefer domestic produced milk. Milk powder is approximately 2 RBM/kg cheaper than domestic raw milk.

Unattractive Industry to Invest

07. Vice Farm Manager at Sanyuan Dairy Farm Group because the raw milk price is too low. This makes it unattractive to invest in dairy farming, import dairy cattle and grow the milk production.

22. Farm Manager in Private Dairy Farm We are currently expanding our farm, with more equipment and cows. Although you can easily buy them, it is very expensive. At the moment with a low raw milk price, this is a problem. When the raw milk price is high, then nothing is a problem.

Underdeveloped Chinese Dairy Market

10. Private Dairy Farm Owner Hebei At the moment I would say it is impossible, we are unable to find markets for our milk so why should we grow to this production level? 11. Farm owner and dairy communities owner Hebei

If the dairy consumption and thus the demand for milk does not increase this production level will not be reachable. If the raw milk price remains low like nowadays this level will not be reached. We could stimulate the consumption of raw milk by lowering

the supermarket price for pasteurized milk. This will allow more consumers to buy more milk.

12. Dairy community owner and member hebei I think that this goal of the government is wrong, because Chinese are not used to consume dairy products so at first the demand for this milk

should be found. 22. Farm Manager in Private Dairy Farm Also the consumer needs to drink more milk, because why would you produce more milk if there is no market for this.

23. Dairy Specialist at Rabobank FAR

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two major challenges. Where the first one is the development of cold

chains and the second one relates to the undeveloped taste for dairy products by Chinese consumers.

Water Shortage 05. Director of raw milk collection Mengniu - Beijing Cows drink a lot of water every day. Some large farms already have water shortages. It is ridiculous to build farms with 10,000 cows, while

you could only provide water to 6,000 cows. 23. Dairy Specialist at Rabobank FAR water scarcity

Table F.3: Results of the motivation for the question if the milk production target is reachable on

industry-level before data reduction and its coding.

107

Appendix - G

This table represents an overview of all conducted interviews. The first column shows the identification number of the interviews, which correspondents with the interview numbers mentioned in the thesis. The other columns present the interview characteristics, such as the date of the interview, the length of the interviews, the value chain function of the interviewee, the function within the organization, the name of the organization, the location of the organization and some other characteristics.

IDNo.

Date Length Value Chain Function

Function Organization Location Other

1 May 13, 2015

1:23:07 Dairy Farming

Feeding Manager

Zhong Di Farm Beijing

Beijing SDDDC farm – independent dairy farm group (4000 cows)

2 May

14, 2015

0:51:53 Dairy

Farming

Farm Owner ? Tianjin Privately owned

dairy farm (800 cows)

3 May 14, 2015


Milking Manager

Bright Dairy Group Shanghai

Tianjin Vertical Integrated farm (3300 cows)

4 May

15, 2015

Unrecorded Input

Supplier

Vice

President

Eastrock Beijing Dairy farm design

and equipment supplier

5 May 18, 2015

1:24:44 Dairy Processor

Director of raw milk collection

Mengniu Beijing 2nd Largest Chinese dairy processor; plant Beijing

6 May 19, 2015


Vice Farm Manager

Sanyuan group Beijing Vertical Integrated farm (1400 Cows)

7 May 19,

2015

Unrecorded Dairy Farming

Vice Farm Manager

Sanyuan group Beijing Vertical Integrated farm (1500 Cows)

8 May

20, 2015

0:51:08 Input

Supplier

Managing

Director

Cooperative

Resources International / Beijing Xiangzhong Biotechnologies

Beijing Breeding company

for semen, embryo’s and fertility treatment

9 May 20, 2015

1:31:03 Input Supplier

Nutritionist Nutreco – Trouw nutrition

Beijing Ruminant feed input supplier

10 May 21, 2015

0:39:05 (partly recorded)

Dairy Farming

Farm Owner Private Dairy Farm Boading

Hebei Privately owned dairy farm (1080 cows)

11 May 21,

2015


Scale Farm owner and

dairy

community owner

Dairy Community

Boading

Hebei Owner of two dairy communities and 1

privately owned

farm

12 May

22, 2015

Recorded Dairy

Farming

Dairy

community owner and member

Dairy

community Shijiazhuang (1)

Hebei Owner dairy

community with 9 farmers and 520 cows of which 200 are milking cows.

13 May

22, 2015

Unrecorded Dairy

Farming

Dairy

community member

Dairy

community Shijiazhuang (1)

Hebei Dairy community

member with 100 cows

108

14 May

22,

2015

Unrecorded Dairy

farming

Dairy

community

member

Dairy

community

Shijiazhuang (1)


member with 100

cows

15 May 22,

2015

1:31:20 Government Director of dairy

farming Shijiazhuang city

Animal Husbandry

Bureau MOA

Hebei Department of MOA responsible for

dairy farmers i.e.

16 May 23,

2015

1:19:17 Dairy farming

Dairy community

owner and member

Dairy community

Shijiazhuang (2)

Hebei Dairy community owner with 5

farmers and 400 cows (170 milking cows)

17 May

23, 2015

Unrecorded Dairy

farming

Dairy

community member

Dairy

community Shijiazhuang

(2)


member with 40 cows

18 May

26, 2015

1:06:04 Research Professor in

Dairy Processing

China

Agricultural University

Beijing Associate professor

specialized in dairy processing technology

19 May 27,

2015

Unrecorded Research Professor in Manure

Treatment

China Agricultural

Univeristy

Beijing Associate professor specialized in

environment-enhancing energy

20 May 28,

2015

1:03:06 Dairy Processing

Strategy and Investment

Manager

Sanyuan Beijing Employed in the

Strategy and

Investment

department of

Sanyuan Food

Beijing Co. Ltd.

21A

June 5,

2015

2:10:08 (group

interview)

Dairy Processing

Senior R&D Manager

Mengniu Hohhot 2nd Largest Chinese dairy processor;

Headquarter Hohhot

21B

June 5, 2015

2:10:08 (group interview)

Dairy Processing

Farm Assessment Manager

Mengniu Hohhot 2nd Largest Chinese dairy processor; Headquarter

Hohhot 21C

June 5, 2015


Dairy Processing

Raw Milk Quality Manager

Mengniu Hohhot 2nd Largest Chinese dairy processor; plant Hohhot

21D

June 5, 2015


Dairy Processing

Farm Assessment Manager

Mengniu Hohhot 2nd Largest Chinese dairy processor; plant Hohhot

22 June 5,

2015


Farm Manager

Qi Zhi Dairy

Farm

Company

Hohhot Privately owned dairy farm close to

Hohhot

23 June 8, 2015

Unrecorded Research Dairy Specialist

Rabobank

FAR

Shanghai Dairy Specialist in Rabobank FAR

109

1. Feeding Manager at Zhong Di Dairy Farm

Date: 13-5-2015

Length: 1:23:07

Value Chain Function: Dairy Farming

Function: Feeding Manager

Institution: Zhong Di Dairy Farm

Location: Beijing

Other: SDDDC farm – Independent dairy farm group (4000 cows)

Years of experience: 6 years

Part 1: Understand Chinese dairy production

A. General

Q: Can you tell me something about your background, your experience in dairy farming and the background of the farm? In 2011 the farm was built. Zhong Dee Company was already active in cattle and semen trading in the international market. In that time we decided to horizontally integrate and become active in raw milk production as well due to potentially high profit rates. The farm is located about 70 km north of Beijing in Beijing city province, close to the mountains. The area is assigned as agricultural area by the government. Many surrounding farms produce

vegetables in greenhouses and the farm also owns 800 mu (15 mu = 1 ha) to produce mainly corn. There are 4000 cows (2000 young stock) the young stock is located at another location about 15 minutes away. In total there are 90 employees working on this farm.

B. Input & Process

Q: How is the feeding process organized on your farm and how did this change over time? We are using different feed inputs, like Alfalfa (US), Corn silage (domestically produced and partly

by themselves), Sheep grass (IM province; used for dry cows), Oat grass (?), cotton seed (Xinjiang province). We use advanced technologies to construct rations for different herds (close-up group, high SSC group, High productive group, i.e.). We compose a ration consisting of corn silage, alfalfa, DDGS, cotton seed, soy products, vitamins and additives. We use a TMR machine for the feeding

process, which is imported from a US company called RHS. On a monthly basis the feeding manager samples the feed inputs delivered by the suppliers. If the nutritional value or other measures are not according to the preferred standards we might decide to switch feed supplier. We are to a large extent depending on external feed sources, because we produce little feed ourselves (only whole plant corn silage). The quality of the feed is more of a constraint then the price of the feed. Quality differs a lot among the deliveries and suppliers. This is one of the biggest challenges for him as feeding manager.

Q: How is the breeding process organized on the farm and did this change over time? In 2011 the cows are imported from New Zealand and Australia. Afterwards we are breeding with international semen from foreign companies. Semen from international companies is used to inseminate the cows. A system of yellow paint on the cows back is used, which indicates if a cow is

on heat. The yellow paint will disappear proving the cow is ready for insemination.

Q: How is the milking process organized on the farm and did this change over time? We are milking our cows in a milking parlor from Boumatic, which is a US based machinery supplier. Since 2011 we are using the same milking parlor. The cows are milked three times a day: 6.30-12.00/13.30-19.00/20.30-1.00. The employees get detailed instructions and trainings on how to milk the cows, which is reported in standard operation processes, which are developed by Zhong Di Farm group.

Q: How is the manure processing organized on the farm and did this change over time? The manure is composted and afterwards distributed on the nearby land. Actually we need 6000 mu to be able to locate all the manure on, but unfortunately land is scare in Beijing province. Much of the manure is now for free transported to the nearby vegetable farmers.

110

C. Output Q: What is the current raw milk production on the farm?

Annual production 9500 kg/year/cow

% fat 4.2% fat

% protein 3.2% protein

Q: What is the current marketing of your raw milk and how did this change over time? We sell our raw milk to Mengniu, where we have a signed contract with. Every year new contract negotiations are started, where the farm can choose between different dairy processors. All dairy processors are willing to receive their milk but the contract terms differ a lot, meaning that there will be chosen the one with the best terms. In general it is thus not hard to find a dairy processor to coop with. The negotiations are carried out by the headquarters of Zhong Di farm, which is doing

this for all raw milk production locations of Zhong Di over China. Every day two large trucks called,

fresh milk express, are filled with milk directly on the farm and transported to a processing plant about 100 km from the farm. This processing plant mainly produces UHT milk and some milk powder. Danone was their processor in 2013, which was paying out better than its competitors. Even when the price was lower, Danone kept to the terms of the contract (suggested reason was because it is a foreign company). In 2014 we were delivering to Sanyuan. In that year the milk price dropped

very fast, because Sanyuan had to process too much milk. Sanyuan was paying out less than competitors, because Sanyuan is a local dairy processor for Beijing, where Mengniu can market their products nationally which decreases the risk. (H: Milk price of Sanyuan is more volatile, due to regional focus). In 2015, we switched to Mengniu, which has merged with Danone in the meantime. Danone is not an option anymore to deliver to, since we don’t exist anymore in the eyes of him, which he is disappointed about since a foreign company lives up to the contract terms.

Q: What is the current raw milk price and how is it determined? Currently the raw milk price is 4.3 yuan/liter. Although in the contract a fixed price is negotiated, there is a variation of 10-15% in the milk price, meaning a variation between 4 and 4.5 yuan/liter. The milk has to meet the requirements set by Mengniu, which is a minimum of 3.5% fat content and 3.0% protein content. The mathematical equation can be found in the white paper. If the milk is not

meeting the requirements then the delivery will be rejected.

Q: What are factors influencing the raw milk price? The largest factor determining the milk price is the world milk price, especially now that China has opened the market for imported milk powder and pasteurized milk (I guess he means the FTA with New Zealand). If this trend continues then it becomes impossible for Chinese farms to remain competitive with the outside world.

D. Challenges Q: What are the largest challenges on your farm? 1. Milk price: 2011 was the golden age for Chinese dairy farming, the sky was the limit. In 2012

the milk price was very good, we could choose from all dairy processors. Nowadays the milk price is low, some periods there milk cannot be marketed so it is turned into milk powder, where after it can be stored for 6 months.

2. Feed sourcing: The land in Beijing is too expensive, so he has to keep importing feed. In five

years I expect to still import a lot of feed, because it is still relatively cheap. Although the quality of wheat grass is rapidly increasing. Wheat grass is produced in Inner Mongolia and Guangxi, so it might be possible to source more feed inputs domestically. But dairy ration composition is hard, he needs a lot of different ingredients for different herd groups, which makes it hard to get constant good quality from own-produced feed or domestically produced feed. He expects that feed imports will increase in the future.

3. Environmental pollution: There is not enough land to dispose the manure on in Beijing. The government is enforcing the legislation around environmental pollution. The dairy farm is also using a lot of water, which is polluting the ground water around the farm. The government is recently sampling more frequently the water quality of the farms waste water. Access to clean water is not a problem according to him.

111

Part 2: Constraints in Chinese dairy development

1. What is your thought about the target of 60 million MT of raw milk production by 2020 and what

are the largest challenges to overcome? To remain competitive on the world market.

2. According to my desk research, I have identified the following constraints. What are your is your

opinion about the constraining effect of these factors on Chinese dairy development?

a. Land & Feed:

b. Water:

c. Labor:

d. Financial capital: 2011 was the golden age for Chinese dairy farming. Investors have been blinded by the high milk prices. The market is slowly dying, for example Zhong Di company

is noticing that cattle imports are diminished and new planned dairy farm projects are cancelled. Already received orders at Zhong Di farm are cancelled. No money to feed the cows, so there are already liquidity problems. Long payback period has no influence on the milk production. The owner will just have less income. It really depends we would. If we

want to produce more we will do just this, not dependent on money

e. Waste management: Manure treatment has policy changed. Policy is getting stricter and stricter. It has changed for example: before if we have the land we can build the farm, but now we have to contact the environmental sector of the government we will come to check the farm and site and then we will decide to approve the building of farm.

f. Productivity: The problem of low raw milk quality will be solved in the future, proven by the major improvements in the past few years.

g. Global competition:

3. Suppose you would get 1000 cows tomorrow and money to build a farm, in which Chinese province would you build it? What factors do you take into account? Inner Mongolia, in the future it will not be possible to build new farms in Beijing area. The government will not support more farms in Beijing, although existing locations can remain in the

area. Inner Mongolia has the advantage of less land scarcity, so more feed inputs can be produced locally. If he would have to choose to locate a new farm, he would locate it in Inner Mongolia.

4. What herd size would best be used to achieve the intended growth in milk production?

The ideal farm size is 4000 to 5000 cows, so large farms. He doesn’t agree with me that

production cost of large scale farmers might be higher and thus less efficient. He further points out that the risk for large scale farmers is lower, such as market risk and price volatility risk. Backyard farmers are continued to be pushed out of the market because we are not competitive. The government will continue to stimulate this development. Backyard farmers lack financial resources, lack technical support, lack knowledge, have difficulties with animal health.

112

2. Farm Owner at Private Dairy Farm

Date: 14-5-2015

Length: 0:53:53


Function: Farm Owner

Institution: Private Dairy Farm Tianjin

Location: Tianjin

Other: Privately Owned Dairy Farm with 800 cows

Years of experience: Since 2004; 11 years

Interview Summary: …

Part 1: Semi-Structured Interview: Understand Chinese dairy production

A. General Q: Can you tell me something about your background, your experience in dairy farming and the background of the farm? I started this farm in 2004 with support from the local government. At that time I kept about 200 cows. I slowly expanded the farm to the current number of 800 cattle, and I am planning to continue

the expansion although the raw milk price should increase before I will buy more cattle. I am currently expanding my farm with a new barn at the other side of the road, because the current housing was not sufficient. The density of cows is too high which leads to more diseases and lower comfort for the cattle. Thus we are not planning to increase the number of animals, but only to give them more space.

B. Input & Process Q: How is the feeding process organized on your farm and how did this change over time?

The feed process and ration composition is organized by one of my employees, who is specialized in animal nutrition. Every day he sends me an update about the feeding situation and the feed statistics to my phone, therefore I stay updated about my dairy farm. As feed inputs we use corn silage, alfalfa, sheep grass, locally produced forage and concentrates. The ration of dry cows consists for

30% about concentrates and 70% alfalfa and sheep grass. We source the corn silage locally from local farmers. We negotiate about the price in the beginning of the season and we sign a contract to enforce the agreements. Every year a new contract is signed with a new price. The price I have to pay for corn silage has been quite stable over the years. At the moment I have to pay about 400 RMB per ton. Although this is very expensive for me this is a good price for the corn producer. I would prefer to pay a premium to my supplier in order to get better quality corn silage, although I am not very satisfied with the quality. The dry matter content is

sufficient with 25%, since it could be a lot lower with a lower price. A high dry matter percentage in this area is 28%. The quality of the feed is currently one of the biggest challenges, especially since the raw milk price is very low. When other feed inputs are purchased I will test it always the quality, to investigate if this is in line with what the supplier has promised. Q: How is the breeding process organized on the farm and did this change over time?

Every year 400 calves are born, of which 200 are female. These calves are raised at the farm. The first lactation cattle are all inseminated with sexed semen and the others with normal semen. The conception rate is 60% for first lactating cattle and 40% in other cattle. Q: How is the manure processing organized on the farm and did this change over time? We separate the milk and use the solid part as bedding for the cattle. The liquid part is used by nearby farmers.

113

C. Output

Q: How did the milk production evolve over time? After June 2014 the raw milk price has decreased to 4.3 RMB/kg, caused by the opening of the

markets for milk powder from New Zealand at a 0% import tariff. After February 2015 regulations has been introduced in order to reduce the supply of milk, which is a kind of production quota. I have a contract to deliver 10,000 kg of milk every day, but with the new rules of the dairy processor I can only deliver 9,000 kg. For the other 1,000 kg I have the option to turn this into milk powder and store it at the processing plant. The cost for this process and storage are for my account. Q: What is the current marketing of your raw milk and how did this change over time?

I deliver my milk for years and years to Mengniu, but I am not satisfied with them. The problem is that I cannot switch to another processor because I there are no other options. In this down market nobody wants to receive my milk. The quality of the milk needs to meet certain requirements for fat, protein and the sematic cell count value should remain below a certain level. There is a list of 50 criteria you have to take into account when delivering the milk. If you fail to meet these criteria your milk delivery will be rejected. If the

sematic cell count is below 100,000 you will receive a premium payment of 0.10 RMB/kg. On the

contrary, when it is higher than 200,000 you should be careful for penalties. If the SSC exceeds 500,000 the milk will be rejected. The fat content should be higher than 3.7% and the protein content should exceed 3.2%. Every day the dairy processors take a sample of the delivered milk and I will get a text with the results. Q: What are your thoughts about the raw milk price you will receive in the future?

It would be ideal if the profit between the dairy processors and farmer would be equally distributed. I was in the Netherlands invited by the SDDDC, where I really liked the concept where farmers at the same time owners are of the processor. In China this is impossible, because all companies think about their own profit and interest. The government is stimulating to be cooperative, although it is hard to implement such a culture.

D. Challenges

-

Table: Data from the farm

General Typeof farm private owned Milkproduction (kg/cow/day) Average 30

Total cattle number 720 High production 34-35

Heifers 120 Low production 18

Dry cows/total (%) 40/720 Milk price (RMB/kg) 3.7

Dry period 60-21 days before calving Milk fat % 3.2

Culling rate (%) 18.75 Milk protein % 16

Divided into groups yes MUN (mg/dL) 22.8

DHI test yes SCC (10,000/ml) 0.6

Silage yes Milking parlor Milking machine parallel

How they get silage self made Manual/automatic automatic

Management Feedingtimes/day 2 Machine size 2 x 16

Push-ups/day 14 Milking times high productive 3

Feeding method TMR Milking times low productive 2

Manure removing machine Barn Playground yes

Manure handling separate solid and liquid Bedding playground dry manure

Feeding cost (RMB/cow/day) 62-63 Barn surface concrete

Forage cornsilage Bedding dry manure

Calves 0-2 months Colustrum 0-1 day; 4 liters Density (cows/beds) 90/80

Weaning days 60 Reproduction Born calves in 2014 >400

Granules no Calving difficulties first calving (%) <1

Forage no Health problems Milk fever (%) 0.5

Milk with antibiotics no Ketosis (%) 7

Water yes

Date 14-5-2015

114



are the largest challenges to overcome? I believe that 60 million is unreachable. Many farmers, especially backyard farmers, have culled their cattle in 2014 and/or threw away the milk. It is very risky to produce milk as backyard farmer, because the dairy processors are increasing the requirements for sematic cell count and quality for milk delivery. In combination with low yields it led to the culling of animals. In the

nearby village this has happened in many cases. In one year the total number of cattle has decreased from 60,000 to 40,000 in Tianjin district. This process is good for me as individual farmer, but is bad for China as a whole. We have to feed 1.3 billion people. The economy and individual welfare in China grows and the president wants to deliver good quality milk to the Chinese citizens. The problem is that milk will never be cheap for Chinese. At the moment the Chinese dairy market is open for other countries, but the domestic production will not grow. Chinese farmers cannot compete against low cost milk production countries in other parts of the

world.

2. According to my desk research, I have identified the following constraints. What are your is your opinion about the constraining effect of these factors on Chinese dairy development?

a. Land & Feed:

b. Water:

c. Labor:

d. Financial capital:

e. Waste management:

f. Productivity:


3. Suppose you would get 1000 cows tomorrow and money to build a farm, in which Chinese province would you build it? What factors do you take into account? Heilongjiang, because that area is rich in natural resources, like good quality land. It has a lot

of corn and wheat production. Additionally the population density is low, so I can raise my cattle far from the residential areas.

