Dairy prices rise as supply shrinks

HOHHOT - Chinese consumers can expect higher dairy prices in December because of a shrinking supply of raw milk from the country's fragmented milk farms.

Most domestic dairy companies put up prices last week, ranging from five to 20 percent. This was mainly in the low-end milk market.

Milk profits are usually thin and are sensitive to price volatility. The price of premium products and milk powders are largely unaffected as high profit margins are able to absorb rising costs.

Analysts have ruled out any price-fixing by major diary companies and instead blame an ongoing shift involving individual raw milk suppliers.

Up until now, domestic dairy companies source most of their raw milk from individual dairy farms. This exposes companies to volatility in supply markets.

The upward pressure on retail prices has not shown any signs of weakening since it begun to increase in July. Statistics from China's Ministry of Agriculture showed that the average price of raw milk has risen for 14 straight months to reach 3.96 yuan per kg in November, up 18.9 percent from the same period a year ago.

Dairy producers told Xinhua that the price of raw milk has shot up to the 4-5 yuan range.

"From a cost perspective, raw milk at 4 yuan is reasonable, but now it's up to five or even six, and that's out of control," said Yao Haitao, vice president of Inner Mongolia-based Mengniu, China's largest dairy producer.

Yu Guangjun, head of the economic institute of Inner Mongolia Academy of Social Sciences, said the recent price hike marks a hiatus from price wars in the past, when dairy producers competed for market share by cutting retail prices.

Yu said the practice hurt dairy farmers. Some sought to reduce production costs by adding additives to milk to boost protein readings.

Such practice led to the milk powder scandal in 2008, when melamine-tainted infant formula powder killed six infants and sickened thousands of others. It also brought down one of China's largest dairy companies Sanlu.

But the current price hike does not benefit milk farmers either, as a premium goes to intermediary milk farms. They source raw milk from farmers and resell it to dairy companies.

According to Yuan Yunsheng, secretary general of the Hebei Dairy Association, these intermediary farms have made a fortune.