More on Milk: Don't Forget Small-scale Farmers

China Calling Posted Friday, November 14, 2008 by Manuela Zoninsein 

Melamine has been found in nearly 10 percent of milk and yogurt samples from three of the biggest domestic dairy companies in China: Mengniu, Yili and the Bright group. These large producers have borne most of the blame in China's tainted milk scandal. Yet small-scale farmers -- whose role in the dairy industry has been relatively ignored -- are crucial if China is to avoid another such crisis, says Marc de Ruiter, founder and owner of Yellow Valley, an artisanal cheese company based in Shanxi Province.

Problems with dairy quality begin at the source, which the BBC recently pointed out. Larger farms, housing a few hundred cows, might deliver their milk directly to top producers. But small-scale farms, with "three cows, 10 cows, maybe 20 cows" formerly depended on middlemen to come around with a collection vehicle and gather local milk produce to bring to the big companies, explains de Ruiter.

This milk was in many cases diluted by farmers to increase its volume, "often up to 30 percent" said one industry expert. And it was this watery result that led producers, further along in the supply chain, to add melamine so as to artifically inflate the protein quotient and thereby raise the price paid for the milk. It's the reliance on middlemen, who push down prices in order to increase profit margins, that leads some farmers "to try to do bad things," admits de Ruiter. In Europe, he explains, it is understood that farmers deserve a fair wage. Pushing prices below sustainable levels leaves farmers "in the worst situation, because the middleman can say ‘take it or leave it.'"

Regulation is the new tune the Communist Party is singing, in the hopes of re-establishing trust both at home and abroad. A draft law currently being discussed would require authorities to immediately conduct investigations upon receiving consumer complaints. Premier Wen Jiabao wants all milk products that pass safety tests to be labeled so consumers can "be at ease." He hopes that in the new environment, fresh problems will "be even more sternly punished under the law."

The initiative would end the phenomenon of roving milk collectors: farmers will have to escort their cows to courtyards, either privately owned, governmentally-run, or operated by producers, where they'll be milked. New rulings require that all milk products be taken to testing centers to check for melamine -- a process which, for Yellow Valley cheeses costs 500 renminbi per batch, or 5-10 percent of earnings.

Larger companies are beginning to receive training on the new standards-but small farmers are still overlooked. At the moment, these communal milking centers are paying farmers handsomely to entice farmers to change their traditions and steer their cows to a central location. Still, this leaves farmers unorganized and powerless, and at the mercy of a middleman who can resume cost-cutting at any point. "It's like cutting off one's own finger," explained de Ruiter, using a Dutch expression to mean such a strategy ultimately hobbles the industry from further development.

The alternative, as suggested by Yellow Valley's founder, is something that would not be accepted in China at this time: the creation of small-scale farmers' cooperatives, which could give farmers a voice in establishing fair prices. "Not to create power for raw means," de Ruiter is quick to point out, "but to help them speak for themselves and create alternatives to the big market players." He explains that by incorporating random checks on product quality, "overseen by foreign and thereby objective investigators, no single powerful group would emerge to monopolize prices. Nor would...corruption or pay-offs be possible."

He believes such cooperatives could help "produce things better, get better products, be more efficient...and create more jobs." Farmers could modernize, as the cost of acquiring and testing out new techniques could be shared. Economies of scale mean demand could be met more easily, thereby reducing the incentive for dilution. Since small companies are often more entrepreneurial, such cooperatives can evene lead to new development and innovation. From de Ruiter's 13 years of experience working with China's food industry, he believes these organizations "would be in the interest of everybody. China needs it."

At the moment, the crisis for China's dairy producers has left a yawning gap for international brands to enter: just this week, TNS Worldpanel found that foreign milk companies did in fact experience market share gains, even in the face of price hikes averaging 26-33 percent for infant milk. And surprisingly, in smaller second- and third-tier cities, price-conscious consumers are turning to local brands that charge less and whose years of presence on market shelves (without becoming mired in scandal) have been rewarded with consumers' trust. In Taiyuan, Shanxi Province, where Yellow Valley cheeses are produced, "people are looking for smaller brands...the smaller guys, who don't have problems," observes de Ruiter.

But as TNS also discovered, in the course of interviews with over 1,600 Chinese consumers, mainlanders are confident that the larger players, like Mengniu and Yili, will recover from this incident and regain prominent market positions. Some are even more optimistic, hoping that these brands will gain international legitimacy. In late October, Premier Wen said he expects China's food exports will "meet international standards and win the trust of people around the world." But if China's new policies, initiatives and investments continue to cater only to these these corporations, weaknesses in the supply chain can still emerge. As de Ruiter warns, "if the farmers don't get any power, somehow, we will have another crisis, in another way."

Full article at http://blog.newsweek.com/blogs/chinacalling/archive/2008/11/14/small-scale-farmers-critical-to-dairy-industry-s-big-picture.aspx