4. What herd size would be ideal to achieve the intended growth in milk production?

-

115

3. Milking Manager at Private Owned Dairy Farm

Date: 14-5-2015

Length: 1:11:48


Function: Milking Manager

Institution: Bright Dairy Group Shanghai

Location: Beijing

Other: Vertical Integrated dairy farm (3300 cows)




A. General Q: Can you tell me something about your background, your experience in dairy farming and the

background of the farm? I graduated from university in 1986. I started as a technical support manager on a dairy farm of about 500 cows in Tianjin province. In 1993, I went to Japan to do an internship, since Japan and Tianjin province started a partnership. My focus was on feeding management for high productive cows. In the early nineties the growth in dairy production was almost non-existing and cows were kept in stanchion barns. In 1988 my farm invested in a European milking system, were the cows

could be milked automatically. The ration with an energy component of corn, soybeans and soy skin, a forage component of two locally produced grass and some salt/minerals led to an annual production of 7.000 kg/milk. My farm was quite advanced and modern compared to the other traditional farming systems, but in the late nineties the development of the milk production took a leap forward. In 2001, a new milking parlor (DeLaval) 2x24 was purchased and a more advanced system of Total Mixed Ration (TMR) was introduced on the farm. With help of this new milking system we could fully monitor the cows and

control the feed ration. In 2003-2004 the farm expanded to 800 cows. At that time they started to cooperate and became part of a group of four dairy farms, from one dairy farm was completely responsible for the rearing of calves. An annual production of 8.000 kg milk/cow was achieved in those years. Although the science was not yet advanced we managed to be the best performing farm in the region. Breeding and selection was one of the major keys that led to this success, according to me. In 2008, they were moved to a new location (which is the current location), because we were having

large problems with mastitis at the old location. About 100 of the 800 cows were slaughtered. Also during that period were a lot of switches in farm managers about 6-7 different farm managers in 2006-2007, because they were not meeting the production expectations. So in 2008 the farm was handed over to the joint venture of Bright Holstein dairy farming and Bright dairy processing group, since the old owner decided not to farm anymore. The total loss was about 1,480,000 RMB. The owner received support from the government to build a new farm in this district of Tianjin city

province. It was not possible to move the farm to another area of China (further from the city), because governmental relations are very important which were already established in this province. In 2009 the stables were finished and cows were imported from Australia, the current ownership is

a joint venture between Bright Holstein dairy farming group and Bright dairy processing. A new farm manager was appointed to the farm which was very successful. Since that time no expansion has occurred, although they are planning to buy a new farm of 10,000 cows close by. They have ordered 1,500 cows from Australia to fill this farm. At this farm, also an order to fill the other 700 cow places

was cancelled and now they are filling the farm with natural expansion to 4000 cows (currently 3300).

B. Input & Process Q: How is the breeding process organized on your farm and how did this change over time? Cattle was imported from Australia in 2009, the last order batch of new cows was cancelled due to

the low milk price in 2014. During that time a heifer would cost about 23,000 RMB, which is close to 3,500 EUR. Semen is also imported from abroad from foreign companies.

116

Q: How is the feeding process organized on your farm and how did this change over time?

We use wheat grass and Alfalfa imported from Australia and US respectively. The other feed inputs are sourced locally. Whole plant corn silage is contracted with local farmers in Tianjin province. If we feel we have to change the cows’ ration, we ask technical support from the nutritional

department of Bright group. They compare the ideal ration based on nutritional demand of dairy cattle with the conditions of feed stocks, such as corn silage. Afterwards an adjusted ration is composed and given to the feed company of Bright dairy group. They are responsible for the sourcing of the requested feed inputs.

Q: How is the milking process organized on your farm and how did this change over time? The milking parlor is very advanced with a lot of data provision, such as milking time, total

production, fat content, protein content, SSC. Each milking claw/attachment costs about 13000 RMB. Milking parlor from Israel with an advanced software system to monitor and control the cows.

Q: How is the manure processing organized on the farm and did this change over time? Although the farm is already operating for five years there is no advanced system for manure treatment. They received a subsidy of 3,000,000 RBM to install a biogas installation to produce

electricity, which is a total investment of 10,000,000 RMB. Unfortunately they are still in the

installation process, and the installation is still not operational. I cannot tell why. Currently the manure is untreated and given away for free to nearby vegetable farmers.


Annual production 9,800 kg/year/cow

% fat 3.8

% protein 3.25

SSC 130.000

Q: How did the milk production evolve over time? The average annual milk production per cow is increasing every year. I expects that this trend will continue, because the quality of feed has an major influence on this, which is improving every year.

Quality feeds with a constant high quality cannot be found in China, so I expect that the sourcing of feed inputs will continue to be abroad. For example in five years even more feed will be imported

instead of less. Q: What is the current raw milk price and how is it determined? Currently the raw milk price is 4.2 RMB/liter. Last year the price was much better but also with a stronger variation. This year the price decreased a lot. There is no minimum price or governmental price support system. The raw milk price depends mainly on the world market price. Lately there are too much imports of cheap NZ milk powder, due to the FTA with 0% import tariff. The dairy

processors have too high stocks of milk powder, which have to be processed before purchasing new milk powder or even raw milk. Q: What is the current marketing of your raw milk and how did this change over time? We sell our milk to Bright Shanghai dairy processing. The system is vertically integrated, with a group of three different processors; Bright Holstein dairy farming, Bright dairy processing and the

mother company Bright dairy group (overarching). We have a negotiated price with the processor because we have large quantities of high quality milk to offer. Dairy processors like to have

partnerships with our type of farms. Sometimes we deliver more than 60,000 tons of raw milk on a daily basis. We have a contract with Bright because we are part of the Bright Dairy group enhanced by our large quantities produced which gives us negotiation power. Q: What are your thoughts about the raw milk price you will receive in the future?

-

D. Challenges Q: What are the major challenges for you at the moment? The cost of feed imports are high, although locally sources feed is also expensive given the quality provided. In general feed costs are high; 2.34 RBM per kg. The breakeven point of milk production

is 3.6 RMB.

117

Q: What are solutions to overcome this challenge? Within the vertically integrated group we try to create a power to the market in order to negotiate prices, such as feed.


General Type of farm company Milking parlor Milking machine parallel

Total cattle number 3263 Manual/automatic automatic

Milking cows 1930 Machine size 2 x 24

Heifers 1327 Milkers number 12

Dry cows/total (%) 2.86 Milking times 3

Dry period 60-21 days before calving Production Milk price (RMB/kg) 4.2

Culling rate 15.9% Milk fat % 3.85

Divided into groups yes Milk protein % 3.2

DHI test yes Lactose % 3.2

Silage yes MUN (mg/dL) 15

Management Feedingtimes/day 3 SCC (10,000/ml) 22.8

Push-ups/day 3 BTC (10,000/ml) 5

Feeding method TMR Calves 0-2 months Colustrum 0-1 day; 4 liters

Manure removing machine Replacement (%) 2

Manure handling fermentation Weaning days 60

Forage cornsilage Granules no

Barn Bedding playground sand Forage no

Barn surface concrete Milk with antibiotics no

Bedding sand Water yes

Date 14-5-2015

118



are the largest challenges to overcome? I don’t think this is possible. The largest challenges are land shortages for feed production and manure disposal and the high cost of milk production in China.



a. Land & Feed: In china there is not enough land to provide sufficient feed and secondly there is no land to dispose the manure. For example in USA, they will receive the amount of land that is sufficient for the number of animals

b. Water: The disposal of contaminated water will become a higher concern in the future.

Although access to clean water is not a problem at the moment and it will not become a problem in the future.

c. Labor:

d. Financial capital: Capital is needed, because dairy farming is expensive (something with 14

RMB/day). If you buy heifers at a high price it will take years before you will make any profit on them, because in the beginning they mainly cost money (rearing etc.). There was a lot of capital available but this has changed, dairy farming has a long payback period. The things that will count in order to make profit are: low replacement rate, control feed inputs, breeding and high milk production.

e. Waste management: Other countries have technologies to turn manure into fertilizer, but

china doesn’t have these practical technologies. There are many technologies, but none of them are applicable practically. So there are solutions but no practical ones. Environmental Legislation enforcement: The government has put more stress to environmental policy. We notice this because the government is coming more often to the farm to take samples about water and soil. Five years ago that would not have happened. Additionally the government

is giving subsidies for manure treatment, like the 3 million RBM they received to fight environmental pollution.

f. Productivity: Raw Milk Quality is not a problem on large farms, but only for small farms. This

constraint will automatically change because farm management has to be adapted or these farms will disappear. Feed Conversion Rate is the same idea, this could be managed and otherwise you are out. Disease control will remain a big problem, because no solution is yet to be found.

g. Global competition: China has high production cost (for example the whole farm here was

100 million RMB investment). Production cost consist of cost of producing milk (variable cost) and property cost (fixed cost), then large farms have low variable cost and high fixed cost and small farms have the opposite.

3. Suppose you would get 1000 cows tomorrow and money to build a farm, in which Chinese


I say Tianjin has the best climate for dairy production. It is not too cold for the cows for longer than 10 days and not too warm for longer than a month. Heilongjiang is too cold for dairy cattle. In general I think that it is better to locate a farm closer to the consumer than closer to land and feed production.

4. What herd size would be ideal to achieve the intended growth in milk production? Large farms have the future in China. The ideal farm size is 2000 cows according to me. Backyard farms and Small farms lack knowledge about dairy farming to remain competitive.

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4. Vice President at East Rock Farm Design

Date: 15-5-2015

Length: Unrecorded

Value Chain Function: Input Supplier

Function: Vice President

Institution: East Rock Farm Design

Location: Beijing, China

Other: Dairy farm design and equipment supplier



A. General

Q: Can you introduce yourself and your role within East Rock? The East Rock company is started by a good friend from high school and me. I met my companion in 1987, at that time we went together to school in the United Stated. He was one grade lower than me. In 1988 I went to the foreign languages school of the Chinese army, where I finally became an officer. Luckily because of new regulations I was able to start another education at the Beijing normal

university. In the end my companion finished his education one year earlier and started a business trading in rubber. Personally, I am specialized in minerals. After the financial crisis and the abolition of the system, I decided to organize my life differently. I then moved to Russia and decided to set up an office for the import of Chinese products. My companion and I met each other again in 2002. We were talking about our businesses and we noticed that we were running a similar type of business. We shared the idea to join forces and share our ideas. After this we then spent another 4 hours in the garden to discuss our ideas and we decided

to sleep about it and think about a name. I've been thinking about a name all night but could think of a good name. When I phoned my partner the next morning, he told me he thought about the name, East Rock. Since that time things were moving fast. Two weeks later we received our permit and we started the business. In the beginning we had no office and worked from home next to our

own jobs. In October 2004 my partner started working for the company full time and I started earlier in August 2004. When the dairy market China was very attractive because of the investments of the government

and individuals, we decided to target the Chinese dairy industry. At that time we had limited knowledge about the equipment and technology in the dairy sector. To gather more knowledge and insights we started travelling and attend several workshops and trainings all over the world. In 2008 we received the first contract with Yili to design a farm with 500 cows. At that time we also received an award, which helped us to expand our network and receive publicity. In East Rock we think it is very important to contact new people and share ideas and knowledge.

Personally, I've been three times to the Netherlands. I have learned a lot about the Dutch dairy sector. I have been amazed and impressed by the fact how all stakeholders work together and is open to each other in the chain. Everybody is open to feedback and suggests improvements to each other. In China this is completely different, where the market is dominated by a few stakeholders and people tend to not follow the contract, arrangements and rules. They will benefit from each other with a short term vision. What I especially am admiring is how everyone works together in the switch to get better. Also, everyone is very open to each other point for improvement. In China

dominated completely different, the market is here, but the followers not go along with the rules or

companies deviate from their own appointments. The company exports to all regions worldwide, we are active in 42 countries on six continents. Most of our products go to the US and Canada. We have 60 employees working in the office and another 200 working in the production plants. Q: What kind of services do you provide to your customers?

Our business is focusing on three different pillars 1. Dairy farm contracting service; construction supervision and hire contractors. 2. Dairy farm equipment

a. Dairy housing facilities; cubicles, water facilities, etc. b. Environmental control; ventilation systems, fans, etc. c. Manure systems; manure separators, biogas installations and other manure

treatment solutions.

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3. Dairy farm design.

B. Input & Process

Q: How do you create value for these dairy farms? The key difference compared to our competitors is that we offer additional trainings and advise to the farm managers and employees. These trainings seem to contain only the basis but for many Chinese dairy farmers this is a lot. An independent farmer who delivers 1,000 kg of milk per day does not have the financial capacity to invest in modern technology. But small investments and improvements can make a large change for these small farmers. But also for our larger clients animal health is not a priority. Due to a lack of awareness farmers are

not familiar with the importance of healthy cows and the benefit to increase the well-being of the cows. We will show these clients different farms and different options to convince them to choose for better animal welfare options. For example we demonstrate how a cow lies down in a cubicle to explain why a cubicle requires a certain size or design. Q: How do you think this will change in the future?

On the short term we will be occupied with the construction services to design dairy barns and

supervise the construction process. In the long term East Rock will be more focused on the farming equipment pillar of our business, because there will be less construction in dairy farming and less investments in dairy farming. Then we will try to assist the existing farms to optimize their productivity and renovation works by using East Rock equipment.

C. Output

-

D. Challenges -



are the largest challenges to overcome? I don’t think this is possible. The size of the Chinese total dairy herd was estimated to be 13 million in 2013, which is a lot if you think that only 0.19% of the Chinese population has a dairy farm. They could only milk 4.5 million cows, more is simply not possible. The current stock is 4.3 million cows. In conclusion I think it is not possible to reach this number, because of restrictions in laborer capacity. For East Rock it became clear that it does not matter how large your farm is but it is

important how to optimize the yield per cow. Another thing is the scandal of 2008, although many people think that the problems are solved while actually the consumers still don’t trust the safety of the products and are uncertain about the quality of the products. The market for dairy products decreased by 20% in 2008. The industry has to regain the trust of the consumers, which is a very slow and costly process. Advertising and campaigning for the safety of dairy products is very important. The three largest dairy producers have failed in

this melamine scandal, but the government is really to blame for the weak control on the sector because all the companies were having the permits to produce dairy products. There is a trend where we see the government withdrawing from the industry and opening the market for businesses to have independent laboratories to test food safety and quality, such as milk and dairy products. In conclusion, why do we have to grow our dairy production while the consumers are not ready yet to

receive the products? Another challenge is the distrust of different actors in the Chinese dairy sector. This has a negative

effect on the innovation capacity of the sector. In the Netherlands you will get a lot of technical

support from different stakeholders, while in China all advisors are trying to do the same without

being creative.


a. Land & Feed: The total land area available for dairy and other agricultural practices is

decreases, because of increasing competition with other sector, residential areas. Already

much food and feed is imported by China as a result of this, if we want to increase dairy

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production more has to be imported by Chinese farmers. This is a consequence which is not

favored by the Chinese government. Therefore I expect that many Chinese companies will

go abroad to produce their raw materials for the farming or processing of consumer products.

The feed business grew a lot last years and received good margins. Also Yili and Mengniu

are processing milk abroad to leverage the credibility that New Zealand milk has in China

and to source raw milk at a lower cost. There are ways to prevent this and stimulate Chinese

dairy farming such as the rule that dairy products are not allowed to be heated twice and a

clear labelling of the products. Not only about the ingredients of a product, but also where

these ingredients are sourced and which path they have followed before ending in the final

product. If we want to produce our milk locally we have to find other ways to be competitive

with the world, if we continue to have high production cost and have no influence on the

price we will be outperformed by the market.

b. Water: Water is a big problem for Chinese dairy. I know in one case where the farm had to

dig about 30 meters to reach fresh underground water, while currently they have to dig 80

meters to have access to clean fresh water. Also the quantity of water is a problem, because

sometimes the flowrate in a location is not strong enough to maintain the processes which

require water such as milking and cleaning.

Therefore I expect that many Chinese companies will go abroad to produce their raw

materials for the farming or processing of consumer products. Already Yili and Mengniu are

processing milk abroad to leverage the credibility that New Zealand milk has in China and

to source raw milk at a lower cost. There are ways to prevent this and stimulate Chinese

dairy farming such as the rule that dairy products are not allowed to be heated twice and a

clear labelling of the products. Not only about the ingredients of a product, but also where

these ingredients are sourced and which path they have followed before ending in the final

product. If we want to produce our milk locally we have to find other ways to be competitive

with the world, if we continue to have high production cost and have no influence on the

price we will be outperformed by the market.

c. Labor:


e. Waste management: At the moment there are no suitable implementations for manure.

Policy regarding manure treatment is currently established, but after it will be put in practice

I doubt to what extent the governments on lower spatial levels are able to enforce the policy,

because they will be lost easily in the matter.

f. Productivity: The low raw milk quality level will be solved. The ones who are not fulfilling the

standards will exit the sector or get paid less for their raw milk. The Feed Conversion Rate

is not competitive in China. Disease management will be the biggest problem, because it is

more difficult to control.


3. Suppose you would get 1000 cows tomorrow and money to build a farm, in which Chinese province would you build it? What factors do you take into account?

It depends if I would like to have short term profits or long term revenues. The difference in Chinese dairy farming is that you can own a dairy farm, but you should avoid becoming a farmer. Farming is a lifestyle not a business. In the past many investors gained large returns after they invested in

dairy farming, that is why it was so attractive a few years ago. In this decision there are two ways of reasoning possible, either you look at cost saving strategy or you look at your consumer and try to get a premium price for your product. If I would decide to build a farm I would choose the second option. If I would build my farm close to the consumer and use a good marketing strategy I can easily get a price of 18 RMB per kg, like Wonder Milk is achieving in Anhui province. Marketing efforts are rewarded very well by Chinese consumers. For example if you would show a short commercial of 30 seconds on WeChat about the Dutch dairy sector, I would

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assure you that all consumers want Dutch milk. Additionally the distance between the farm and the

consumer should be as short as possible, because this is the only way to win the trust of the consumer.

4. What herd size would best be used to achieve the intended growth in milk production? I don’t know about the future of small scale backyard farmers in China, in my opinion it really

depends if they will receive support from the Chinese government. Until now the government is

enhancing the exiting of these farmers by stimulating the development of large scale farms, but it

is questionable if the government will continue this policy. For example Nestle has a very strong

base in the north, where it is trying to develop very short supply chains. The idea is that there will

only be one stop between farm and supermarket. Milk is expensive in the supermarket. I think you

would pay 1.50 EUR for this, while in the Netherlands you would pay only 0.80 EUR. Pasteurized

milk is mainly produced by local dairy processors having their own dairy farms, instead of small

scale family farms or individual farms. Most of the pasteurized milk production is produced by large

scale farms, meaning that small farms are mainly used for UHT milk production.

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5. Director of Raw Milk Collection Mengniu Beijing plant

Date: 18-5-2015

Length: 1:24:44

Value Chain Function: Dairy Processing

Function: Director of Raw Milk Collection

Institution: Mengniu

Location: Beijing

Other: 2nd Largest Chinese dairy processor; plant Beijing




A. General

Can you tell me a little bit about yourself and your background? I graduated from China Agricultural University, majoring in agricultural economics. In 2001, I started

working for a company named Wondersun Dairy, where I stayed for 7 years of which four years in the raw milk collection department and 2 years in technical support. In 2008 till May 2011, I worked for professor Li at China Agricultural University. Afterwards I started working at Mengniu in the financial department for two years and currently for the raw milk collection department. Within the raw milk collection department, I am focusing on the development of Standard Operation Processes (SOP). These processes are implemented at farms of the Mengniu dairy farming group and suggested to Mengniu’s other raw milk suppliers. These SOP contain different standard

procedures for several processes taking place at dairy farm level, such as milking and feeding, describing detailed the tasks and activities of all employees. It is important for different employees to work together in these SOP’s to achieve the highest results.

B. Input & Process

Q: How did the role of Mengniu change during the last 15 years in the dairy chain?

In the nineties the government had the aim to develop dairy production in China, so it advised the farmers on how to feed the cows and provided subsidies to farmers to purchase cattle. At that moment herd sizes were very small, with maybe 5-6 cows or sometimes larger with 10-20 cows. If a farm had 30 cows, it was a large scale farm. As of 2000, Mengniu supported the farmers to group together and start using milking machines in dairy villages and milk collection stations. Due to this development the labor efficiency increased and farmers started to milk more cattle and improved

the production per cow. Dairy farmers started to earn more money and become highly profitable. The next step was an increase in cooperation between different farmers, where they started to milk, feed and manage the cattle together, because of lower costs. This was the start of the dairy communities with sometimes more than 100 cows. In 2008 something happened in the dairy chain [Melamine crisis], and the media found out about the fact that people added something to the milk. Dairy farmers were blamed for this by the consumer, while actually the milk station owners and managers were responsible. After this event

the government started to intervene in the chain and concluded that milk collection stations were not applicable and trustworthy anymore. Mengniu realized that they had to invest in their raw milk supply to guarantee supply in the future and some people within Mengniu realized they could earn

money by investing in dairy farming. The result was the setup of a fully-owned dairy farming group, although there are also private investors and other investors involved. The management of these scale farms required a modernization process and usage of modern equipment. For example before 2008 we only knew the number of the cow, while currently we collect a lot of data about the individual

cows, such as milk yield, etc. In some periods we realized a profit margin of more than 30%, which stimulated others to invest in dairy farms and setup own dairy farms. After that development more and more private scale farms are constructed, I heard that there are nowadays 70 farms with more than 1000 cows. The family farms are still in China but these have low inputs and thus receive a lower payback.

C. Output Q: What influences the raw milk price of Mengniu paid to the farmers?

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Mengniu assumes that the quality and safety of raw milk is better guaranteed at larger farms,

therefore it pays a different price to different farming types. I am not familiar with the statement that 94% of the raw milk supply is coming from large scale farms, but it might be true. Mengniu considers a farm large scale if it has a herd size exceeding 100 cows. The current average price for

family farms is 3.7-3.8 RMB/kg, cooperative farms 4.1-4.2 RBM/kg and large farms 4.5 RMB/kg. Another interesting thing is the seasonality in the raw milk price, caused by variation in raw milk supply and demand for dairy products. The milk quantity produced is different over time because of different seasons and a hike in demand is related to the Chinese festivals. In June and February there are important festivals in China, where many people give their relatives presents. A popular present are milk gift boxes, which has an upward trend of the raw milk price during these periods.

Q: What type of contract does Mengniu have with his suppliers? Mengniu has a contract with all her suppliers, but often contracts are not lived after. A farmer can easily decide to switch from dairy processors if another delivers a higher price. Contracts are often signed for a period varying from 3-5 years, but long term relationships are not common in China. It relates to the ratio between the amount of farmers in an area compared to the dairy processors, if farmers can choose between several processors they will easily switch between processors if another

delivers a higher price.

Q: How is the raw milk collection process of Mengniu organized? The average raw milk quantity delivered is 10,000 tons per day on average, because the raw milk supply varies over time. The maximum production is 12,000 tons delivered per day, while the minimum production is 7,000-8,000 tons delivered per day depending on the season. The last five years the demand for dairy products from Mengniu is stable, so there is no need to increase the

supply. Most of the raw milk is produced in the north of China and processed in the region and afterwards it is shipped all over China as milk powder. Q: What is the influence of the government on the raw milk price? Together with Yili, Mengniu collects about 1/3 of the raw milk supply, which means that we are price setters. The government has little influence on this price, although every province constructs a reference price periodically. Different provinces have different systems. Some provinces are putting

low effort in the determination of a reference price, which leads to a free market idea. While other regions believe that farmers deserve a higher raw milk price, personally I believe that this does not work. On the short term the farmers will receive a higher price, but in the long run processors decide

to source their milk somewhere else and the farm will quit. Mengniu can decide to stop buy raw milk from a farm and thus eliminate the farm, so it can also decide to offer a lower price. This reference price meeting is organized by the animal husbandry bureau and attended by several

people from the dairy chain, such as farmers and processors. The reference price is not followed in most provinces, but in Heilongjiang and Shanghai it is quite successful. I think this is related to the extent of competition in a region, for example in Heilongjiang there are many different dairy processors, which creates different options for dairy farmers. In Shanghai it is a bit different because the main dairy processor GuangMing [Bright] is state-owned and delivers a higher price to the raw milk suppliers to guarantee high quality milk supply.

D. Challenges Q: What do you think about the milk powder imports and should the government install policy to prevent this? If raw milk prices are higher than milk powder imports, they will purchase more milk powder. Fonterra is shipping a lot of milk powder to china. I don’t support the idea to have trade barriers or

other types of policy, because it should be an open market where companies should decide what to

buy and what not. Q: What is your view on Chinese dairy processors who are investing in other countries to produce dairy products? Yili has done more investments abroad than Mengniu. Mengniu has a milk powder plant in New Zealand, which I think is good because Chinese consumers trust foreign products more. It might be

an important factor to regain the trust of Chinese consumers. Q: What is your view on the rapid drop out of small scale dairy farmers? I think this development is a result of the government policy to reform the sector.

Q: What type of suppliers does Mengniu prefer?

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I expect that the raw milk department of Mengniu prefers to source 100% from large farms, because

many different small suppliers involves more costs to monitor, control and negotiate with all suppliers. For example Mengniu has to pay visits to the dairy farms and talk with the farmers, the fewer farms the lower the costs are.

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1. What is your thought about the target of 60 million MT of raw milk production by 2020 and what are the largest challenges to overcome?

This growth might be possible. The largest challenges are feed resources, manure, water and grass to feed the cows.


a. Land & Feed: -

b. Water: Cows drink a lot of water every day. Some large farms already have water shortages.

It is ridiculous to build farms with 10,000 cows, while you could only provide water to 6,000 cows.

c. Labor: -

d. Financial capital: -

e. Waste management: -

f. Productivity: -

g. Global competition: -


province would you build it? What factors do you take into account? Ningxia, because the climate is dry to prevent disease problems, like mastitis and hoof diseases. Feed sourcing is not a problem, because of the fertile land and much grassland. And the yellow river

is streaming through this province, so water is also not a problem. It is relatively close to Beijing and other markets, compared to other regions. Setting up a farm in Beijing is not possible anymore because the government will not allow this because of the high population density and the risk of

animal diseases and environmental pollution.

4. What herd size would best be used to achieve the intended growth in milk production? The ideal farm size would be according to me 1000 cows, but it is highly dependent on the distance

to processing plants and the feed resources.

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6. Vice Farm Manager at Vertical Integrated Dairy Farm

Date: 19-5-2015

Length: 1:17:48


Function: Vice Farm Manager

Institution: Sanyuan Group

Location: Beijing

Other: Vertical Integrated dairy farm (1500 cows)




A. General

Q: Can you tell me something about your background, your experience in dairy farming and the background of the farm? I have studied at China Agricultural University. After my studies I have started working at inseminator at Sanyuan group. Currently I am the vice farm manager at this farm location of Sanyuan, in between I have done many different jobs. Sanyuan group has different farming location

in and around Beijing. This farm is owned by the Beijing Economic Development fund, but some farms of Sanyuan group are directly owned by them. The collected milk of Sanyuan is processed into pasteurized milk and yogurt as final dairy products. My responsibilities at this farm relate to the management of the employees and other resources, such as machinery and feed inputs. The farm is setup in 2001 in another location, although in 2002 the farm is relocated to this location. The relocation was forced by the groverment, because the

previous location was too close to the residential area. At that time the farm had 600 dairy cattle and the farm has a total area of 500 mu. The farm has expanded the number of cattle by natural breeding with own cattle, acquire cattle from terminated Sanyuan farms and some cattle is imported

from Australia. Imported cattle will cost around 20.000 RMB per head. At this farm 80 people are employed in various responsibilities, such as milking staff, feeding staff and financial people. The background of the people varies. An agricultural background is not required. Before the employees start working they receive training and if they fulfil this successfully

they can start working. Although I have to admit that applicants with an agricultural or technical background are preferred.

B. Input & Process Q: How is the feeding process organized on your farm and how did this change over time? In an ideal ration it is not that important what type of feed you provide your cattle, but the quality

is more important. High quality feed gives more energy and this is more important, especially for high productive cows. This will lead to a higher longevity and sustainability of the cattle. This is a challenge at this farm, because cows only have 1 or 2 lactations before culling. If I can increase to 3 lactations it would save costs, since raising costs for young stock is very expensive. Another challenge is fertility, because at the moment the calving interval is 450 days. We are trying to

decrease this number by trying to decrease the fattening of the older lactating cows.

We use different types of feed inputs, like alfalfa (locally produced), Wheatgrass (Australia) and Sheep grass (Inner Mongolia). We require 14 million tons of feed per year. We have a central office within the Sanyuan group, who is responsible for the procurement, payment and quality control of the feed. Therefore I am not aware of the prices of feed inputs. I know that our feed costs are about 50% of the total costs, which is currently about 2 RMB. We also use quite a lot of corn silage which we are sourcing in a radius of 300 kilometers around the farm. We check the quality of all feed received. When the feed is received we take a sample to test the

quality such as dry matter and other nutritional values. In Sanyuan group there is a department who is responsible for the feed sample tests, including nutritionists who advise the farmers on ration composition based on the available feed stock. If these test results are not according to the negotiated or promised standards, we will reject the batch of feed. It happens sometimes that we have to reject a delivery of Sheep grass. Most of the other feeds have a quite stable quality. The

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rejected sheep grass is sold to other local backyard farmers at a discount or sold to Sanyuan after

a price reduction, because it is too expensive to return it to Inner Mongolia. The imported feed from US or Australia is always of good quality. This system is similar for all Sanyuan farms and all the knowledge is shared between farming locations.

The feed procurement has been really stable over the past years. We have always imported feed from abroad and this is likely to continue in the future. Q: How is the manure processing organized on the farm and did this change over time? At this farm we have a biogas installation to threat the manure. Additionally we received financial support from the local government to treat the waste water. The government wants farmers to clean the water and conserve water resources. The nearby river has dried up a few years ago which makes

water a real problem in the future. This water is rain water contaminated by water from the milking parlor cleaning and moist from silage. We treat this water and use it for irrigation of vegetables nearby or in the air-conditioning system where the cows are sprayed with cold water to reduce the heat.

C. Output

Q: What is the current raw milk production on the farm?


% fat 3,4 nu 3,7

% protein 2,0 nu 3,1

The Sematic Cell count is 200.000 and the bacteria count is 100.000. Q: How did the milk production evolve over time? The Jewish people helped us a lot. Many farm managers went to Israel to receive farm management trainings, which helped us to improve our milk production. The fact that we exceed the 10,000

kg/cow/year has thankfully happened because of them. The opening of the Chinese market attracted many foreigners to China. They acknowledge the great potential that China has backed with a market of 1.3 billion people. As a result there are many partnerships between universities and companies. Nowadays we produce almost 11,000 kg/cow/year, while when I started this was only 5,000 kg/cow/year. The average daily production was 17 liters per day per cow. Dairy was not so important

and advanced at that time, it was mainly about pigs and chicken farming. I think biggest difference is in the genetics of Chinese dairy cattle which increased a lot over the years.

Q: What is the current raw milk price and how is it determined? Our current raw milk price is 4.0 RMB/kg. We receive a bonus if the protein or fat content is higher per 0.1% improvement. The base price is 3.6 RMB, but due to additional quality bonuses we have a raw milk price of 4 RMB. The base price changes a lot over time, depending on the demand for milk. For example in summer the prices are higher because there is more dairy consumption because

people like to drink milk, but the cows produce lower yields. Around Chinese New Year the demand for milk increases so the raw milk price is higher as well. Q: What is the current marketing of your raw milk and how did this change over time? Since we are part of Sanyuan group we deliver our milk to Sanyuan, which processes it into different final dairy products. I don’t know where our milk is used for but I think for pasteurized milk.

Q: What are your thoughts about the raw milk price you will receive in the future?

-

D. Challenges Q: What are the major challenges for you at the moment? The biggest challenge for our farm is to deal with the currently low raw milk price while the costs of

feed are at the same level or even higher. This affects the margin negatively.

Q: What are solutions to overcome this challenge?

The role of the government in the dairy sector should be to stimulate the raw milk prices. Some farmers already left China to start a dairy farm in Australia or New Zealand. This produced milk is shipped to China and sold to Chinese consumers. There should be some funding to the Chinese agricultural sector in order to let Chinese farmers compete with foreign milk producers.

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Q: What is the largest risk for this farm? The support for the dairy sector from the government is very important. It is very difficult for Chinese dairy farms to survive, because the competition with other parts of the world such as New Zealand,

Australia and Europe is very strong. Luckily my farm is not impacted too much, because the production results are very good. Unfortunately this is not the same for all farms, which makes it hard to survive for them. Table: Data from the farm

General Type of farm company Milkproduction Milking machine parallel

Total cattle number 2700 Milking parlor (manual/automatic) automatic

Milking cows 1450 Machine size 2 x 24

Dry period 60-21 days before calving Milkers number 5

Culling rate 28% Milking times 3

Divided into groups yes Milkproduction (kg/cow/day) 30.1

DHI test yes Milk price (RMB/kg) 4

Silage yes Milk fat % 3.6-3.7

Management Feedingtimes/day 3 Milk protein % 3.1

Push-ups/day 12 SCC (10,000/ml) 20

Feeding method TMR BTC (10,000/ml) 10

Manure removing labor Barn Playground yes

Manure handling separate solid and liquid Bedding playground dry manure

Calves 0-2 months Born calves in 2014 1200 Bedsize 230 l x 112 w x 102 h

Colustrum 0-1 day; 4 liters Bedding sand

Replacement 8% Forage cornsilage

Weaning days 60 oat grass

Granules corn flakes alfa alfa (imported)

Forage no alfa alfa (locally produced)

Milk pasteurized milk sheepgrass

Water yes

Date 19-5-2015

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are the largest challenges to overcome? This is not possible, because the raw milk price is too low. If there is no financial support this aim

will be reached.


a. Land & Feed:

b. Water:

c. Labor:


e. Waste management:

f. Productivity: The quality of the feed is not a constraining factor, because they can set the standards themselves. If the required quality is not available in China, they will decide to import it from other regions. The same counts for the feed conversion rate. Although this is more difficult for small farms, they might have problems with farm management and

productivity.

g. Global competition: If the global market price is too low it will result in massive imports to China and all Chinese farms will terminate their business. The cost of feed is too high in China, resulting in a high cost of production.


province would you build it? What factors do you take into account? I would build the farm in Heilongjiang, because of the availability of fertile land. It is easier to

cultivate your own feed required to feed the cattle at a lower price. Sheep grass, corn and soy will

be cheaper than if purchased here in Beijing, because demand is lower. Additionally the province is

located near Russia, where many crops are produced, which could be easy to import these crops.

Although the province is far from the markets near the coast it is still better than Inner Mongolia,

because the environment is getting worse. Desertification is a problem in Inner Mongolia, which

decreases the quality of feed produced. That land is only suitable for grass production and not for

higher value crops like corn or wheat. If you would locate farms close to the cities, this will be

impossible because of new regulations from the local government regarding environmental

protection. Six farms of Sanyuan have to relocate because of this law, since they are located too

close to residential areas or polluting the environment.

4. What herd size would best be used to achieve the intended growth in milk production? -

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7. Vice Farm Manager at Sanyuan Group

Date: 19-5-2015

Length: Unrecorded


Function: Vice Farm Manager

Institution: Sanyuan Group

Location: Beijing

Other: Vertical Integrated Farm (1100 cows)



A. General

Q: Can you tell me something about your background, your experience in dairy farming and the background of the farm? I graduated in 1989 from Shenyang University in Liaoning, where after I started working on a dairy farm responsible for feeding for 10 years. After this period I received additional education and training to become a farm manager, which gave me the current position as vice farm manager in Sanyuan Group. I am in this position for four years now. Sanyuan group consists of 32 farms in and around Beijing, but before there were 36 farms. Many farms had to relocate because they were too

close to residential areas or other problems, some of them are indeed relocated and some of them are closed. Six farms are privately owned and the others are owned by the government, just like Sanyuan. This farm location is set up in 1958, which makes it an exception in Chinese dairy farming. Many scale farms are recently set up with new equipment, but this farm doesn’t even have a milking parlor but a stanchion barn milking system. In 2011, we have renovated parts of the farm, although we expect that the farm has to close soon. The environmental policy has tightened over the last years

with stricter rules and requirements, since this dairy farm is located close to the residential areas we have might have to relocate by the end of this year.

There are 49 employees working in the farm. They have to work 5-6 days a week and most of them live in the nearby villages, so they will go home easily. A few employees live further away and stay for a longer period at the farm. The average salary for an employee is 3,000 RMB/month and they have 8 days off per month.

B. Input & Process

Q: How is the feeding process organized on your farm and how did this change over time? We source our corn silage around Beijing and Hebei province in a radius of 300 kilometers around the farm. In Beijing there is no vacant land which makes it hard to grow crops. Therefore our feed is coming further away. We buy the whole corn plants where after we cut, process and store it. In

order to stimulate the conservation process we add acid to the corn silage. The other feed inputs are arranged by the feed company in the Sanyuan dairy farming group. This central company is responsible for the procurement and logistics of the feed as well as the quality such as dry matter content. If the quality of a batch does not meet the requirements we will reject the shipping, although in practice this often means a discount on the price of the product. Feed in rare in this area so we

often have a shortage, we simply cannot reject feed too often. We have two different rations for our cattle, one for the high producing cows and the other for the

other cows. Q: How is the breeding process organized on the farm and did this change over time? Our cattle are sourced from different farms over the years, because some farms had to relocate or quit and this farm received the cattle from these farms. We have been breeding our cattle since 1958 without importing cattle from other countries. The Sanyuan group also has a company

integrated responsible for breeding. They distribute semen, embryos and other genetic material to our clients. We strive to have a replacement rate of 30%, while it is currently 32%. The main reasons for culling are hoof problems, fertility and a low milk yield. The average lactation is 2.56 before culling.

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Q: How is the milking process organized on the farm and did this change over time?

We are using a stanchion barn milking system. In this system we tie the cows in a barn and we milk them individually. There are 590 cows milked in this system twice a day.

Q: How is the manure processing organized on the farm and did this change over time? Our manure is separated in a liquid fraction and a solid fraction. The solid fraction is used as bedding and in the pasture system to create a layer of 15-20 cm of manure. An external party is responsible for the manure treatment. They sell the liquid fraction to farms. We don’t have to pay a fee to them. I have heard that they receive 32-33 RMB/m3 for the liquid fraction. We are required by the government to use a manure treatment technology such as separation or biogas. Especially newly build farms are enforced to have their manure treatment organized.

Q: How is the water procurement organized on the farm? We have a water tower to supply water to the farm, but we are very careful with water because in Beijing there is a water shortage. On our farm we are not cleaning the water and reusing it, all the waste water sinks into the ground.

C. Output

Q: What is the current raw milk production on the farm?

Annual production 10600 kg/year/cow

% fat 3,6

% protein 3,1

SSC 250,000

Q: What is the current marketing of your raw milk and how did this change over time?

We deliver our milk to Sanyuan on a daily basis, because we are part of the Sanyuan group. This has been the case for many years already. Q: What is the current raw milk price and how is it determined? The last months we have received 3.5 RMB/kg, which is close to the minimum price of 3.4 RBM/kg

within Sanyuan group. Before the raw milk price was higher and sometimes hit 5.5 RMB/kg. In general the raw milk price is adjusted every quarter, but it happens in practice more often.

Q: What are factors influencing the raw milk price? The raw milk price has decreased because of the increasing imports from New Zealand, which is cheaper than local raw milk. Some dairy farms are even not able to sell their milk to dairy processors, which create pressure on the raw milk price. Yili and Mengniu are decreasing their raw milk prices so Sanyuan has to follow them.

Q: What should the government do to help the dairy farms? The dairy processors have too much power in the raw milk price determination, they only think about short term profits. The government should arrange measures to divide the power better over the chain, although this is difficult. The government has agreed on a Free Trade Agreement with New Zealand offering a 0% import tax, this is very negative for the Chinese dairy farmers.

D. Challenges

Q: What are the biggest challenge(s) you are facing at the moment? The efficiency in this farm is very low, especially the labor efficiency. In other newly build farms with better equipment this has already improved a lot, in this farm we have to do everything twice which requires a lot of labor.

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General Type of farm Company Milkproduction Milking parlor (manual/automatic) automatic

Total cattle number 1100 Milkproduction (kg/cow/day) 28.7

Milking cows 595 Milk price (RMB/kg) 3.6

Heifers 139 Milk fat % 3.6

Dry period 60-21 days before calving Milk protein % 3.1

Silage yes SCC (10,000/ml) 25-30

Management Feedingtimes/day 3 Calves 0-2 months Colustrum 0-1 day 4 liters

Push-ups/day 2 Weaning days 60

Feeding method TMR Granules corn flakes

Manure removing labor Forage no

Barn Bedding playground dry manure Milk with antibiotics no

Barn surface concrete Water yes

Date 19-5-2015

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are the largest challenges to overcome? No, China will not achieve this level of milk production, because the raw milk price is too low. This

makes it unattractive to invest in dairy farming, import dairy cattle and grow the milk production.

Additionally there is a shortage of land, which makes it difficult to produce enough feed and find

vacant land to setup dairy farms.



a. Land & Feed: -

b. Water: -

c. Labor: -



f. Productivity: -



I believe that climate is the most important thing, more important than a location close to the consumer or close to land/feed. I would say Shandong, Hebei or Henan. Sanyuan is building three farms currently in Shandong province, since it is not possible anymore in Beijing. The city is

expanding and the surrounding villages are growing, so there is less land to divide over more people

and farms. 4. What herd size would best be used to achieve the intended growth in milk production? I think the optimal size is between 2000 and 3000 cows.

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8. Managing Director of CRI Beijing Xiangzhong Breeding

Date: 20-05-2015

Length: 0:51:08


Function: Managing Director

Institution: CRI Beijing Xiangzhong Biotechnologies Co., Ltd.

Location: Beijing

Other: Breeding company for semen, embryo’s and fertility treatment



A. General

Q: Can you introduce yourself and your role within your company?

I started working in 1997 in dairy after I graduated from university, where I studied agricultural economics. Since that time I have always worked in the dairy sector, at first in medicine later in feeding and currently in breeding. The animal health company distributed locally produced drugs but also imported medicine from for example Pfizer. The feeding company I worked for was Charoen Pokphand (CP) from Thailand. I was responsible for technical support in nutrition and sales. In 2001 I started the Beijing Xiangzhong Biotechnologies co., Ltd., and in 2008 the company started to cooperate with CRI.

Q: Can you give me a general overview of your company? The Cooperative Resources International (CRI) is in business already for more than 100 years and has its roots in United States, but since 2008 active in China. Our business is divided into three different segments, at first we sell international semen from the US, secondly we provide pregnancy diagnoses by blood checks and the third division focusses on the investigating genes of cattle to investigate the expected milk production. Most of our clients are large scale corporate farms with a

herd size exceeding 5000 cattle.

Q: What kind of services do you provide to your customers? Within our company we try to improve the genetics of our clients by delivering better genetic material to improve milk yield and increase the feed efficiency. These two pillars are responsible for better performances on farm level and increase the profitability of Chinese dairy farms.

B. Input & Process

Q: What features does the ideal Chinese dairy cow have? The right genetics allow the cow to achieve the maximal milk production for the farmer, where I think that the exterior, meaning solid legs and large body mass, is very important to achieve this. It is hard to define the ideal Chinese dairy cow, because compared to the US there is minimal data

available, which makes it more difficult to monitor the herd and find the best performing cows and select these genetics. The undeveloped system and infrastructure in China for data collection decreases the chances of finding good genetics significantly. Furthermore Chinese dairy farmers are in doubt if they should follow the American breeds or the Europeans breeds, where our clients think that both systems are possible and feasible. In China both systems are developing, but I see that

large farms are favoring the US breeds, and smaller farms prefer European breeds.

Q: What is the difference between the two systems according to you? The American breeds are considered to be high productive and large cows, where European breeds are smaller but stronger and have a higher milk quality regarding protein and fat content. In general I would consider the American breeding values to focus on quantity with less fat and protein and the European breeding values focus on dry matter in the milk and thus the quality of milk.

Q: What are the most important breeding values for Chinese dairy farming? 1. Higher yield per cow 2. increase the longevity by improve the hoofs and legs of cattle 3. Increase the rumen health to increase the digestibility. Many cows in China receive too much

concentrate feeds, and little dry matter intake, which leads to health problems.

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I have noticed that there is a large difference between small farms and large farms, because large

farms are way ahead in these breeding values. I am not intending that small farms should follow large farms, because their herd management is very different. It is impossible to focus on the same breeding values. For example small farms are using lower quality feed, they care only about the

costs and less about the health and performance of the cow, therefore the raw milk price is different for small and large farms. I think it varies between 3.8 RMB and 4.5 RMB, for small farms and large farms respectively. The only way for small farms to meet the standards of large farms is to get together and cooperate to buy inputs together. In the north of China this development is occurring more and more. Q: The Chinese conditions for dairy production are different from US and Europe, how should the

Chinese adapt the breeding values to meet the Chinese conditions more optimally? The climate and the feed resources in China are the main difference compared to other regions like Europe and US. Although the quality of Chinese feed, like alfalfa, is lower I think it is necessarily to keep feeding high quality feed from the US to high productive cows, because these cows require the energy. If you would feed lower quality feed, then the milk yield will decrease which is unacceptable for Chinese farms. Regarding the difference in climate, it would be better to have dairy cattle with a

smaller volume in order to decrease the energy loss during heat stress.

C. Output

-

D. Challenges

Q: What are the largest challenges in providing your services to the customers? The raw milk price, when it is too low the Chinese farms are not investing in improving the genetics of their cattle. They easily switch to Chinese semen because this is cheaper, although scale farms see the difference in offspring from our semen and continue their breeding program with imported semen. Another challenge is the data collection of cattle and their performances, because there is few data available, because it is not collected in a central point. The government together with

universities is focusing on collecting more data in order to stimulate the breeding sector in China, because they are aware of this weakness in the chain. Many farmers are not sharing their data not because they don’t want to but mainly because they don’t see the added value and the importance

of such a system. More training and education is needed to convince the farmers about the added value of such a system also for their farm business.

Q: What could be role of the government in order to overcome these challenges? The dairy economic in China is effect by three aspects, the government, market and environment. The government did less in the past to guide the dairy industry, but it shows more and more interest in it currently. For sure, government did not want to see this dramatic change in the dairy industry, things can be changed, but slowly and in control. By dramatic change I mean the rise of large scale farms and rapid exit of small family farms. The market require both quantity and quality milk, consider the quantity as the first thing, but people

now are focus on the safety of the food, that is why the milk producer force many tiny farms transform into a bigger one, the bigger, which is easier to manage and control the quality of milk, so the key things is the quality, not the size. Environment effect the position of a farm and the size, fresh milk should be closer to the city, big size means more farmland and indeed we don't get that much land, so I believe small farm with good management is a solution to the south of China where people are more concentrate in the city.

I think, in China, the government made some law and rules to avoid disaster, dairy industry just like

the youngest kid, it had too many old brothers, for government itself have not got enough time to manage it, market will be the teacher to guide what this kid should do. For right now, Yili and Mengniu as have more potful affection on the dairy industry.

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I think this is possible, but there are challenges. First of all is the raw milk price, which is fluctuating significantly. The government should install policies to prevent such volatility, because farmers aren’t able to manage their cows stable. The second challenge is improving the farm management, because at the moment there is a big difference between large scale and small scale management practices. The third thing is innovation; farmers should be open for new techniques to manage their farms

better, although this is improving because many students and young people are now working in dairy farming. 2. According to my desk research, I have identified the following constraints. What are your is your


a. Land & Feed: -

b. Water: -

c. Labor: -



f. Productivity: -



I would say Ningxia or Gansu province, because the forage is of better quality, the land is cheaper and there less environmental problems because it is far away from residential areas. Closer to cities is not an option, I am in close contact with a professor who was always advocating for farms close

to cities, but since three years he changed his mind because it causes too many problems with the residents.

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I think there are two sizes suitable for Chinese conditions. The first one is a large dairy farm with 10.000 cows which is located in deep rural areas far from the market. This dairy farm produces milk in bulk for the main market. The second size is about 500 cows, which is a small farm, located closer

to the city and provides the city with fresh milk. A size smaller than this is not possible because we need a lot of milk in the future, which can only be achieved with large farms having economies of scale.

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9. Nutritionist at Nutreco Trouw Nutrition

Date: 20-5-2015

Length: 1:31:03


Function: General Manager/Nutritionist

Institution: Nutreco – Trouw Nutrition

Location: Beijing, China

Other: Ruminant Feed Input Supplier



A. General

Q: Can you introduce yourself and your role within your company? I received my PhD-degree from China Agricultural University in July 2007 in Animal Nutrition focusing on ruminants. I started working for Sanyuan, where I had many different jobs related to dairy farming and farm management until 2010. Then I started working at Trouw Nutrition which is a subsidiary of Nutreco. Nutreco is a Dutch company, which makes that I have travelled to the Netherlands quite often. Dutch dairy farming is very well advanced compared to China, because here everything is done with labor. My first job at Nutreco was dairy nutrition developer, where I helped

to create new mineral supplements. Since October I am working as a technical support manager in calf rearing where I support the sales of Nutreco by visiting dairy farms across China to advise them in calf rearing by using Nutreco Calf Milk Replacer (CMR). Q: What kind of products or services does Trouw deliver to create value for dairy farms? Since 2013, we are introducing the life start concept to Chinese dairy farmers. This concept has added value because China has the highest cost of milk production in the world. Many farmers think

that they can reduce the cost during the calving and transition period of the adult cattle, but research has proven that most cost saving efforts are possible during calf rearing, a good start makes the

young stock able to grow to strong and fit dairy cows. Our concept is divided in four phases, where the first phase is within 24 hours after birth where the calf requires 4 liters of colostrum. Afterwards the milk replacers are used in three phases, where the dry matter content of the CMR is increased from 12% to 15% to 17% respectively. After introduction many farmers were applying the concept,

but currently the low raw milk price forces farmers to feed the calves own milk. Not all the raw milk is collected, so it is cheaper and more convenient to use the milk than throwing away. Even large corporate farms are switching to using own milk, but I am convinced they will return to the concept when prices are higher and/or all milk is collected. Another business pillar is premixes, minerals and raw feed materials.

B. Input & Process

Q: What type of farms does Nutreco serve with its products? According to me there are 7 million dairy cows in China, which is different from the government statistics. 1.5 million cattle are housed on farms larger than 500 cows and the other 5.5 million are kept in smaller farms. Nutreco is mainly focusing on farms exceeding 500 cows. In China there are

three different dairy farming types; small/backyard farms, dairy communities and large scale farms. Some large scale farms are part of a vertical integrated group and others are individual farms.

Nutreco focusses on the dairy communities and the individual large scale farms, because farms part of a group have their own integrated feed company. Nutreco can only deliver raw materials like soy, corn or wheat to them. This is associated with lower margin compared to more added value products as premixes and feed additives. Premixes are processed products containing different concentrate feeds/raw materials used to increase the nutritional value of the ration on top of roughages and forages. Feed additives are high value products containing vitamins, minerals and other scare feed

stocks. Small or backyard farmers don’t have the purchasing power to buy expensive feeds, so Nutreco is not focusing on them. Furthermore backyard farmers are exiting the sector in big numbers, which makes it an unattractive market. Q: How is the typical Chinese ration composed and how did this change over time?

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The current typical Chinese ration for scale farms is about 60% concentrate feeds and 40%

roughage. In my view three different phases in dairy farming ration. Before 2008, the ration was composed by using feed stocks at lowest cost, which often meant locally available feed sources. The result was a

low yields, poor milk quality and often health problems such as hoof problems. The dry matter intake was 20 to 25 kg/day/cow. As a joke we sometimes say that the veterinary had good sales in those times. The second phase started after the melamine crisis, where the focus was on improving the raw milk quality and safety. In order to achieve an improved milk production high quality, though expensive, feed sources were imported from all over the world, such as alfalfa and DDGS from US and cornflakes, cornflakes and oat hay from Australia. The quality was very good and the aim of improving milk production has been achieved, but it is way too expensive. Farmers only consider

about improve the annual milk yield per cow, without taking into account the involved costs. In my opinion farms with an annual production of 9,000 kg/cow can earn just as much as farms with an average of 11,000 kg/cow/year. Therefore I see a new phase starting the end of this year beginning of next year where cost of production becomes more important than the milk yield per cow. China is a country with limited land resources, but we do have land where we can grow products like alfalfa, sheep grass and wheat straw. The main challenge relates to the lack of experience in the

process of harvest and storage of these feeds, and also how to feed certain products to dairy cattle.

For example in Israel wheat straw is fed to dairy cattle while in the northeast of China wheat straw is burned because there is no application yet in a ration. Israel is a country with similar problems to China, because there is also lack of land and thus feed.

C. Output

-

D. Challenges Q: What are the largest challenges to increase the quality of locally produced forages? The Chinese dairy sector is very young and still developing. We have no knowledge, no experience, no money and no infrastructure to deliver good quality forage. I think there is enough quantity

produced already but the quality is poor, which makes it unattractive for dairy farms enhanced by the fact that they don’t know about the availability and how to use it in their ration. But the quality has already increased, stimulated by a higher demand for the product, and increased awareness for

the alfalfa producers by dairy farms and the incentive of a premium paid if alfalfa producers deliver a higher quality. In my opinion there are three different key improvements, how to irrigate the forage crops, how to harvest and process the crops with imported machinery and how to store the

crops. Many of our clients are using more and more locally produced forages, but I think when the raw milk price will recover farmers will switch again to imported alfalfa. This process will retard the process of local forage quality improvement. I know that Sanyuan receives subsidy to invest in alfalfa production and also Yili and Mengniu are investing in alfalfa production, but the problem is that they are also unable to produce a good quality alfalfa. They don’t want to feed this locally produced alfalfa to their cows, because it does not meet

their required standards, as result they continue importing expensive alfalfa. Q: What is are the differences between sheep grass, locally produced alfalfa and imported alfalfa in nutritious value? Sheep grass has a dry matter percentage of 6-7%, domestically produced alfalfa has a percentage of 15% and imported alfalfa has a percentage higher than 18% dry matter. The protein content

varies over these different forages, partly because of the process of harvest and storage.

Q: Where do you see the main forage/roughage producing regions rise in China? Inner Mongolia East, Ningxia, Gansu, Xinjiang and Shaanxi, because there is land available of a lower quality. The Chinese government prefers crops for human consumption over forages, so these forage production will not take place in Heilongjiang for example because the soil quality is also suitable for corn or wheat production.

Q: You already mentioned feed as a component to save costs. Where are other potential cost saving opportunities? In breeding, currently many animals, genetics and embryos are imported at high cost. If the system will be more developed then infrastructure and markets will be created for good quality and cheaper

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genetics in China. Another cost saving opportunity is to decrease the mortality rate on farms which

is currently 12%, by installing better disease management and control. Q: What is your view on the consumption of milk in China?

After the melamine crisis, consumers were looking for the highest price in the outlet, assuming that the product also has the best quality and safety. This was an incentive for Yili and Mengniu to increase the milk price, although this resulted in very high prices for consumption milk. I believe that the price for milk is too high and therefore unaffordable for many consumers. In China we have five tiers for the government to rank cities. In the first tier are Beijing, Shanghai and Guangzhou, in the second tier are all provincial capitals and in the last tier are small rural towns. Only the first two tiers are able to buy consumption milk in the supermarket. The other three tiers don’t have the

purchasing power for milk. Q: What do you think that the government should do about the challenges in the dairy chains? I think that the government should do nothing about this, which would be the best. The problems will be solved automatically. In China we have no authority responsible to control if the money is really used for the assigned purpose. Therefore government officials or subsidy receivers are

misusing the money, which makes it a waste of government money.

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I am very critical about this expectation or goal, because why do we need to grow to this level. The main problem is global competition. If we would open the door for dairy products then all the dairy products will be imported. If China wants to accomplish a sustainable and steady growth, we should find a way to compete with the world not just internally. The main challenge is not the forages or roughages, but the short term thinking of dairy processors like Yili and Mengniu. While many farmers

had to quit their business, Yili and Mengniu had a profit of 50 billion RMB. In my opinion the main challenge is to distribute the profits better over the chain.


1. Land & Feed: -

2. Water: -

3. Labor: -

4. Financial capital: -

5. Waste management: -

6. Productivity: -

7. Global competition: -


In Ningxia, because of the climate which is not too cold in winter and not too warm in summer. This will be far from the market indeed, but I think there are two types of dairy farming systems. The

first one is close to cities (Beijing, Tianjin, Shanghai), which is driven by consumer demand. The

second type is driven by resources such as land and natural conditions. If you look at China’s coastal regions, there is a high population density, a deficit in milk supply and most of the wealthy consumers live there. Most of the milk is produced in the north therefore the surplus of milk is in the north, so actually it might be better to build the farm in the middle to benefit from both situations.


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10. Dairy Farm Owner at Private Dairy Farm

Date: 21-5-2015

Length: 0:39:05 (partly recorded)



Institution: Private Dairy Farm Baoding

Location: Baoding, Hebei

Other: Privately Owned Dairy Farm with 1080 cows




A. General Q: Can you tell me something about your background, your experience in dairy farming and the

background of the farm? I have started working in dairy farming in 2004, when we started this dairy farm. I used to work for a semi-governmental company who was responsible for the processing of beets for human consumption. Much by-product was produced at this process for example beet pulp. We were looking for a new business for the beet pulp. At that time dairy farming was a good option so I decided to setup a dairy farm. We started with 200 dairy cows in 2004. The cattle for our farm are sourced

from nearby dairy communities and other small farms. In 2008 we were keeping 380 cows and we achieved an average milk yield of 24 liters per day per cow. After 2009 we decided to quit buying cattle and only breed with our own genetic material. At the moment there are 1080 cows in this farm. On a daily basis we produce 17,000 kg of raw milk. Q: Did you receive any government support for the setup of the farm or in a later stadium? The tenure for the land where this farm is located ended in 2004. The local government provided us

with new land tenure for 30 years. At that time we also received a subsidy for the construction of the barns. In 2009 the government started to support dairy farming, where we received subsidy to upgrade and renovate our barns and buy equipment.

B. Input & Process Q: How is the feeding process organized on your farm and how did this change over time?

We are not always purchasing our feeds at the same company. We used to have our alfalfa from the USA, but currently we prefer wheat grass which is coming from Australia. We constantly monitor the quality of the forage combined with the costs. The supply of alfalfa has a large variety in quality, therefore we often switch supplier. The corn silage is sourced locally within a radius of 10 kilometers. We try to select the best corn grown in the area, where after we contact the farmers to negotiate a price. The price is paid per

hectare depending on the quality and the corn density on the plot. Once we have agreed upon a price, we ask a contractor to harvest the corn and process it into corn silage. Afterwards it is stored at our farm in a silo. We don’t have a contract with corn farmers, but an informal agreement.

The farmers in this area have two harvests per season, meaning that they first grow wheat from April till June and then grow corn, which will be harvested in September or early October. For one mu they receive 750 RMB for the corn and 600 RMB for the wheat on average. In order to have sufficient corn silage we require annually 2400 mu of corn.

Q: What components does the cow’s ration have? The cow has a 37kg product, where; (22 kg DM dag

- 15 kg corn silage (produced locally) (*0.3) - 9.5 kg of compound feed (from our feed supplier) (* - 4 kg of alfalfa (from USA) (0.8 DM) - 1 kg of wheatgrass (from Australia) (0.8 DM)

- 1 kg of beet pulp (from North Hebei/ Inner Mongolia) (0.3 - a bit of molasses (by product from sugar industry)

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Q: What has been the development of the price of feed over the years?

The past years the price of corn has increased significantly, but every year the negotiated price in the beginning of the season does not differ from the paid price after harvest. Therefore we exactly know how much we have to pay to our suppliers. The price for cornflakes has increased rapidly. Ten

years ago we used to pay 0.4 RBM per kg, while currently we pay 2.0 RMB/kg Q: How is the breeding process organized on the farm and did this change over time? At our farm we have a calving interval of 410 days. We try to improve this number by stimulating the fertility. Q: How is the milking process organized on the farm and did this change over time?

We milk our cows three times per day in different groups. Q: How is the manure processing organized on the farm and did this change over time? We have manure scrapers in our barns, which collect the manure in basins behind the barns. Afterwards the manure is separated in a liquid and solid part. We reuse the solid manure as bedding in the cubicles. The liquid part is given for free to the nearby wheat farmers, who use to fertilize

their fields. A small part of the solid manure is sold to vegetable farmers in the area. They are willing

to pay a 30 RMB/m3 for the solid manure. The government has no strict rules or regulations for the manure processing, although they stimulate biogas installations. The problem with biogas is the treatment of the manure before it enters the installation. Q: What is the cost structure of your farm? Our total costs are 3.7 RMB per kg of milk, of which 2.1-2.2 is feed costs and 0.3 labor costs. I think

that on average the feed costs are 60% of the total costs.

C. Output Q: What is the current raw milk production on the dairy community?

Q: How did the milk production evolve over time? We currently have a milk production of 38 kg/cow/day compared to 24 kg/cow/day in 2008. This is because of improvements in breeding, feeding and management. If you compare this with the 17 kg/day/cow in 2004 when we started the farm we have accomplished major improvements. Q: What is the current raw milk price and how is it determined?

- Q: What is the current marketing of your raw milk and how did this change over time? We deliver our milk to Mengniu. Mengniu sets high standards for milk production and if you don’t meet these standards the milk is rejected. The minimum percentage of fat is 3.6% fat and 3.1% of protein. At the moment we face difficulties to achieve these strict standards, especially the

percentage of fat is difficult to achieve. Because of these problems we have asked a third

independent party to take milk samples on a regular basis. This laboratory company investigates what the real problem is with our milk. The second reason is for cross checking the results of our raw milk samples. We have our doubts if Mengniu is sampling our milk in a fair and honest method. It could not be possible that our fat percentage remains lower than what we are used to. Before this low percentage was possible in summer period, but currently it is not even summer yet. We have changed many things in the

management of our cattle from changing the ration to climate. The ultimate limit for Mengniu regarding the fat percentage is 3.3% fat, if it is lower they will reject the milk. Our milk contains a fat percentage of 3.45%, which is very close to the absolute minimum. In cooperation with our feed company, DSM, we have changed the ration multiple times, which led to a higher protein percentage but we failed to improve the fat content. At first we have tried to increase the starch content and afterwards the fiber content. As a result the production increased,


% fat 3,45

% protein 3,1

Lactose 4,8

Sematic Cell Count 150.000

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but the fat content stayed behind. At the moment we are lowering the starch in the ration, where

we hope to get less diluted milk. I am afraid that Mengniu might doe dirty things to our milk in order to test lower fat contents, they might add water. The reason might be that they would like to receive the milk, but not at a high price. Mengniu has set these standards in the first place to avoid farmers

to add milk or other things to the milk. Q: Do you have a contract with Mengniu and could you easily terminate this contract? Yes we have a contract for 5 years with Mengniu, but this contract is unfair. If you will not sign a contract with Mengniu, then they will not accept your milk. A signed contract is thus essential. There is no negotiated price in the contract. The received price is depended on the market says Mengniu. But I doubt this because the price is set by Mengniu according to their interest. In this region we

can choose between three processions Junlebao, Yili and Mengniu. Mengniu and Yili have the owned farms and thus these are the most stable. If these processors decide not to source your milk, then no other processor would like to receive your milk. If there is a lot of demand for milk then Yili and Mengniu will compete by increasing the raw milk price. But when the market is saturated, they communicate and decide upon a price which is not fair for the farmers. Therefore it is difficult to terminate the contract and start with a new processor.

Q: What could be done to solve the problem of low raw milk price? I think that more people should setup a dairy processing company which will lead to more competition for raw milk. Additionally farms should be insured against low milk prices to make sure they will survive low prices. The third suggestion relates to restoring the consumers trust in dairy products by companies like Mengniu and Yili.

Q: What could the government to about this problem of low raw milk prices? At the moment the risk for the farmers is too big, because there is too much milk produced. On the short term there are no elections, meaning that there will be few backup from the government. If your company fails and gets bankrupt, you have no fund or insurance to count on. There are few the government could do, but this will probably not be at the benefit for farmers. The government is in favor of increasing the quality standards, which makes it even more difficult to deliver the milk and get it accepted. We are unable to meet these high standards. The translator suggests that a

quota system, like in Europe should be possible to limit the quantity of produced milk. The real problem is a lack of competition in the market for raw milk, which increases the power of processors and leads to low prices and high requirements for farmers. It is very difficult to set up a processing

company, and if the company gains too much power it will be competed out of the market by Yili and Mengniu.

Q: What are your thoughts about the raw milk price you will receive in the future? I think the raw milk price remains low and might even be lower, although this is unsustainable for the farmers.

D. Challenges -

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are the largest challenges to overcome? The large dairy farms have the potential to grow, while small farms will not grow. The increase has

to be realized by the large farms, although they have grown already significantly. The raw milk price

is the most important factor in this growth. At the moment I would say it is impossible, we are

unable to find markets for our milk so why should we grow to this production level?


a. Land & Feed: -

b. Water: -

c. Labor: -



f. Productivity: -



Ningxia, because the environment is very suitable especially for corn production. In Ningxia it is possible to achieve dry matter percentages of 38% in corn, while here we have only reach a DM-level of 30%. Feed production is the most important consideration for me.


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11. Scale Farm Owner and Dairy Community Owner

Date: 21-5-2015

Length: 1:02:21



Institution: Dairy community (2x) and scale farm owner

Location: Baoding, Hebei

Other: Owner of two dairy communities and 1 privately owned scale

farm



A. General Q: Can you tell me something about your background, your experience in dairy farming and the background of the farm?

I am the owner of three dairy farms. The largest dairy farm is privately owned and the other two are dairy communities. My own dairy farm has 1200 dairy cattle of which 600 are milking cows. The two dairy communities have 36 member farmers in total. The member farmers all have a different amount of cattle, the smallest has 20-30 cows and the largest farmer owns more than 100 cows. The average production is 26 kg in the community, while we achieve an average of 30 kg/day in the scale farm.

Q: How do you select the farmers to join the community? When the dairy community started many farmers joined and quit again and everybody could join. Since the raw milk price is decreasing, more farmers are quitting. Three to four years ago we had in total 80 farmers, while currently 30 farmers are left. Most of these farmers have left the community and found another way to gain an income.

Q: What was the reason for you to invest in a dairy community? The government is supporting the dairy communities financially with subsidies to improve the dairy farm and make land available to setup communities. It also became interesting when the processors installed the minimum daily delivery of 2,000 kg, because many backyard farmers were not able anymore to deliver their milk directly although they had the cattle and other resources to produce milk available. The motivation for dairy processors to install this rule is to make it less costly to monitor and control their raw milk supply. Fewer suppliers mean less transaction costs.

B. Input & Process

Q: How is the feeding process organized on your farm and how did this change over time? We use different feed inputs like:

- Alfalfa, imported from USA

- Sheep grass from Inner Mongolia - Corn Silage which is produced locally

We pay about 1100 RMB per mu for the corn silage. The corn silage has a dry matter content of about 24-28% and the quality is quite stable. I have a trader who works for me to source all the corn silage.

- Concentrates from the feed company - Whole wheat from Xinjiang.

The dairy communities and the scale farm use the same inputs and a similar ration, although in the community the members have the option to buy my TMR feed. In theory they could choose their own feed, but in practice they all come to the TMR center. We feed almost 40 kg of feed per cow on a daily basis to our cattle. Q: How is the breeding process organized on the farm and did this change over time? At the scale farm we have a mortality rate of 2% and the replacement rate is between 20-30%. The

main reasons for culling are disease, fertility and low yield. If the cows are not pregnant after 200

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days they are replaced and if they are not producing more than 25 kg per day within 40-60 days

after calving they are culled as well. Q: How is the milking process organized on the farm and did this change over time?

The cows in the scale farm are milked three times a day and the cows in the communities are milked twice. All the farmers are themselves responsible to bring the cows to the milking parlor. Q: How is the manure processing organized on the farm and did this change over time? At the scale farm we separate the manure. The solid fraction is dried and used as bedding and the liquid part is given for free to nearby farmers. In the dairy community the manure is composted and sold to nearby farmers. The price for compost is on average 20 RMB/m3, but the price is highly

seasonal. Especially in spring and autumn the price is high, while in summer the price is low.

C. Output Q: What is the current raw milk production on the dairy community and scale farm? At the scale farm we produce 18,000 kg of milk per day and we receive an average raw milk price

of 4.5 RBM/kg. The two communities are smaller, but produce together 20,000 kg of milk. They

receive a raw milk price of 3.8 RMB, but they have to pay a fee to me as owner of 0.8 RMB per kg. In return for this fee they can use the facilities at this farm such as the buildings, barns, milking parlor etc., but also electricity, water and land rent. Thus the farmers receive a net price of 3.2 RMB/kg. Q: How did the milk production evolve over time?

- Q: How is the raw milk price determined? Yili, our processor, uses a system of different categories to determine the raw milk price for different raw milk suppliers. There are four different categories, two for small farms and two for large farms. The dairy communities belong to a different category than the scale farm. Therefore a different raw milk price is calculated with a difference of 0.8 RBM/kg. Even in the quality of the raw milk is exactly

the same the dairy community will receive a lower raw milk price. Additionally Yili gives a bonus/fine when the sematic cell count is below a certain level: for example when above 400.000 a 10 cent penalty and below 200,000 a 15 cent bonus. The difference between the categories also depends on

the housing of the cows, where if your farm has decent bedding, use TMR ration, apply group feeding and have a climate control system, your farm belongs to a higher category.

Q: What is the current marketing of your raw milk and how did this change over time? At the moment we have a contact with Yili to supply our raw milk to them. It is my responsibility to sign a contract and guarantee an offset of the produced milk. Yili has certain minimum requirements, which is 3.4% for fat content and 3.0% for protein content. There is also a minimum delivered quantity per day, which is 2,000 kg, in order to get your milk delivery accepted. Since our farmers are united in a dairy community, this quantity requirement is not a problem. The contract with Yili is for five years from 2012 till 2017. Before we were delivering our milk to Mengniu, but Yili’s factory

is closer so I decided to switch. Before 2008, I was delivering my milk to both companies, but this is forbidden since the scandal. In my opinion there is not really a difference between the two, so I mainly look at who can offer me the best price. Although there is no price negotiated in the contract, the price depends on the market. Currently cheap imported milk powder from New Zealand has a large impact on the raw milk price.

Q: What is your responsibility as community owner on the dairy community?

Everything on the farm is owned by me, except the cattle. I am responsible for the land rent, the water supply, the buildings and the electricity. I take care for the sourcing of feed inputs for all three farms, in this way I can get some discounts. I have employees working in the TMR system center on the farm. The member farmers can come to this TMR center and purchase the required amount of TMR ration for their cattle. The cost of this feed is deducted from the raw milk payment, after the fee of 0.8 RMB is deducted. Thus the feed costs are deducted from the 3.2 RBM/kg. I am also

responsible for the milking process, meaning that I will hire external employees to milk the cows. External employees are independent, where farmers might try to increase their own milk quality or volume if they have to milk the cows by themselves. Also a sample from each herd is taken every milking in order to be able to crosscheck afterwards if Yili will not accept the milk. The difference is that I don’t have control over the management system of the cattle, which I do have in my own scale farm. The member farmers can buy a TMR ration from m

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D. Challenges Q: What are the major challenges for you at the moment?

One of the major challenges is to standardize the community farms towards the level of scale farms, because more investments are needed and this will drive the costs for milk production. The government and dairy processors require higher farm management standards for dairy farms and they assume this can only be achieved by scale dairy farms. Therefore I think that the community members will become a shareholder of the standardized farm in return for the ownership over the cows. In other words the ownership over the cows will be transformed into shares in the scale farm.

Q: What is the difference in cost price between the scale farm and dairy community? The cost price for a dairy community is lower than a scale farm, because the management costs are lower for scale farms. The cattle on the communities have an individual farmer who looks after the cows and is directly affected by the performances of these cows. Because there is a low investment in dairy communities the risk is lower for these farms. The cost of production for a liter of milk on the scale farm is 3.5 RMB.

Q: What component of the cost prices gives most opportunity for improvement? That is difficult, but if we could increase the sustainability of cattle it would have a very positive effect on the costs. In other words we should reduce the culling rate. Another option is to have more dairy cows resulting in a higher production, which decreases the cost per unit. It is difficult to lower the medicine cost and labor cost because these are already the lowest possible.

Q: What should the government do in order to help the farmers? At this moment the government is supporting the sector heavily, but it does not make a difference. The reason for this is no regulation in the raw milk price. The government should setup a system with a base price, where the benefits of milk production are spread over the supply chain fairly. An independent party should control a system of three base prices for farmers, producers and consumers, and then the system will work. If this system works then the government could start with subsidies to improve the barns and cattle. At the moment the dairy processors have a monopoly

position.

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are the largest challenges to overcome? In my opinion, this depends on the market. If the dairy consumption and thus the demand for milk

does not increase this production level will not be reachable. If the raw milk price remains low like

nowadays this level will not be reached. We could stimulate the consumption of raw milk by lowering

the supermarket price for pasteurized milk. This will allow more consumers to buy more milk. The

dairy processors should invest more in the marketing of the dairy products and especially the

marketing for the mid segment of supermarket milk. Currently a lot of advertisements promote the

high quality milk, but they should promote the 9 RMB/kg milk. If you compare the milk price with

the price for eggs, the price for milk is too high for consumers.



a. Land & Feed: -

b. Water: -

c. Labor: -



f. Productivity: -



province would you build it? What factors do you take into account? Anywhere is possible as long as the farm is setup far from the villages in a more desert like environment. Additionally it should be easy to source corn silage. Ningxia is possible because of the climate but the forage production is not as good. To conclude, I think the location is not the most important thing but the management.


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12. Dairy Community Owner and Member – Dairy Community

Shijiazhuang (1)

Date: 22-5-2015

Length: … (Sophie)


Function: Dairy Community Member

Institution: Dairy Community Shijiazhuang (1)

Location: Hebei

Other: Dairy community owner with 520 cows of which 200 milking cows and 9 farmers.

Years of experience: 10 years’ experience

NOTE: A representative of the Animal Husbandry Bureau was present during the interview

with the dairy community manager.


A. General

Q: Can you tell me something about your background, your experience in dairy farming and the background of the farm? I started dairy farming in 2002 near to my house with a small farm. At that time all farmers were backyard farmers and spread over the village. I slowly increased my dairy herd to 117 cows. In 2008 there was a scandal which forced us to move into this new location. This location was vacant after the previous owner quit dairy farming. Together with his cousin and his brother, he started this dairy

community, which meant that they fall under the regulation of dairy communities. This was approved by the Animal Husbandry Bureau. Currently there are 9 farmers with 520 cattle in total, of which 200 are milking cows. I have about 100 cows and the second largest farmer has also almost 100 cows. Q: Why did you decide to set up a dairy community and not a scale farm?

The advantage of being a diary community is that you can deliver together more liters of milk to the

market. Secondly it is easier for the government and dairy processors to control the farmers and thirdly it was forbidden to keep dairy cows in your backyard, because cattle and citizens had to be separated. Also I think that dairy community members are more dedicated to do their job in comparison to employees in a scale farm. I think it is better to have a lower amount of dairy cattle, since these are taken care of more because the members are the owner of the cows. Even before 2008 the government was promoting dairy communities, but due to the scandal in 2008 this process was accelerated.

Q: After you have set up a dairy community, what kind of support did you receive from the government?

1. In 2008 we received a subsidy of the local Shijiazhuang government to renovate our stables. The subsidy was about 300 RMB/cow.

2. We received trainings to improve the quality of our roughage and corn silage.

3. In order to improve the genetics of our cattle we receive semen for a low price or sometimes even for free.

4. Some individual farms (members) also received directly a payment from the government 5. The Environmental Protective Bureau is pushing us now to relocate our farm, because we

are located in a water saving area. In this area there is no cattle farming allowed because it serves as a water reservoir for the city residents. I think we cannot stay here long, maybe we have to move by the end of the year.

B. Input & Process

Q: How is the feeding process organized on your farm and how did this change over time? As manager I am responsible for the sourcing of feed and procure the feed mixes. We feed concentrate, containing soybean meal, cornflakes and corn pellet to our cows, next to corn silage. This corn silage is sourced within a radius of 10 km around the farm. In the past we have fed

imported alfalfa to our cows, but currently it is too expensive for us. The quality of domestic produced alfalfa is not stable, so we could not find a good supplier to provide us with domestic alfalfa. We are

152

applying the same TMR ration to all of our cattle from all the different farmers. The dairy processor

has forced us to switch from sourcing feeds from local farmers to certified feed companies, which makes the feed more expensive. We are forced to buy our feed there otherwise Mengniu will not accept our milk. The reason for this is safety issues.

Q: How is the milking process organized on the farm and did this change over time? We are hiring employees to clean and maintenance the milking parlor, which is a 2x20 swing over milking parlor of domestic produce. Every farmer has to milk his own cows in the parlor, twice a day. Samples of this milk are taken by an independent employee to be able to do cross checking afterwards. The milking parlor was built by the previous owner in 2003, but renovated in 2010 by me.

Q: How is the breeding process organized on the farm and did this change over time? Currently our culling rate is 10% per year. The main reasons for culling are: 1. Fertility, 2. Udder health, 3. Milk yield.

One farmer, who used to be an artificial inseminator, is responsible for the inseminations of cows

after a farmer has detected heat. Q: How is the disease management or disease control organized on your farm? For simple diseases we will treat the cows ourselves with drugs and medicine, but if it is more difficult we will call the veterinary. If a cow dies, there are three options:

1. If a cow is close to dying, Chinese farmers will sell it to a slaughter house for a very low

price 2. If a cow recently died (1-2 hours), they will sell it even cheaper to local villagers 3. If a cow is dead, they have to report it to the Animal Husbandry Bureau. Afterwards an

official will come to the farm and inspect the dead of the cow. The carcass will be burned in a hole in the ground and afterwards covered with sand. Many Chinese farmers will not report the dead of a cow when they expect FMD at a cow.


Together we deliver 5000 kg of milk per day to the dairy processor Mengniu. We are ourselves responsible for collection the milk and transport it to the dairy processing plant. The quality of our milk is not so high. The fat content is 3.39%, protein 3.04% and the SSC is ‘qualified’.

Q: What is the current marketing of your raw milk and how did this change over time? We have a 3 year contract with Mengniu. We also have to option to choose Sanyuan group, but their milk price is lower, so normally we will stay with Mengniu in the future. But remember that farms are weak and we have no option then sign a contract. When the market is good, the processors will deliver a high price. The minimum requirements by Mengniu are protein 3.0%, fat 3.3%, SSC <500.000, microorganisms <200.000 and a total delivered quantity per day of 5000.

Q: I noticed that your quality performance is close to the minimum requirements, are you afraid that this will drop below the minimum? They will inform us when it is too low. Afterwards technicians will come to our farm to help us overcome the problems.

Q: What is the current raw milk price and how is it determined?

The current price we receive for our milk is 3.6 RMB/kg. There is a 0.3 RMB management fee meaning that the farmers will receive 3.3 RMB/kg. Q: How did the raw milk price develop over time at your farm? The price kept decreasing since a few years. Mengniu offers a relative high price compared to other dairy processors. For unknown reasons our milk got rejected last year, but after this event Mengniu

sent technicians to our farm to help us to overcome our problems. Earlier this year we had to deliver our milk to Junlebao, because Mengniu has shares in Junlebao so they said that we have to bring our milk to the Junlebao factory. During these 30 days our milk got rejected 6 times by Junlebao, so they switched again to deliver their milk to Mengniu. Regarding the price dropping, I expect that the most horrible days have passed. In general we are happy with Mengniu.

153

D. Challenges

Q: What are the major challenge(s) you are facing the moment?

1. A low raw milk price, if the milk price will decrease even further we will not survive

2. Improvement of milk yield 3. Imported milk powder, this is often cheaper and causes competition for our raw milk.

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1. What is your thought about the target of 60 million MT of raw milk production by 2020 and

what are the largest challenges to overcome? No I don’t think that the milk production will grow to this level, given the current market

circumstances and low raw milk prices a lot of dairy farmers will quit farming. In this area the milk

production and number of cows has been stable for 7 years and I don’t see a reason why this would

change. I think that this goal of the government is wrong, because Chinese are not used to consume

dairy products so at first the demand for this milk should be found.

2. According to my desk research, I have identified the following constraints. What are your is

your opinion about the constraining effect of these factors on Chinese dairy development?

a. Land & Feed: -

b. Water: -

c. Labor: -

d. Financial capital: I have to invest in my farm, but I don’t know where I will get the money

from. It is very hard to get support from the bank, because he is already in debt with the bank, so it’s too risky for the bank to lend him more. I only have the option to borrow some money from a friend or sell part of his cattle.

e. Waste management: Environmental regulations will become stricter, where after farmers have to relocate themselves. A few years ago there was no attention to these problems but now the environment is becoming more and more important.

f. Productivity: Dairy farmers have to meet very high standards demanded by the dairy processors.



province would you build it? What factors do you take into account? North of Hebei province, there is good climate and enough land.


I would say a farm of 100 cows will provide a good family income. But this herd size per farm is difficult to manage for dairy processors in order to control the quality.

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13. Dairy Community Member 1 – Dairy Community Shijiazhuang

(1)

Date: 22-5-2015

Length: Unrecorded




Location: Hebei

Other: Dairy community member with 100 cows (incl. young stock)

Years of experience: 10 years’ experience


A. General

Q: Can you tell me something about your background and your experience in dairy farming?

I started more than 10 years ago with dairy farming, because at that time I was working as an artificial inseminator (AI). The manager of my former dairy farm decided to quit farming, so I had to quit this job and I decided to start my own dairy farm. I bought some dairy cows. Over the years, I was able to grow my cattle number to 100, because of high profit margins.

B. Input & Process

-

C. Output -

D. Challenges

Q: What are the major challenges you are facing right now? We maybe have to relocate our dairy farm, because we are in a water saving area. This probably can mean quit dairy farming. We are in the dairy community working as a kind of employees, so if

we cannot keep our cattle in here we have to move. We need to find another dairy community manager to accept us in another community with new social dynamics. To be honest, if I have to find another dairy community I will probably quit, because dairy farming is hard these days. If they quit they can find other work in the city, where the salaries are ok. I am in this business for more than 10 years, and nowadays we are facing the biggest problems in dairy farming, since I started. The business is not so stable, meaning that profit varies a lot. A few years ago the profit was way better, but currently there are very low profit margins. At the moment even 0% profit. The milk

yield of his cows (23kg/day/cow), is low compared to the other communities, like for example the one we visited yesterday.

Q: Why is your milk yield low? The yield is low, because we cannot afford the high quality feed, and our genetics are not so good. This dairy community is different from other dairy communities, because we group the cows in

different groups of low/high production with different rations but the cows are in one place. Which makes it hard to do identify which cattle is which difficult during milking. (IMPORTANT NOTE: This is not true according to the translator; he had to say this because a manager of the Animal Husbandry Bureau was around. In practice, the cows of every farmer are separated from each other and there are no different TMR rations fed to the cows.)

Q: What is your view about the future if you can stay in this dairy community? In that case I do see a bright future, because I think I can improve the yield of my cows by importing more knowledge about dairy farming. Until now I got limited information about feeding and breeding. Maybe there is a way to gain more knowledge about dairy and reach the same production standards

156

as in the Netherlands. I already received some information and materials from his former boss who

quit dairy farming. I am confident that I am able to improve my yield. Q: Besides improving your yield you could also lower your production cost, what is your view on

this? If I compare the former dairy farm, where I used to work with my own dairy farm, then I will have lower costs but also lower productivity. I think it is better to have higher costs and apply an SOP (Standard Operation Processes), because the productivity increase will compensate for the higher cost. In general I think higher cost with higher productivity on a scale farm is better than lower costs and lower productivity on my farm.

157



are the largest challenges to overcome? 2. According to my desk research, I have identified the following constraints. What are your is your


a. Land & Feed: -

b. Water: -

c. Labor: -

d. Financial capital: Investing my money in my farm is better than having it in the bank,

because the interest rates of the bank are bad.

e. Waste management: This is very important, because this might harm the health of the people but also the animals.

f. Productivity: -



Hebei, north of Hebei 4. What herd size would best be used to achieve the intended growth in milk production? -

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14. Dairy Community Member 2 – Dairy Community Shijiazhuang

(1)

Date: 22-5-2015

Length: Unrecorded




Location: Hebei

Other: Dairy community member with 100 cows (incl. young stock)

Years of experience: Since 2006; 9 years’ experience


A. General Q: Can you tell me something about your background and your experience in dairy farming?

I started farming eight years ago (2006-2007). The dairy community manager is my cousin and he persuaded me to join him in the community. At that time he decided to purchase some cattle and start dairy farming. During the first years I have started dairy farming I received good profits, so he continued dairy farming and expanded his cattle number. Q: What was your job before you started dairy farming?

Before he started dairy farming, he was working in construction works to build houses in the city. Compared to the work that he was doing as a construction worker, the income is almost even.

B. Input & Process -

C. Output -

D. Challenges Q: What is the most major challenge for the future?

Dairy farming requires a lot of financial capital. For example we pay 10.000 RMB/cow which makes it difficult. But I enjoy being a farmer more, because construction work is often a temporarily job without any security to have a sustainable income.

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15. Director of Dairy Farming Animal Husbandry Bureau (Ministry

of Agriculture)

Date: 22-5-2015

Length: 1:31:20

Value Chain Function: Government

Function: Director of dairy farming Shijiazhuang city

Institution: Animal Husbandry Bureau – Ministry of Agriculture

Location: Hebei

Other: Department of MOA responsible for dairy farming support



A. General Q: Can you tell me something about your background and your experience in dairy farming?

I graduated in 1984 from Hebei Agricultural University. After graduation, I started working at the Animal Husbandry Bureau on a station responsible for raw milk quality control. Over the years I have been responsible for several subsidy programs to stimulate dairy farming.

B. Input & Process

Q: What kind of subsidy programs did the government implement to stimulate dairy farming? In 1985 the raw milk production was unable to meet dairy demand, especially in cities. Therefore the local government installed a subsidy scheme to stimulate raw milk production. At that time the raw milk price was 0.60 RMB/kg of milk, where farmers received a 0.05 RMB per kg direct payment for every kg of milk delivered to the market. This program stopped in 1991, because the goal of the government to achieve a certain raw milk production per capita in the city was achieved. Another program where I was involved in related to an EU project starting in 1996, where milk

powder was shipped for free to China. At that time China was still a developing and poor country and dairy products were considered s expensive and luxury products. The milk powder was processed into several dairy products and sold to urban consumers. The profit made on the dairy products was invested in the development of domestic dairy farming. Trainings by experts were given to dairy farmers about feeding, breeding etc., as an example of investments in the domestic development. After 2008 there was a real change in dairy farming policy. The quality and safety of dairy products has to be guaranteed. The government installed subsidies to promote scale dairy

farming and dairy communities, where backyard farmers were stimulated to adapt standard management practices and become scaled dairy farms or group in dairy communities. The subsidy was used by farmers to improve or built stables and purchase stable equipment. Q: What were the selection criteria for farmers to receive a subsidy? The main criteria related to herd size. In 2009 the herd size had to be over 200 cattle and in 2009

we increased the criteria towards 300 cows. On average the farmers receive 2000 RMB/cow, but the total amount depends on the herd size. Farms are divided over different categories, namely 200-300 cows, 300-500 cows, 500-1000 cows, where every category receives another amount per cow.

Q: Do you think that 2000 RBM/capita is enough? That is enough, because they already have a renovated their farm and adapted standard management practices, so they don’t have to start from scratch.

Q: How long do you think that this subsidy program will continue? I think it will continue for at least 3 years and at most 5 years. I believe that after five years we have reached a point were all farms have been renovated and operate at a required level. I think that all dairy farmers have developed their farms in five years. Currently the program is received well by the farmers and it is effective.

C. Output

160

-

D. Challenges

Q: What are the major challenges for dairy farmers in this district? Limited availability of resources and different problems with resources, like air, land and water are the major challenges. The different resources have different problems. In China the place used for cattle husbandry is also suitable for human beings, so because of high population density competition for land rises. This means that it is hard to find land for cattle husbandry. Additionally, cattle farming cause lots of contamination problems.

Q: How can the Animal Husbandry Bureau assist the farmers to overcome these challenges? Enlarge farm size and then make the profit relatively higher. The Chinese raw milk price is already sky high, compared to the rest of the world. China has the second highest domestic milk price. It is therefore more likely that the raw milk price will decrease then increase. By creating economies of scale for dairy farmers and increasing their productivity we can create more relative profit on farm level.

Q: What kind of methods does the Animal Husbandry install to achieve this? We mainly support farms and farmers that have already shown progress in the past. We expect that they will be able to enlarge themselves again. The Environmental Protective Bureau (EPB) has implemented strict regulations on dairy farming to prevent environmental pollution. As a result of these regulations some farmers might quit, which creates opportunity for other farmers to grow and use the newly available resources.

Q: What kind of policies did the Environmental Protective Bureau imply? The national council published a regulation on drinking water protection. The key message of this regulation is that no cattle farming is allowed in water saving areas, since their manure and waste water might contaminate the water resources. These areas were appointed already several years ago, but until recently this was not enforced by the local governments. Farms located in water saving areas have to be relocated or quit.

Q: What determines if a farm will be relocated or not? If a farmer has the money, I will relocate his farm to another location otherwise I will quit. There

won’t be a subsidy provided by the government, because these farms know already for a long time that they are operating their business in a water saving area. Also the dairy processors are involved in the enforcement of removing farms from water saving areas. Dairy farms need a permit, which is

issued annually by the Animal Husbandry bureau. This permit is demanded by dairy processors before they accept a dairy farmer as supplier. One of the new requirements to receive a permit is the location of the farm out of a water saving area. In the past there were no requirements regarding environmental policy, so this is new to the bureau. Q: What do you expect about the growth of dairy farming in Hebei province? I expect the milk production in Hebei to decrease, since the raw milk price is very low currently and

I don’t expect an increase in this price. Many farms are currently not profitable, which makes dairy farming a difficult industry compared to other industries. Farmers might decide to sell their cows and work in another farming sector or move out of agriculture. Q: How is the raw milk price determined in Hebei? The raw milk price is mainly decided by the market. The bureau is organizing four times per year a

meeting with dairy farm representatives and dairy processors to develop a reference price for the

upcoming period. Almost without exception, this reference price not respected by dairy processors. Dairy processors have the power in the dairy value chain. Q: How can the Animal Husbandry bureau decrease the power of dairy processors? The bureau can only organize these reference price meetings, since we are only responsible for the dairy value chain until raw milk collection. After that point the Food and Drugs Authority (FDA) is

responsible for the value chain. The viewpoint of FDA is food safety and not support farms. There is always competition between government departments in China, but this is the responsibility of Chairman Xi to solve this problem. As animal husbandry sector we ask ourselves who we serve only agriculture or also the value chain and agriculture. Q: What is your view on the Free Trade Agreement with New Zealand?

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As a result much cheap milk powder is entering China, resulting in low milk prices. So I believe that

we should sell more pasteurized milk in China, because this is not possible with milk powder. Q: Another solution might be to decrease production cost, what can the Animal Husbandry Bureau

do about this? It is not easy to control by the bureau. Dairy farm technologies are still not at the right level, for example with corn silage processing are still a lot of problems. It takes two to three weeks to harvest and cut the corn silage, which impacts the quality of the corn silage negatively. Another option is offering training to farmers during field trainings, just like the SDDDC does. We might improve the productivity of farms which leads to lower costs per produced unit.

Q: What is the future of Backyard farms in Hebei? There will be no future for them; actually many of them have already disappeared in Shijiazhuang city. Currently only 4% of the farms is backyard. Dairy communities or scale farms have the future. I consider diary communities as a transition mode between traditional farms to scale farms. I expect that all dairy communities will also disappear within 10 years.

Q: What is your vision on manure treatment and control this by the government?

I would say that the government should install regulation regarding manure treatment and develop manure policy. A feasible system for Hebei is manure fragmentation, where after manure collection the manure is stored and separated in liquid and solid fraction. These fractions can be sold separately for about 10 RMB/M3, which is the current market price for processed manure.

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1. What is your thought about the target of 60 million MT of raw milk production by 2020 and what are the largest challenges to overcome? I think there will definitely be an increase in milk production, maybe even a 100% increase. In Hebei

province the milk production might decrease but nationwide it will definitely increase.


a. Land & Feed: -

b. Water: -

c. Labor: Cow managers and qualified technicians are gone be a problem!



f. Productivity: Share knowledge with advance dairy farming countries about technologies and development will solve the problem of productivity but this is a problem still.

g. Global competition: I think that the cost of milk production will not be the main problem.

Because after years and years of effort in dairy farming, the cost of dairy production will decrease, so that might not be the first problem. The price is connected to the pasteurized milk; if we sell more pasteurized milk then we are not dependent on global raw milk price anymore. Consumers in China now very little about pasteurized milk. Dairy processors don’t produce a lot in pasteurized milk. Mengniu and Yili need a lot of new plants and equipment all over China to produce pasteurized milk. So the dairy processors will not favor the option of promoting pasteurized milk. They might even stop this development, since they have

created the power in the supply chain based on UTH milk. More and more groups will invest in pasteurized milk in first belt and second belt cities will use pasteurized milk. Some

consumers are investing in cooling systems. Ultimately the price of milk will go down and then all people get access to purchase pasteurized milk instead of UHT milk. Pasteurized milk is not often way more expensive than UTH Milk. There will be investors who will invest in plants to produce pasteurized milk.

3.Suppose you would get 1000 cows tomorrow and money to build a farm, in which Chinese province would you build it? What factors do you take into account? Gansu, because there is a good climate the humidity is low. A lot of grassland and silage production, good labor costs. Yes, it is far from the market, but this might not be a problem. In Beijing it is not possible anymore, because it is not allowed anymore to have animal husbandry activities in Beijing. Maybe in the north of Hebei province, where the climate is colder than and not as humid as

Shijiazhuang city. Choose between cheaper and better inputs or outputs, it will depend on the product. If we keep on producing UHT milk I will go for Gansu province and if we switch to pasteurized milk than I would prefer the north of Hebei. Final product is important. 4. What herd size would best be used to achieve the intended growth in milk production? -

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16. Dairy Community Owner and Member Hebei

Date: 23-5-2015

Length: 1:19:17

Value Chain Function: Dairy farming

Function: Dairy Community Owner and Member

Institution: Dairy Community Hebei

Location: Shijiazhuang city, Hebei

Other: Dairy community owner with 5 farmers and 400 cows (170

milking cows)




In 2002 the government told us that there was a bright future for me in dairy farming. Before I used to work as a construction worker, which was often temporary jobs with an unstable and low income. At that time Hebei province installed new regulations to promote the development of dairy communities. I started to invest in dairy farm equipment and built stables, where shortly after the first farmers moved into my dairy community. Until 2011 I did not own dairy cows myself. The property of the dairy community, such as buildings, equipment and some machinery belongs to me.

As of 2011, some farmers decided to move out the diary community because of low profit margins. 8 farmers decided to quit and I was able to buy there dairy cattle, which is about 120 cows. Currently (2015), there are 5 farmers in my dairy community including me and we have about 400 cows of which 170 are milking cows.

B. Input & Process

Q: How is the feeding process organized on your farm and how did this change over time? Every farmer is responsible for their own feed input sourcing, ration composition and feeding, but this will change as of June 1, 2015. Since they are switching to a scale farm, they have to organize the feeding process together. In the new season he will be responsible for the procurement of feed inputs and storage. Currently the dairy processor, Sanyuan, only allows us to have three different compound feed suppliers. As dairy community we have selected New Hope lilu, Djong Bee Jaa Bee and New Land-

Beijing. The individual farmers can only choose from these three feed companies. All the farmers use different feed inputs and have different rations, composed by different feed companies. The corn silage is sourced from farmers’ located about 10 km maximum of the farm. The farmers themselves are responsible for cutting and process it into corn silage, a process that could take 2 weeks. We also use sheep grass which is coming from Inner Mongolia.

Q: How is the breeding process organized on the farm and did this change over time? The breeding is subsidized by the government. Breeding companies receive subsidies and distribute

them for free to farmers. If you prefer to have a higher genetic bull or imported semen you have to pay a premium. In general all farmers use the free semen. An artificial insemination (AI) technician is called whenever a cow is on heat. Q: How is the milking process organized on the farm and did this change over time?

The cows are milked two times a day by 2-3 employees. These employees are paid by him as dairy community manager/owner. There are no samples taken on the farm from individual farmers/cows, so they don’t know the quality of individual farmers. Q: How is the manure processing organized on the farm and did this change over time? Before they were composing the manure and give it to nearby farmers. At the moment they are giving it for free to a nearby biogas installation. They will get a partly refund for transportation cost,

but the manure is collected for free. The biogas installation is installed on a scale dairy farm with

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600 cows, but those cows aren’t producing enough manure to reach an optimal production. This

biogas installation is financially supported by the national government.

C. Output

Q: What is the current raw milk production on the dairy community?

Annual production 2600 delivery, but 2800 produced (kg/day)

% fat 3.6

% protein 3.0

Sematic Cell Count 200000-300000

bacteria <200000

Every day we deliver approximately 2600 kg of raw milk to the dairy processor, which is Sanyuan.

But we produce 2800 kg of milk on a daily basis. The difference of 200 liters is caused by the fact that we don’t deliver milk of cows with a high sematic cell count, in order to improve the quality of our delivered milk and guarantee the minimum requirements of the dairy processor. This 200 kg of

milk is fed to the calves. Currently our fat content is 3.6%, protein content 3.0%, SSC (250.000) and bacteria count (less than 200.000). Q: How did the milk production evolve over time?

The milk production per cow increased from 16-17 kg/day to 22-23 kg/day. Q: What is the current raw milk price and how is it determined? Our milk price is very low, namely 3.35 RMB/kg, because the quality of our milk is low. My management fee is 0.40 RMB/kg, which means that the farmers will receive 2.95 RMB/kg. Dairy processors have a system of four categories, namely: scale dairy farm A, scale dairy farm B, dairy community A, dairy community B. Every dairy farm is inspected by an employee of the dairy

processor and assessed to a certain category. We belong to the lowest category, which is dairy community B. Q: What is the current marketing of your raw milk and how did this change over time? Currently we have a contract with Sanyuan for 3 years. I am sorry, but I am not allowed to say

anything about the content of the contract. Before we used to deliver our milk to Yili, but Yili was

demanding high investments in our farm such as air condition systems, certain feeding practices and applying more standards management practices. We were unable to fulfil these requirements. So we have decided to switch to Sanyuan, although we do receive a lower price from Sanyuan. The difference is about 0.2-0.3 RMB/kg. (See also other reason of subsidy). Currently Sanyuan is a small producer of IFT, due to worse market conditions because of the melamine crisis. Sanyuan is mainly producing UHT milk in this area.

Q: What are your thoughts about the raw milk price you will receive in the future? I expect that our received raw milk price will increase because we are actually in a transition phase from a dairy community to a scale farm. This means that in the future we might be assessed in one of the scale dairy farm categories. I think that our raw milk price can increase by 0.4 to 0.6 RMB.

D. Challenges

Q: What are the major challenges for you at the moment?

Currently the dairy community is not profitable. If there is no change in the situation I might quit dairy farming. A higher raw milk price is essential in this, but during the reference price meetings where he is part of he doesn’t see any improvement in the near future. During these meetings dairy processors keep stressing on the fact that there is no demand for dairy products at the moment. For the upcoming months he doesn’t see any change in raw milk price.

Q: What are solutions to overcome this challenge? The key solution is receiving a higher raw milk price. Another solution could be improving the genetics on his farm to improve productivity. Currently he is involved in an embryo transplant program, subsidized by the government, but the results of this program can be noticed in three years. If he would sell his low yield cows and buy higher yield cows, this is too expensive for him. As a result the feed costs will increase, because better genetic cows demand higher quality feed.

Although he expects that this higher feed input costs will be compensated by higher milk revenues.

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After the construction works are finished on the farm and he changed his management to

standardized processes, he expects that the dairy processor will consider him in a different category supplier, leading to a higher raw milk price.

Q: How is the transition from a dairy community to a scale farm organized? Ideally I would buy the cows from the other farmers, but he is unable to do so because he doesn’t have the financial capital. Another more feasible option is renting the cows from the other farmers, where the rental price would be 2000 RMB/year, while the buying price is 12000 RMB/year. The second option is related to giving the dairy farmers shares in the new scale dairy farm in return for their cattle.

Q: What is the role of the government in this transition? The government is helping the dairy communities to improve their farms to a scale farm structure and management practices. Our dairy community receives a subsidy of 2000 RMB per cow. The incentive for the local government to subsidize us is based on the ambition to produce IFT (Infant Formula) in Hebei province. Only dairy farmers having a contract with Sanyuan or Junlebao dairy processors are able to receive this subsidy. If you are supplying your raw milk to Yili or Mengniu,

you will not receive this subsidy, because these dairy processors are Inner Mongolia based. This is

also the main reason that we have switched from Yili to Sanyuan. Another reason is that Yili our previous dairy processor, was demanding high investments in our farm such as air condition systems, certain feeding practices and applying more standards management practices. Q: Which requirements besides delivery contract with Sanyuan or Junlebao do you have to meet in order to receive the subsidy?

The main requirement relates to the fact that you have already shown progress in installing standardized management practices in your farm and that you have already started with building stables with headlocks, cubicles with bedding and feed TMR in different groups. Q: What is the largest risk for this farm? I heard that Junlebao is sourcing their raw milk for 70% from scale dairy farms owned by the Junlebao group. The government is supporting this development, but the risk for dairy communities

like me is that our milk will be rejected by the dairy processors and we will be out of the supplier network. He expects that all dairy communities will be disappeared in 3-5 years, since the government is promoting scale dairy farms. As a result they receive a lower raw milk price, which

makes them unprofitable and not competitive.

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1. What is your thought about the target of 60 million MT of raw milk production by 2020 and what are the largest challenges to overcome? The total Chinese milk production will definitely grow, but not by 40%. China will always import milk

powder from New Zealand. Employees of dairy processors only think about profit, they will never

prefer domestic produced milk. Milk powder is approximately 2 RBM/kg cheaper than domestic raw

milk.


a. Land & Feed: -

b. Water: -

c. Labor: -


e. Waste management: Manure is not really a problem, since there is a biogas installation in the area.

f. Productivity: -



If I would get the money, I would quit dairy farming. The dairy farming sector is very risky, since it is unknown what will happen in the future regarding price for example. Dairy processors have too much power in the value chain and combined with high milk powder imports, this is very hard for

individual dairy farmers. To illustrate this, last year there was a problem with New Zealand milk powder, resulting in an expected shortage of raw milk inputs. All large dairy processors were sending their employees out to the dairy farms to ask if they would deliver their milk to their company. The

milk price was sky high and even getting over 6.0 RMB/kg, after four months the milk price decreased and it kept decreasing since then. The government is promoting dairy processors to build their own dairy farms to guarantee the safety in the chain, but this has huge implications for individual small farmers. Their milk could be rejected in the future, and actually this is already happening in the future.


-

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17. Dairy Community Member Hebei

Date: 23-5-2015

Length: Unrecorded

Value Chain Function: Dairy farming



Location: Shijiazhuang city, Hebei

Other: Dairy community member of community with 5 farmers and

400 cows (170 milking cows)




I started dairy farming in 2003, before I was a truck driver. At that time the dairy industry promised to provide a bright future. Also the fact that my brother, who is the owner of the dairy community, asked me to become part of the community stimulated me to start my own farm. He started with the purchase of 10 cows, which he increased over the years to 23 milking cows and 17 young stocks with natural expansion by breeding.


C. Output

Q: What is the current raw milk production on this farm?

Currently he is producing 450 kg of milk per day (450/23 = 19,50 kg/cow/day).

D. Challenges Q: What are the major challenges for you at the moment? Currently his dairy farm is facing a very low raw milk price which makes it hard to be profitable.

Q: If you farm has troubles to be profitable, why have you invested in a new stable? The new stable is mainly build with financial support of the government. Additionally he is not the owner of the stable, the dairy community manger is, so he is not investing personally in the stable.

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18. Professor in Dairy Processing China Agricultural University

Date: 26-5-2015

Length: 1:06:04

Value Chain Function: Research

Function: Professor in Dairy Processing

Institution: China Agricultural University

Location: Beijing

Other: Associate professor specialized in dairy processing technology

Years of experience: Since 2009; 6 years of experience


A. General

Q: Can you tell me something about your background and your experience in dairy? I received my PhD-degree in 2009 from China Agricultural University, majoring in dairy processing. Since then I am working as an associate professor in the food technology department of the China Agricultural University. Our lab focusses on three different aspects:

1. Dairy processing; how to organize the cheese, yogurt and UHT processing in China. Cheese is the key focus for us, since cheese production is currently very low in China.

2. Dairy nutrition; we are investigating the effect of mainly proteins on human health 3. Probiotics; How to increase the intestinal health using probiotics in dairy products.

Q: What are probiotic products? Many probiotic products are currently imported from countries, like Denmark. This market is growing quickly in China and leaving 1/10th of the profit made to local suppliers, the rest of the profit is distributed by foreign companies. Therefore almost all major dairy processors like Mengniu, Yili,

Junlebao and Sanyuan started to produce these products themselves. All the products are of good quality bacteria. Probiotic products are sold in two varieties, namely yogurts and fermented drinks (like Yakult). Depending if the fermentation process takes place in the cup or in a big steer mixer

and packaged afterwards the viscosity is determined, where this is lower in the latter. This method is also the most common used.


C. Output Q: In an ideal situation how would the raw milk collection process be organized by large dairy

processors? The raw milk should be stored and delivered below 7 degrees, where after it will be stored for 24 hours in a big tank. Regarding the different dairy herd sizes, I believe it is true that large scale dairy farms can more easily meet the standards of dairy processors compared to small farms. I believe that this is related to the standard management practices on these farms, such as animal health, feed management and housing. INSERT ABOUT DIFFERENT UHT milk classes

In my view there are three different types of dairy processing in China based on geographical

location. In the north and northeast of china there are a lot of farms, so there is a surplus of raw milk production. This surplus is processed into UHT milk and sold with a national coverage all over China. In contrary, in the south there are fewer farms and thus a lack of raw milk production to meet dairy demand. Local dairy processors are processing this raw milk for the local market in mainly pasteurized milk and yogurts. The third category contains the first tier cities (Beijing, Shanghai and Guangzhou) where the amount of farms meets the dairy demand in these cities precisely. Because

these dairy farms are more regulated the raw milk quality will in general be higher. The total market for dairy products in these cities and a growing number of other cities is complicated because all dairy processors are active in these cities, since the consumers have the highest purchasing power and physical and market infrastructure is available. In the supermarkets in these cities you will also find imported products.

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Type Region Farm Density Dairy

Trade

Dairy

Processors

Main

products

Other

A North & North East

High farm density

Surplus Yili & Mengniu UHT milk, yogurts

B South Low farm density

Deficit Local dairy processors


C First tier cities:

Beijing, Shanghai & Guangzhou

Middle farm

density

Equal Sanyuan,

Bright Dairy

Pasteurized

milk, yogurts

Quality of

milk will be better due to educated citizens

Q: What is the government influence in the dairy processing, regarding milk powder and raw milk?

There are government regulations regarding the usage of milk powder in products. For example it is not allowed to use milk powder in yogurt and UHT milk. The government provides for every final

diary product if it is allowed to use milk powder. These regulations are the same all over China, indifferent from the location. Although many dairy processors use milk powder in their products, but they are obliged to label their products mentioning that it is recombined milk or milk powder is used. Q: I have read that yogurt production is mainly based on milk powder, is this untrue? In yogurt production, very few dairy processors use milk powder. If you look at flavored yogurt

products with for example fruits, then almost all products are based on milk powder. If you for example look at a local dairy company like GuangMing (Bright Dairy Shanghai), they serve the local market, but their own raw milk procurement is not enough so they have to use imported milk powder. Q: How is the consumption of dairy products organized? We have noticed that if the economic situation of people improves than they will consume more

pasteurized milk and yogurts. One driver for this relates to the infrastructure of a cold chain

developing with welfare growth. Also there is a difference in price for UHT milk, which is more expensive in small towns and rural areas compared to urban cities. In cities there is more competition among dairy products and dairy processors, so they will decrease the price of UHT milk to gain or sustain market share. Only a few dairy processors have the financial resources and power to expand their business to rural areas and small towns, because it is costly to get your products there (higher transaction costs). Rural consumers are therefore less educated in the differences between dairy

products, when they see UHT milk of Yili or Mengniu they will just buy it because there are no other options. Q: What are the relative shares of dairy consumption in China? I would guess that 80% of Chinese dairy product consumption consists of liquid milk. The other 20% is cheese, butter and milk powders. In the category liquid milk products the main category is UHT

milk with more than 50%, yogurts (±25%), fermented dairy products (±20%) and pasteurized milk less than 5%. Pasteurized milk consumption is so low that it is not considered as separate in the statistics.

D. Challenges

Q: Do you agree with me that pasteurized milk consumption is a method to maintain a sustainable

raw milk price in china which is less related to the global milk price? Why is this not stimulated at the moment? There are several reasons for this. First of all consumer education, many Chinese consumers don’t know the difference between pasteurized milk and UHT milk. Dairy is a relative young market in China, which started only 15 years ago around the year 2000. I remember that in my home town in the north of China I saw the first yogurt products in 2004, if you recall that this is just 10 years ago then there is a long road ahead.

Secondly, the delivery system is not yet developed. The cold chain development in China is behind, which makes it difficult to transport pasteurized milk and yogurts within China from processing plants to supermarkets to consumers. At the moment these cold chains are developing and it should be more and more possible to deliver pasteurized milk to the market.

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Thirdly, Mengniu and Yili already have differentiated their UHT milk products. They are selling high

quality/luxury segment (ex. Milk Deluxe), standard segment and low level segment with different price categories. Dairy processors are having difficulties to source different quality of milk to process these into the mentioned segments. On a national level there are regulations regarding milk quality

standards (%fat, %protein and SSC) which all raw milk delivered should meet. This is also the reason that dairy processors are demanding higher standards to their suppliers in different regions. For example in Beijing the plant of Mengniu mainly produces the high quality luxury UHT milk. Maybe they have already invested a lot in the marketing for these products, so they don’t want to invest again in the promotion of pasteurized milk. Although I think that they would be pleased to sell more pasteurized milk, because consumers have to consume it within seven days, instead of leaving it on the shelf for half a year. Another interesting remark is that Chinese consumers won’t buy a product

if the shelf life is already passed halfway. Fourthly in contrary to Yili and Mengniu, Sanyuan and other local dairy processors are advertising for fresh (pasteurized) milk consumption, but this means that Yili and Mengniu will lose market share. Q: How do dairy processors differentiate the different quality of milk in their factories?

Every delivered truck is sampled by the dairy processors for raw milk quality. Afterwards the raw

milk delivery is separated in the factory based on quality values and further processed. Q: Many dairy processors are currently investing in raw milk production abroad, what is the driver for this? I think that the main driver is that the Chinese climate and the limited availability of resources are driving the Chinese Dairy processors to invest in other countries around the world. The government

is supporting this, because they don’t want to be too dependent on imports. The Chinese dairy processors are mainly investing in whey powder production plants, because this is a problem for Chinese dairy processors. The cost of whey powder is very high, since in China there is almost no cheese production (note that whey is a waste product of cheese production). Whey is used in Infant Formula and other milk powders. Q: How is the government supporting the dairy processors to invest abroad in dairy?

I have limited knowledge about this, but maybe related to international trade negotiations and agreements. Such as the 0% import tariff.

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I think it is possible; the consumption of milk is limited. Mainly liquid products, not value added products. If Chinese consumers start to consume more of these products, enhanced by economic development then this production growth is possible. I think the first challenge is to solve lactose intolerance for Chinese consumers. Add some lactose enzyme in the products. The second relates to the government, which has made for more than 10 years promotion to drink milk in the primary

school. Supply one box of milk to the students during school time. If more milk is given to primary school kids then the milk consumption and production will grow. Currently this only happens more in big cities. And the third thing is to create more market for elderly and pregnant women. The company can design different types of milk powder products for these people. More and more fragmentation drinks (probiotics), the market is will grow better and more. Also cheese will grow as well.


a. Land & Feed: -

b. Water: -

c. Labor: -

d. Financial capital: - e. Waste management: Especially in big farms. If it is a backyard farm they can treat the

manure by themselves. In the recent years some farms in Hunan are (Liu Kai) are closed of

the manure production. The citizens complained about the contamination issue, protested even. Also the media Farms were located very close to the city.

f. Productivity: -



I would build this farm in the north of China, like Heilongjiang, because I pay more attention to the milk quality. I think it was/is not a problem of controlling the safety in the china and the lack of this in the past, but it is related to the pollution of limited resources. If the land and water is polluted and limited then these will lead to poor milk quality. Especially in large scale farms you can import

concentrates, but you cannot import roughage. So if the land and water is contaminated it will be difficult to meet the safety and quality standards. In the north there are more resources and these are less polluted.


I have read some research about this, but it is difficult. Nobody can answer this question, so we should collect more data and conduct research. In Beijing it will be mainly large scale dairy farms,

because natural resources are limited which makes crop production difficult. These dairy farms invest

in management practices. It is too expensive for small farms close to cities, because land is expensive which makes it hard to be profitable. On the contrary in Heilongjiang, more natural resources are available, so family farms are able to produce crops for their cows themselves. The government is currently stimulating these family farms with subsidies, for example to buy machinery such as corn silage machinery. So I think a farm size of 20-100 cows is more suitable for farms in the North East of China.

Did you know that there is a big issue regarding land in China, because it is not privately owned. There are 20-50 year contracts and nobody knows what will happen after these contracts are finished. This results in short term views of investors and people. The focus is on production instead of sustainable production. Dairy communities are because of this reason also not preferred by the government because the property rights are difficult to manage. It is hard to define whose belongs to whom.

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19. Professor in Manure Treatment China Agricultural University

Date: 27-5-2015

Length: Unrecorded


Function: Professor in Manure Treatment

Institution: China Agricultural University

Location: Beijing

Other: Associate professor specialized in environment enhancing energy (College of Water Resources and Civil Engineering)



A. General Q: Can you tell me something about your background and your experience in dairy? I started working at CAU three years ago. In our research center we focus on energy production out

of biomass. For energy production we can use organic material, like corn stalk, agricultural waste like manure or blue alleges in lakes. We can convert this into biofuel or biogas. Before I have studied in Sweden and worked there as well as post doc and working in a factory as process controller.


C. Output

Q: What are the most feasible manure treatment solutions in China? Currently there are four models which could be implemented, based on the region or area where the

farms are located in. Also depending on the local conditions a certain technology could be implemented:

1. Centralized plant for manure treatment; this model could be implemented in a region with several small farmers. The investment for an individual farmer is too high, so within an area they could together invest in a system to collect and process the manure. A possible applied technology could be a biogas installation. (case site in Beijing)

2. Reusing manure treatment; this model is currently already implemented on big farms, such as the farms of large dairy corporates like Mengniu or Yili. In this model in the first step the

manure is separated in a solid and liquid part. The liquid part is treated with an adjustment to make it suitable for cleaning the farm. It is true that the manure could be very acid and harm the equipment, that’s why it is treated in some cases with chemicals. The solid part is fermented and afterwards used as bedding for the cows. The solid manure is self-heated during the process; no external heat will be put in the closed system. (Case site in Shaanxi, where 90% of the manure production is reused)

3. Manure disposal on land; this model could be implemented in regions where there is more

land and less people, like regions in west China. Normally in these areas there are fewer

problems with environmental pollution. The idea is to close the nutrient cycle better and combine animal husbandry with crop production. In this model there are calculations for the relation between land and manure disposal. (Case site in Ningxia province)

4. Comprehensive model; the model is suitable for big cities like Shanghai but also although to a lesser extent Beijing, where there are very strict standards regarding environmental pollution. The aim is to close the nutrient cycle and manage the nutrient waste better with

advanced technologies. (Case site: Shanghai) Note: The professor will sent me an overview of these models in pictures and description in Chinese.

These are the different models which depending on the local conditions could be implemented with different technologies. There is a difference between aerobic digestion and anaerobic digestion,

which means waste water (liquid part) treatment to remove nitrogen and biogas production

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respectively. The anaerobic digestion (biogas production) is the most common. But there is also a

biological technology where the manure is composted and used as fertilizer on the land. And the last one is physical technology where the manure is centrifuged/separated into a liquid and solid part.

Q: What is the current status of the policy regarding manure treatment? First of all, the policy regarding this topic is still developing. The national government is currently discussing the options with experts like professors and industry representatives. Depending on their feedback and the trial sites in different locations in China a final policy will be developed over time. Our university is also conducting a lot research to find suitable cases for Chinese circumstances. For example our professors are regularly invited to present their ideas on training courses for local governments and dairy processors to talk about nutrient management and waste treatment. This is

not only related to the dairy sector, but also other At the moment there is some policy regarding manure treatment, depending on the size of the farm. Large scale dairy farms are forced by the upstream company/dairy processor to implement a system of manure treatment. The dairy processors have the duty according to the government to monitor and control the quality and safety of the dairy value chain. Since the manure production is also part of the chain they force large dairy farms to treat their manure to prevent milk contamination,

drinking water contamination or pollution in feedstock. The most common manure treatment is

currently a manure separator, but biogas installations are also used. Regarding small farmers, these are facing very serious problems and many small farmers have quit their business. The first reason is the low raw milk price, but another reason is the requirements of the local government environmental departments. Some farms are located to close to citizens and causing pollution problems. The mentioned four models is developed by the national governments are currently suggested to

local governments, dairy processors and farmers to solve problems of environmental pollution. It is the job of local governments to apply these models practically to the local conditions with different technologies. Currently these are just suggestions but I think they will be official policy in a few years, enhanced with financial support in the beginning. But later I think the farmers have to make it cost efficient. Q: Why does it take long to develop this policy?

First of all it is very complicated matter and secondly it is a difficult process to develop policy around manure treatment, since many different government departments are involved. There are at least three involved, namely the department of Agriculture, department of Energy and the department of

Environment. Q: What will the manure treatment policy look like in 10 years?

I think it will be more organized and things will be sorted out. The four models which are currently just suggestions will be enforced by official legislation, but first these models have to be more developed. The government will give financial support or subsidies to manure treatment practices. Additionally, I think that recycling of nutrients in manure will help to solve the energy shortage of China. For example if you look at the shortage of fuel in the south, biofuel is a good alternative. Q: What influence will this enforcement of legislation have on the Chinese cost price of milk

production? It might have a negative influence on the cost price, although I think that over time Chinese farmers will create value out of their manure. Currently the view is only upstream to the dairy processors; since they are receive money in return for their raw milk. Once they acknowledge that downstream there is also value to create if you look at the different components that manure contains, they will invest in manure treatment technologies. Currently there is no driving factor for farmers to invest

in manure treatment, since there is no potential revenue. (Remark: maybe the government should

be the driving factor to force farmers to invest in manure treatment.)

D. Challenges -

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20. Strategy and Investment Manager in Sanyuan

Date: 28-5-2015

Length: Unrecorded


Function: Strategy and Investment Junior Manager

Institution: Sanyuan

Location: Beijing

Other: Employed in the Strategy and Investment department of

Sanyuan Food Beijing Co. Ltd.



production

A. General Q: Can you tell me a little bit about yourself and your background? I received a bachelor degree from China Agricultural University, where afterwards I received a bachelor’s degree in Agricultural Economics and a master’s degree in Food Quality Management for

Wageningen University. Since two years I work at the strategy and investment department of Sanyuan Food Co. Ltd., and before I worked for four years as a quality controller within Sanyuan. My main responsibility is research about new investments and product lines for Sanyuan factories.


C. Output

Q: What kind of products is Sanyuan producing? Sanyuan produces UHT milk, pasteurized milk, yogurts, a little bit of cheese and IFT (Infant Formula T). Of the liquid products, 80% is pasteurized milk and 20% is UHT milk. Beijing prefer mainly

pasteurized milk, but also UHT milk is consumed a lot. Pasteurized milk is perceived as fresh and nutritious by more educated people like in the first tier cities (like Beijing). For example on our pasteurized milk we advertise with a time schedule: 6.00 AM: Cow is milked, 10.00 AM: Milk is transported to factory, 11.00: Milk is tested, 12.00 AM: Milk is processed and packaged, 15.00 PM: Milk is shipped to supermarket, 18.00 PM: milk is on the shelves. This is not only a marketing tool, but it is also reality. Sanyuan is able to do this, because the farms and processing plants are all in Beijing.

Q: Do you require additional values from the farms to supply for this milk? No not really. Sanyuan is known for a high milk standard. 90% of the supplying dairy farms belong to the Sanyuan group, since we are managing these farms the raw milk has a high quality. The other 10% of raw milk are also large scale dairy farms, so their raw milk quality is high as well.

Q: How is the raw milk price determined within Sanyuan?

Compared to Mengniu or Yili we don’t have an assessment based on TMR application, using cubicles etc. All our farms are applying SOP’s, meaning that the quality is high. We don’t make a difference in raw milk price for our farmers. The standard raw milk price of Sanyuan is higher compared to other dairy processors. Dairy farms receive a bonus or penalty based on %fat, % protein and antibiotics. The government has set minimal standards, but our company has higher internal standards regarding milk quality and safety.

Q: Why do you think that the high internal standards have developed like this over time? According to me this is not related to the final products that Sanyuan produces, for example because Sanyuan is producing a lot of pasteurized milk. Sanyuan is owned by the Beijing local government, and therefore closely governed by the government. Sanyuan is also financially supported by the Beijing government, resulting in high quality milk for a low price which is good for the consumer. Sanyuan has the brand image of safe and high quality, because our standards are very strict. But

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after the reform resulted from the 2008 scandal, nowadays all companies are safe and have high

quality standards, like Yili and Mengniu. Q: In an ideal situation where should Sanyuan invest in according to you?

Sanyuan will focus more on IFT production. We have built a factory in Hebei province, because there were old factories with old equipment located who needed to be renovated and updated. These old factories are now bought by the Hebei government, because they were located near residential areas. The original idea was to build this IFT factory on this site in Beijing, but due to too much air pollution in Beijing no new factories were allowed in the city of Beijing. The third reason relates to the support of the Hebei government (remember that farmers received a subsidy to improve their stable if they deliver the milk to Sanyuan). It doesn’t relate to the raw milk supply in Hebei, because

the milk of Beijing farmers will be used in the production process of IFT in Hebei (only 2hrs drive). Q: Wouldn’t there be a problem of milk deficit for the existing factories in Beijing? Actually the Sanyuan farms were producing too much milk about 1 year ago, many farmers had to get rid of the milk or produce milk powder. Currently the milk production and milk processing are in balance.

Q: On which final dairy products should Sanyuan focus in the upcoming years? Sanyuan will focus on Beijing market in the future, so pasteurized milk will remain important for Sanyuan. Sanyuan is also focusing on IFT production, since this is stimulated by the government. Chinese parents are mainly buying foreign IFT brands, so the Chinese government would like to develop a national IFT brand and stop the imports of IFT.

D. Challenges Q: What are the largest challenges to achieve a focus on IFT? There is a lot of competition between dairy companies to produce IFT, like Yili and Mengniu. Their development is really fast, which makes it hard for Sanyuan to compete. Secondly there are many imports from foreign companies for the same price of Chinese IFT and then Chinese consumers prefer foreign IFT. After the 2008 scandal, Chinese consumers have no confidence in local IFT and

other dairy products. It will take years and years to restore this trust. The ultimate goal is to develop a good quality new brand for IFT.

Q: What is the reason that Yili and Mengniu to invest abroad and built factories there? The high quality and safety of raw milk in these countries, because of lower transaction cost such as lower monitor and control checks during raw milk procurement. The price of raw milk is lower

abroad; in order to be competitive in China Yili and Mengniu will use the cheaper raw milk abroad to produce dairy products like UHT milk. Chinese consumers prefer imported dairy products. By investing abroad they can deliver also foreign dairy products. This will be used to advertise with to convince Chinese consumers to buy Chinese dairy products based on foreign milk. Global competition; Especially Yili has the ambition to become a global dairy processors and aims to export products not only to China but to all countries globally.

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1. What is your thought about the target of 60 million MT of raw milk production by 2020 and

what are the largest challenges to overcome? I believe this is possible, according to our data the raw milk production grows 9.3% on average per year. If we continue this trend then this is surely possible. I don’t see a lot of challenges. The consumption will grow fast, because compared to other Asian countries the average milk consumption of China is very low. Additionally other tier city citizens will get more access to dairy

products. I expect the growth in diary consumption mainly to be increase because of UHT milk, pasteurized milk and yogurts. Also IFT consumption will grow, because Chinese citizens are allowed to have a second child. Additionally because of global warming, there will be less rain in New Zealand and Australia leading to lower milk production, so less imports from those regions.


a. Land & Feed: -

b. Water: -

c. Labor: -


e. Waste management: - f. Productivity: - g. Global competition: -


I would build the farm around the big city, because the market is close. There are also better

educated people to work on the farm, and with support of universities. But I would also take the climate and the land resources into consideration, so I think within a radius of 300-400 km around a big city is the best. Then I have enough access to land and close to the market.

4. What herd size would best be used to achieve the intended growth in milk production? I don’t have the knowledge to indicate an ideal farm size.

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21 A,B,C,D. Group Interview Raw Milk Procurement in Mengniu

Date: 5-6-2015

Length: 2:10:08


Function: Senior R&D Manager; Senior Farm Assessment Manager; Raw

Milk Quality Manager; Farm Relations Manager.

Institution: Inner Mongolia Mengniu Dairy Group

Location: Hohhot, Inner Mongolia

Other: Group interview with persons responsible for raw milk

procurement, with different angles R&D, management, quality

and business.

Years of experience: All 5 years


A. General

Q: Can you give a short introduction of Mengniu? Mengniu started as a derivative from Yili dairy group. One man started Mengniu and made it a success in approximately 20 years. The headquarters are located in Hohhot, together with 6 processing plants.

B. Input & Process

-

C. Output

Q: How is the raw milk collection process of Mengniu organized? All the farms of Mengniu are located within a radius of 200 km around the plants. This is an official

requirement otherwise Mengniu will not accept the raw milk. The smallest suppliers of Mengniu are small farmers with a few cows to the largest with 10,000 cows. The raw milk is collected within 20 hours after milking. Generally the milk is collected by a third party on the farm, but some large farmers can bring the milk themselves to the processing plant. The collection truck requires a certification from Mengniu and the government before it may operate, additionally it needs to have different compartments to separate the milk from every individual farmer. When the milk is received

in the plant it will be collected in a dispatch center, where a sample is taken from all individual farmers. This sample tests the quality and safety of the milk and it also serves as the basis for the payout to the farmer. Q: What are the minimum requirements for Mengniu to accept the milk from the farm? There is no minimum daily delivery quantity per individual farm. Before it used to be 1,000 kg/farm, but nowadays we focus more on quality. The minimum requirements are equal to the minimums set

by the national government, which is %fat (3.1%), %protein (2.8%) and TBC/micro-organisms (<

200.000). Q: Which categories in raw milk supplier are installed in Mengniu? All our raw milk suppliers are classified in four different categories. The classification happens based on organizational structure/ownership of the farm.

Type Description Additional Payment

Distribution (2015)

Distribution (2010)

Distribution (2020- expected)

A Scale farms with additional

certification (organic or Global

+1.00 RMB 5% 1% 20%

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Agricultural

Practices (GAP))

B Private owned farm

+0.60 RMB (TMR: +0,80 RMB)

45% 19% 60%

C Dairy Community

+0.20 RMB (TMR +0.40

RMB)

45% 40% 20%

D Small Scale farmer / Milk collection center

+0.00 RMB 5% 40% 0%

Additionally when I (senior farm assessment manager) graduated from university approximately 15

years ago, almost all farms belonged to the D category. Those farms were very small and unprofessional. The cows were milked by hand without any machine. Q: Some farmers told me that they also get a higher raw milk price if they install TMR ration, cubicles, or other management practices. Why is the implemented and what is the reason?

Mengniu, like other dairy processors, has developed guidance for dairy farming. In this guidance we

advise farmers what kind of management practices to install and we transfer the knowledge about the advantages of these practices. The mentioned all belong to this guidance. The farmers will not get a bonus if they implement a suggested practice, except for TMR ration. Farmers will receive a bonus if they apply TMR ration in their farm. We installed this bonus in the beginning of last year with the aim to improve the feeding level for dairy cattle. Within Mengniu we look at many things to define if a farm applies TMR, but the two key things are:

1. TMR machine available; equipment to stir the different components of a TMR ration;

2. Usage of corn silage; if the farm has sufficient corn silage stock and uses it. The bonus system is very effective, since almost all farmers now use TMR. So we are currently investigating additional TMR requirements to further improve the feeding level, for example with:

1. Ration formulation guidelines 2. Quality standards for corn silage

In the future we might also install other bonuses in our raw milk price determination to stimulate other farm management practices to improve the dairy farming. As an example we could use the

installation of cubicles, applications that are currently part of the guidelines.

Q: What is the role of raw milk quality in the determination of raw milk quality? We are using a table to determine the bonus that a farmer receives based on the quality of the farmer. Since protein is more valuable than fat to Mengniu we apply the ration fat: protein 1:1.8. So for example for every 0.1% additional of fat in raw milk, the farmer receives 0.05 RMB/kg extra.

While for every additional 0.1% protein, the farmer receives 0.09 RMB/kg extra. We think that currently the base raw milk price is 3.0 RMB/kg, but we are not sure. Q: In general, how is the raw milk price determined by Mengniu? There are four components of the raw milk price determination.

1. Base price; this base price is adjusted to the market circumstances. We look at the raw milk

price of other dairy processors, the global price dairy prices, demand for dairy products and our upcoming supply. According to Mengniu’s regulations we have to adjust the base price at least every three months. In practice we adjust the base price more often, depending on the circumstances.

2. Organizational structure of the farm; based on the mentioned categories the farm/supplier

is classified and receives an additional payment. 3. Quality bonus; based on the fat content and protein content the farm receives a bonus. The

bonus is adjusted to every single daily delivery of milk, based on the result of the taken sample.

4. Safety penalty; the sample taken will provide also information about the ice point (SNAP), which indicates the presence of antibiotics. The farmer will receive a penalty if this is below standard. If it is below the minimum requirement the raw milk will be rejected.

Q: What is the role of the government in the determination of the raw milk price? In some interviews people told me that there is reference price guidance? Indeed, almost all local governments install a reference price, but we are not obliged to meet this price. In Guangdong, a province close to Fujian, there is a minimum price. Mengniu is not allowed to offer a price below the minimum.

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D. Challenges Q: About the dairy community category, some interviewees told me that this is a transitional form

between backyard farmers and scale farms and thus will disappear. What is your thought about this? Dairy communities will not disappear, because it will take a large investment to turn these communities into a scale farm. There must be someone who is willing to invest in these farms and buy the cows of the individual farmers. Therefore it will take a long time before the communities will disappear. Q: Suppose that I am a category B farmer, how can I get to an A category farm?

First of all Mengniu has to accept your transition from B to A, therefore Mengniu delivers assistance to pre-selected farms to get to category A. The farms are selected based on previous performance and if Mengniu believes that they have the perspective to become a supplier for a particular final dairy product type. The main requirement is to receive a certification, which allows Mengniu to process this milk into for example school milk or organic milk.

Q: Is the raw milk from different categories used for different final products?

No, all the milk from B,C,D category farms is processed the same in the factory and used for all kind of products. Only the milk from category A is used for specific final products, like organic milk or school milk. A D-farm can deliver sometimes better quality and safe milk than other categories. Q: The stimulation of government and dairy processors to upgrade the value chain to more safety and higher quality leads also to higher production costs for farms. What is your thought on this risk?

The key cost factor is not the investment in a TMR-machine, cubicles or other investments (fixed costs), but the key factor are costs for feed like forage, roughage and corn silage. With our bonuses to farmers to use TMR, they will increase the feed efficiency and reduce the feed waste. But maybe the government has ideas to decrease feed costs, we don’t know. Another factor is labor costs, also with the usage of a TMR-machine less labor is required, and meaning the labor costs on the farm will be reduced.

Q: What are your thoughts about the high imports of New Zealand milk powder? Is this fair to Chinese farms? It is a fair market. China is part of WTO, so it has to open the markets for other countries. Chinese

farmers must focus on reduce the cost and create a higher efficiency in production. But most importantly to regain the confidence of the Chinese consumer in dairy products and increase the dairy consumption. Higher and better management levels on the farm the cost will be decrease. For

example in Ningxia the production levels are similar to those in Europe with 9.000-10.000 kg per annum and the cows are fed with own grass and other local feed resources. Q: Can these local feed resources be transported to other parts of China? And do you know about potential Chinese feed resources to decrease cost? These are currently already transported to other parts, but it is very small yet. Maybe in the future this will grow. There is a grass which is growing in Gansu province, called langenchiao (wolf needle

grass), which might be suitable as roughage for dairy cows and there are tree leafs growing all over China which have a high nutritional value which might be suitable as well. But different types of breed might be required to have an efficient digestion of this feed. The Chinese government has released a policy to guide companies that would like to start growing grass and forage. A few years ago we did not realize that there is a problem with the supply of high quality forage, but now we are realizing that this is a problem. Some regions in China have a low soil quality, which makes them

unsuitable for rice or wheat production. The government gives subsidies to companies who are

investing in poor land in the north and North West of China to produce roughage, etc. Q: Mengniu invested recently in a processing plant in New Zealand, what is the reason for this? Do you think that Mengniu will invest more abroad? There is trend for Chines dairy processors to invest abroad, so Mengniu is currently producing milk powder in New Zealand, but no yogurts or UHT milk. The reason is that the milk is cheaper there,

just business. Maybe in the future Mengniu will also invest in dairy farms in New Zealand. I think that investing in a plant is step 1 and step 2 might be to build farms around the factory. CHINESE DAIRY CONSUMPTIONQ: You mentioned already that confidence in dairy products needs to be increased. But the price of consumption milk is high compared to other countries which might also avoid more dairy consumption?

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If we would decrease the consumption price of milk, then Mengniu would make less profit. Last year

the profit was only 4%, and this should not decrease further. A lower consumption milk price is a factor but the key factor is that diary doesn’t belong to a Chinese diet. Not breakfast nor lunch or dinner contains traditionally any dairy products. If a Chinese consumer buys milk, he will drink it as

a kind of snack with friends. We prefer fried fish, tofu or fried vegetables over dairy products. But here in Inner Mongolia and more in Xinjiang province the Muslim people like dairy products traditionally because it is part of the diet.

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Currently the annual raw milk production is 5000-6000 kg/cow/year. If we can increase this to 10.000 kg/cow/year then the aim of growth is possible. The total number of farms will decrease, the number of cows will remain equal and the efficiency and production of the farms will increase. The challenges to overcome are as follows: - Guidance/strategy; A guidance will help the farms to have better practices to manage the cows

and obtain a higher production. This guidance should be provided by the government or dairy

processors.

- Feed; we have to secure sufficient amount of high quality feed.

- Market; 5-10 years ago there were high profits for the farmers, because of large margins.

Nowadays it is a big challenge to be profitable with lower margins. Maybe the price of milk in

the supermarket will become more reasonable, not low, to attract more consumers.

- Environment; Waste water treatment and manure production are getting more awareness by

the Chinese government and they start to realize it is a big problem. In the future there might

be subsidies to install more and better manure treatment technologies, provided by the

government.


a. Land & Feed: -

b. Water: -

c. Labor: -

d. Financial capital: - e. Waste management: -

f. Productivity: -



Senior Farm Assessment Manager: I will build my farm in West Inner Mongolia or Ningxia.

There is a famous dry land plateau where a lot of grass is growing which is very feasible

for dairy cows. Mengniu also has plants there so that is not a problem, but mainly there is

a lot of forage available.

Raw Milk Quality Manager: I will take the following three things in consideration:

If the province has presence of factories to process my milk

If the province has a good climate for dairy cows

If the province has enough forage from the local area.

Therefore I will build my farm in Inner Mongolia, close to Hohhot thus in this area.

Farm Relations Manager: I will also choose Ningxia because of the large availability of

forage.

Senior R&D Manager: I have a different opinion, because I will look at the consumer. I

think the demand of the consumer will be more individually. Every consumer is demanding

for a customized dairy product, so I will build my farm close to the consumer in first tier

cities (CBD) to offer a large variety or products. Also in these cities there is good

infrastructure to have cheap transport to supermarkets but also to get alfalfa from the US.

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The negative point is the environment, because large cities don’t allow farms anymore

around the residential areas. 4. What herd size would best be used to achieve the intended growth in milk production?

-

183

22. Farm Manager in Private Dairy Farm

Date: 5-6-2015

Length: 0:48:23


Function: Farm Manager

Institution: Qi Zhi Dairy Farm Company

Location: Hohhot, Inner Mongolia

Other: Privately owned dairy farm close to Hohhot.



A. General

Q: Can you tell me something about your background, your experience in dairy farming and the background of the farm? The founder and owner of the farm is an old employee of Mengniu, but currently he doesn’t work there anymore. The farm is managed by me and currently we have about 40 employees. The farm

started in 2011, and we are currently expanding the farm with a new milking parlor and new stables. At the moment we have 840 cows, including 400 milking cows. When the construction works are finished, I hope to expand the herd to 700 cows. But with the low milk price it takes longer to expand the farm and the construction works are delayed as well. Q: Why did the owner decide to build the farm in this location? First of all because Mengniu and Yili are close, this makes it possible to find a market for the raw

milk produced. Secondly he is a local, meaning that he can arrange things very conveniently with local government because of the relations.

B. Input & Process

Q: How is the feeding process organized on your farm and how did this change over time? We have a TMR machine since the start of the farm. At first this was a stationary machine, but these

required 4 laborers, which is too many. Recently we purchased a mobile TMR machine, which requires only one laborer. The forage component of our ration consists of alfalfa, imported from USA, and sheep grass, coming from east Inner Mongolia province and also oat hay from Heilongjiang province. We also feed corn silage, which is grown by ourselves. We rent about 500 mu of land from local farmers, where we plant corn. The corn seeds are planted

in May and the harvest is in September, the season is very short because of the long and cold winter. There is no possibility to have two harvests, with wheat and corn. Because of the short season we have difficulties to increase the dry matter percentage of the corn silage. In the beginning of the farm we also had difficulties to process the corn plants into silage, because there was no knowledge about how to do this. We learned a lot about producing corn silage and we purchased professional machines. During the harvest season we hire extra people to assist with corn harvest and silage production.

Our used concentrates are delivered by Zheng Di company and they assist us to create an optimal

ration. Q: What average number of lactations for culled cows and what are the main reasons for culling? The average number of lactations is 2.7 at culling. The top three of reasons are:

1. Mastitis; in our farm we have many problems with mastitis and a high SSC. 2. Stomach disease

3. Fertility; it is very difficult to get the cows pregnant. Q: How is the milking process organized on the farm and did this change over time? We have installed a milking parlor of 2x12, produced by a Chinese brand. In the beginning we milked our cows 2 times a day, but later we decided to milk three times a day in order to increase the milk production. There are eight people responsible for the milking process, but this is also too many,

184

because of high labor costs. Together with the expansion of our stables, we are building a new

milking parlor. Q: How is the manure treatment organized on the farm and did this change over time?

Since we are rented about 500 mu for corn production, we are distributing the manure on these fields.

C. Output Q: What is the current raw milk production on the farm? On a daily basis we produce about 10,000 to 11,000 kg of raw milk, with a fat content of 6.67 and

a protein content of 3.09. The sematic cell count is 140,000 and the TBC (microorganisms) is 61,000. Q: What is the current marketing of your raw milk and how did this change over time? Our current raw milk price is 3.9 RMB/kg. We belong to the B category of Mengniu, which means that we receive a bit more than a nearby community farm. We have been delivering the milk to Mengniu since the start of the farm and I think we will not change to another processor.

Q: How did you source the cows at the start of the farm? All the cows are from this area around Hohhot, so no imports from New Zealand or Australia. Some of the cows are bought from backyard farmers, and some of these backyard farmers are now also working in the farm.

D. Challenges

Q: What are the largest challenges currently on your farm?

1. Labor cost; we have too many laborers on our farm. The owner of the farm wants to replace labor by technology, for example the new TMR machine and the construction of a new modern milking parlor. With the stationary TMR machine we needed 3-4 people for feeding, we have managed to decrease employees needed for feeding to 1. The salaries for wages have increased a lot and also we needed more labor over time. In 2011, the monthly salary

in this area was about 2000 RMB and the laborers would work every day. Currently we will pay the laborers 3000 RMB/month and the laborers will work one day and then one day off. The work is hard and heavy, for example in milking we started to milk 3 times/day which

requires more from the employees. 2. Raw milk rejection; Our milk gets sometimes rejected because of a too high sematic cell

count. We have to find ways to decrease the mastitis and cell count with our cows.

3. Increasing costs; There is a trend that input costs are rising and I think that this will continue. Hopefully the raw milk price that we receive from Mengniu will follow, but at the moment this is not happening. For example when we started this farm, we thought it was easy to feed the cows, because we had alfalfa and a lot of corn silage. Over the years we learned a lot about how to feed the cows, but this resulted in additional costs such as better machinery for corn silage production and use chemicals to help the fermentation process of the corn silage.

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Yes it is possible, because of a growth in yield per cow and expansion of farms. For example our farm is currently delivering 10.000 kg per day, but in two years I expect to grow to 15.000 kg a day. There are some preconditions to achieve a growth in milk production, like equipment and cows and good management. We are currently expanding our farm, with more equipment and cows. Although you can easily buy them, it is very expensive. At the moment with a low raw milk price,

this is a problem. When the raw milk price is high, then nothing is a problem. Also the consumer needs to drink more milk, because why would you produce more milk if there is no market for this.


a. Land & Feed: -

b. Water: -

c. Labor: -

d. Financial capital: Many investment projects have a time span of five years, but in dairy this

is difficult to earn money in five years. Investors cannot get the money back easily, which makes it a challenge.


f. Productivity: The productivity on our farm has improved a lot, for example our feed efficiency. I don’t expect this to be a problem for future dairy development.




The key factor is how to bring milk to processor. The farm should be located close to a dairy processor. I think Inner Mongolia is the best, because Yili and Mengniu are here. Also the local

government is supporting dairy a lot here, which helps to build the farm.

4. What herd size would best be used to achieve the intended growth in milk production? The ideal farm size is 1500 to 2000 cows, because if the farm is too small then it is difficult to manage cost. If it gets bigger than 2000 cows, then the herd management is a real problem.

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23. Dairy Specialist at Rabobank FAR

Date: 8-6-2015

Length: Unrecorded


Function: Dairy Specialist

Institution: Rabobank, Food & Agri Research and Advisory

Location: Shanghai, China

Other: Dairy Specialist, Rabobank FAR



A.General

Q: Can you introduce yourself and your role within your company? I started working in banking in the early 2000’s as analyst in the petrochemical sector and infrastructure. My first time at Rabobank was in 2002, where I worked in dairy and beverages sector.

Rabobank wanted to expand its Food&Agri Research department in China and they asked me for this position, because of my bilingual skills. After a few years I quit at Rabobank and continued working as an analyst, but this time in consumer sector. At that time many consumer companies, like retailers made their IPO on the Hong Kong stock exchange, where in the early 2000 many of these companies were local and small. In 2010 I rejoined Rabobank again as FAR analyst in Dairy and Beverages. The Chinese dairy sector has been very interesting and dynamic since 2010, with strong investments in the entire chain but especially the primary dairy farming sector.

187


development 1. What is your thought about the target of 60 million MT of raw milk production by 2020 and what are the largest challenges to overcome? This growth target is possible, but still difficult to accomplish. The previous goal for the Chinese government was 45 million tons of production by 2015, but the production will approximately reach 38-39 million tons by the end of the year. This means that in 2015, we are more than 10% behind on target. Recently a new ‘agricultural outlook’ has been presented by the Ministry of Agriculture (MOA) including predictions until 2025. The largest challenges to achieve this level of production are

land competition, water scarcity and manure production, but also farm management skills are important. 2. According to my desk research, I have identified the following constraints. What are your is your opinion about the constraining effect of these factors on Chinese dairy development?

a. Land & Feed: As you probably know China has limited land resources compared to its population.

Food grains, like rice, wheat and corn, have priority over animal husbandry by the Chinese government, because of the self-sufficiency goal of China. Competition for land in China is therefore negatively for animal husbandry and thus dairy farming. Dairy farming requires a lot of land, not only to build the farm on but also for feed and manure. This means that it is not solely about the size of the land, but also if the land is suitable for dairy production. Not all regions in China are suitable for dairy production because of climate. China is a large country

with different climate zones, and not all of them are suitable for dairy farming. Mainly China’s Northern provinces have the natural climate to have dairy farming activities. Secondly suitable land for dairy production should be located of reasonable distance to ports for feed import and thirdly it should be of a safe distance from residential areas and preferably further away from other animal husbandry like pig farming, because of the spread of FMD disease. Last year Sheng Mu hi-tech, a dairy farming group who did an IPO on Hong Kong stock exchange last year, I visited their farm in a desert area in Inner Mongolia. They were located far from residential areas

and pig farming and the underground water was not too hard to dig up because apparently the yellow river used to be there in the old days. They started collaborate with alfalfa producers in the region since the fertility of the soil was quite high, meaning that the location far from ports

was less a problem. b. Water: Irrigation of land is a problem in China. In the Northern provinces there is little rain

during summer, which is the main growing season. While in the south there is enough quantity, but the quality is often a problem. Many dairy farms across china depend on underground water, where they require a permit for from the local government. The dairy farms have to pay a fee per used quantity of water, although this fee is low. Dairy farms and other water users do not understand the true value of water, because they are not paying very high costs.

c. Labor: In my opinion farm management is essential for the upcoming years of Chinese dairy

farming. The low quality and poor safety in the dairy industry was the driver to transform Dairy farming in China, so dairy processors realized that they had to invest in upstream dairy activities in order to guarantee the safety and quality in the chain. Because of this transformation there are two farm management systems, namely the low input-low output model used by small farmers and high input-high output driven by large investments on large farms.


e. Waste management: I believe that especially the liquid part of manure is a problem, because

the solid part is often reused in the bedding of farms. The environmental ministry is developing policy for environmental protection which has come into practice a few months ago. The local governments are responsible for enforcing these policies; it is questionable if they will implement strict rules on dairy farms. Local governments have also the responsibility to stimulate

investments and employment in the area, which is a kind of KPI where local governments are evaluated on. Combined with the policy of tax exemptions for primary agricultural activities, like income tax, this makes corporate dairy farm investments in often remote rural areas encouraged by local governments, without taking into account environmental issues. The result is that the raw milk is sold outside of the region, without development of upstream or downstream supply chain activities and leaving the manure inside the region without feasible manure treatment. In

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some cases the local citizens are protesting against corporate farms because of pollution and

sometimes these farms have to relocate. There is case where the government stimulated the investment in a corporate dairy farm with preferential policy, namely provide land at low rental fee. The government promised to relocate the nearby villagers out of the buffer zone between

the farm and the residential area, but the government did not live up to the promise. After a while the local citizens started to protest against the corporate dairy farm, and the government forced the farm to relocate. This is a significant problem in China because land is owned by the farmer, but by the government. It is a risk if the land lease will hold for the entire tenure length and the government will not terminate the rental contract earlier.

f. Productivity: Foot-and-Mouth disease is a problem in China; therefore I would suggest having

dairy farming on a safe distance from pig farming. Additionally many large scale farms vaccinate their cattle for FMD, but this is occurring to a lesser extent in smaller farms, probably due to high costs.

g. Global competition: If you look at production cost, the corn prices are increasing CAGR with 4-

5%. The corn prices are protected in China because the government wants to achieve a certain

level of self-sufficiency and is therefore stimulating corn production. In 2008 the corn prices in

the US and China were similar around 1600 RMB, while now the US farmers pay 1000 RMB and Chinese pay 2200 RMB. The difference in costs per ton for alfalfa is about 100-150 US$, because of freight cost and trade. Chinese dairy farmers are trying to grow own alfalfa, but again the suitability of the land is an issue. Additionally the harvest and processing of alfalfa is difficult because of the lack in cutting technology. For example the alfalfa should not be too dry, because then leafs will lose their protein content. In the current down market, the alfalfa production

process is slowing down the expansion and development of this trend. I think there is a justification to maintain a higher cost of production in China, because of food safety reasons. Food safety remains an growing issue in China demanded by Chinese consumers. I think that a growth in pasteurized milk consumption is a solution to maintain a higher internal raw milk price to compensate for a higher cost of production. Although the government has developed a production standard for final dairy products, which states that producers have to use raw milk as input in yogurt for example, otherwise it has to be labeled as recombined product. The

government motivates this policy for two reasons, at first they want to gain confidence of the consumers and secondly it protects the domestic raw milk suppliers from volatile and lower global dairy prices. The subsidies a dairy farm receives are little, but there are other types of

support. Especially discounts on land rent or infrastructure development are often used by local governments to attract dairy farming investments by corporate farms in a region. Pasteurized milk consumption is a solution for Chinese dairy farmers to become less dependent on global

market prices, but there are two major challenges. Where the first one is the development of cold chains and the second one relates to the undeveloped taste for dairy products by Chinese consumers. Personally, I grew up in Shanghai with pasteurized milk from Bright dairy, but I cannot taste the difference between cold UHT milk and cold pasteurized milk. Additionally many Chinese consumers don’t know the difference between the milk products. Mengniu and Yili started their business rural based and based on resources with low cost production motives. When Yili and Mengniu entered the Shanghai dairy market, they offered lower prices and

obtained market shares. UHT milk is not always lower priced than pasteurized milk. If you compare premium UHT milk (like Milk Deluxe of Mengniu) with normal pasteurized milk than the prices are respectively 22 RMB/liter and 12 RMB/liter. But compared to premium pasteurized milk the price is lower, because this is priced at 25 RMB/liter. In conclusion it is difficult to compare different dairy products, because of the market segmentation like premium or low-cost and all in between. The difference in pricing is a combination of marketing efforts and actual

difference in raw milk procurement for different final products. For example 70% of Milk Deluxe

product of Mengniu is delivered by Modern dairy, which is a high raw milk quality supplier. The prices of consumption milk in supermarkets are high, because of a quick process of premiumization. As a result the product mix of dairy processors moved up leading to higher average prices for liquid milk, especially UHT milk. In the summer of 2013, there was a shortage of raw milk, because of a fall in production of 6%, due to diseases (FMD) and a hot summer. Standard liquid milk products were out of stock in supermarkets, but higher quality premium

products were available. In short, the increase in price since 2013 was caused by higher raw milk input costs as result of the shortage and enforced by the focus of dairy processors on premium end products. The average price of milk is comparably high and is leading to a slow destruction of the market. Therefore I expect that the process of premiumization will not continue because it is ahead of itself now. For the upcoming years I think it will be more aligned with the general economic circumstances. Moreover I expect a spillover effect because of the

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anti-corruption campaign of President Ping. Premium liquid milk is considered as a luxury product

and is occasionally used as a present for relatives or potentially used as a gift to maintain relationships with government or semi-government institutions. There has been already a significant fall in sales of luxury products, like designer bags, but it might also effect the liquid

milk gift boxes. Dairy is indeed not a stable food for Chinese, but it is becoming more and more. Although I expect the growth in dairy consumption to happen in yogurt, ice cream and food service, where dairy is used as an ingredient for other products, rather than an increase in liquid milk consumption on a daily basis. Therefore I think that a growth in dairy consumption should be achieved by new products, because liquid milk has reached a certain level of maturity. 3. Suppose you would get 1000 cows tomorrow and money to build a farm, in which Chinese

province would you build it? What factors do you take into account? I would choose a province in the northern part of China, like Inner Mongolia. Large scale farming is relatively new in china I think it really depends on the land availability and thus opportunity for forage and silage production and manure disposal. It also depends on the population density of the area, the distance to the market and the suitability of the land. It is key for Chinese dairy farms to find a balance between these concepts. The cold chain is a problem in China, because in many

regions the cold chain is still developing which makes it costly to use the cold chain and increases

the cost for consumers in the end. For example it took Singapore 30 years to become an entire milk market on pasteurized products, while Singapore is a small country.


China is currently investigating by trial and error the ideal herd size, because large scale dairy farming is relatively new in China, it emerged the last five years. At the moment the side effects of

large scale farming are becoming visible for all parties involved. People are forced to rethink about the appropriate size of herds. Before farmers were bragging about farms with more than 10,000 cows, because this is also a measure in China more than 1,000. Nowadays people are not so proud anymore to mention herd sizes increasing 10,000 cattle. The ideal farm size is around 3000 milking cows and a total herd of 6000 cows, at least that what an expert recently told me.

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Appendix – H

This appendix presents an overview of Chinese dairy processors, which is extracted from Hu (2008), which is a master thesis titled How to Market Dairy Products in China? An explanatory study on market entry mode for a foreign dairy company to enter China’s urban dairy market. Mengniu

One of the market leader companies who have sales over all China Liquid milk: Milk(17),Functional milk(38),Flavored milk(52),High‐end milk Yogurt like: Yogurt drink, Yogurt(15) Ice cream: Ice cream(24), High‐end ice cream(4) Milk powder: Baby(24), Adults(12),Milk tea(6) Others: Cheddar cheese(3), Butter and Cream (4) http://www.mengniu.com.cn/cpzx_ytn.asp Yili

One of the market leader companies who have sales over all China Liquid milk: Milk, Added value milk(40),Flavored milk(48),High‐end milk(1) Yogurt like: Yogurt drink (12),Yogurt(12) Ice cream: Ice cream(12), High‐end ice cream(‐) Milk powder: Baby(26), Adults(13),Milk tea(2) Others: Cheddar Cheese(7), Butter and Cream (3) http://www.yili.com/products/milk/product_intro/index.html Nestlé

The only WFOE within the market leader companies in China. They have sales of dairy product over all China. Liquid milk: Milk(1),Added value milk(‐),Flavored milk(5),High‐end milk(‐) Yogurt like: Yogurt drink(‐),Yogurt(‐) Ice cream: Ice cream(16), High‐end ice cream(9) Milk powder: Baby(14), Adults(9) Others: Condense milk (1), Butter and Cream(2) http://www.nestle.com.cn/Document.aspx?ChannelId=284&SourceId=5&lang=zh‐cn

Yashili

One of the market leader companies who have focus on milk powder market only. Their sales are over China Milk powder: Baby(10), Adults(4) http://www.yashili.com/cn/product.aspx Chenguang

One of the market follower companies who have major sales over southern China Liquid milk: Milk(9),Added value milk(4),Flavored milk(15),High‐end milk(‐) Yogurt like: Yogurt drink(‐),Yogurt(4) Ice cream: Ice cream(9), High‐end ice cream(‐) Milk powder: Baby(‐), Adults(1) Others: Milk tablet(1) http://www.chenguang.com.cn/Product.asp Guangming

One of the market leader companies who have major sales over all China Liquid milk: Milk(4),Added value milk(12),Flavored milk(10),High‐end milk(1) Yogurt like: Yogurt drink(‐),Yogurt(12) Ice cream: Ice cream(‐), High‐end ice cream(‐) Milk powder: Baby(12), Adults(10) Others: Cheese(5),Butter(5) http://www.brightdairy.com/products.php Sanyuan

One of the market follower companies who have major sales focus on Beijing areas Liquid milk: Milk(5),Added value milk(‐),Flavored milk(‐),High‐end milk(1) Yogurt like: Yogurt drink(‐),Yogurt(‐) Ice cream: Ice cream(‐), High‐end ice cream(‐) Milk powder: Baby(‐), Adults(1)

http://www.mengniu.com.cn/cpzx_ytn.asp

http://www.yili.com/products/milk/product_intro/index.html

http://www.nestle.com.cn/Document.aspx?ChannelId=284&SourceId=5&lang=zh‐cn

http://www.yashili.com/cn/product.aspx

http://www.chenguang.com.cn/Product.asp

http://www.brightdairy.com/products.php

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Others: Cheese(1) http://www.sanyuan.com.cn/channel.php?id=3 Sanlu

One of the market follower companies who use to have major sales over on mid China Liquid milk: Milk(5),Added value milk, Flavored milk(6),High‐end milk(‐) Yogurt like: Yogurt drink(19),Yogurt(25) Ice cream: Ice cream(12), High‐end ice cream(‐) Milk powder: Baby(30), Adults(12) http://www.sanlu.com/ProductList.aspx?cid=22&Is=0 Wandashan

One of the market follower companies who have major sales over north China Liquid milk: Milk(4),Added value milk(1),Flavored milk, High‐end milk(‐) Yogurt like: Yogurt drink, Yogurt(4) Ice cream: Ice cream(‐), High‐end ice cream(‐) Milk powder: Baby(9), Adults(14) Others: Butter(1) http://www.wondersun.com.cn/youzimingpin.asp Taizinai

One of the market leader companies who have focus on yogurt market only. Their sales are over China Yogurt like: Yogurt drink(27) http://www.taizinai.com.cn/Product.asp Weiquan

One of the market follower companies who have focus on milk powder market only. Their sales are only focus on urban areas in east coast China Milk powder: Baby(4), Adults(2) http://www.weichuan.com.cn/chanpin/index.asp Yashili

One of the market leader companies who have focus on milk powder market only. Their sales are over China Milk powder: Baby(10), Adults(4) http://www.yashili.com/cn/product.aspx

http://www.sanyuan.com.cn/channel.php?id=3

http://www.sanlu.com/ProductList.aspx?cid=22&Is=0

http://www.wondersun.com.cn/youzimingpin.asp

http://www.taizinai.com.cn/Product.asp

http://www.weichuan.com.cn/chanpin/index.asp

http://www.yashili.com/cn/product.aspx

Van de Ven, Roel Bernardus Martinus - Ghent University...

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