Chinese can't get enough milk?
Milk was allocated in 1987 in China as an economic resource through rationing. It was meant for consumption by babies. The quota for milk was fixed at 250 gm a day. Buyers had to produce their babies’ birth certificate and a letter from their work unit for buying their entitlement of milk. Besides the quota system and difficulty in buying milk, the demand for milk remained low due to consumers’ low incomes. Almost 10% of Mr Hu Yihan’s salary, for example, was spent on his son’s milk.
The demand for milk in China went up as it became more affordable and consumers realised that it was good for their health. Parents became aware of milk’s role in making their children tall. As income of Chinese people increased, they gradually adopted a Westernised diet of which milk is a major component. Substitution of tea with milk occurred widely. Easy availability of milk through thousands of supermarkets and convenience stores made it easy to buy milk. No one had to go to milk factory any longer to collect his quota of milk. As a result of increasing income levels, changing trends and easy access to milk, individual demand increased sharply. Mr Hu Yihua’s family of three persons, for instance, started consuming 20 kg of milk every month. On the back of China’s high population, the aggregate market demand for milk also shot up. The demand curve thus shifted outwards to the right.
Supply of milk has also increased many times in China over the past two decades. China has undergone a ‘dairy revolution’ and emerged as the seventh largest producer of milk in the world. It produced 18.5 million tones of milk last year and yet the production of milk did not keep pace with demand. As per the China Association of Dairy Products Industry, the country’s annual demand for dairy products is estimated to rise to 18 Kg per person by 2015, a 38% increase over last year. As shown in diagram, while the demand and supply curves have both shifted outwards, the demand curve is expected to further shift to the right in future. If milk production does not increase to meet increasing demand of milk, there will be excess demand causing increase in price.
To increase milk supply in China, dairy farmers in Inner Mongolia have been importing cows from Australia. Major milk producers like Yili and Mengniu have increased their investments. Yili plans to invest 1.07 billion Yuan to expand their production capacity at Hohhot plant by 40% to 1.8 million tonnes. Yili is also looking to source milk supplies from Shaanxi province. China’s second largest company, Mengniu plans to invest 900 million yuan to expand its production capacity by 15% to 2.75 million tonnes by the end of this year.
While increasing supply, the milk producers have also been promoting milk to further extend the demand curve. The two major companies have been aggressively advertising the benefits of drinking milk. Mengniu drafted China’s first astronaut Yang Liwei to promote its milk through a high profile advertising campaign. As local companies control most of the raw milk supply, they
have driven out almost all foreign brands, except Nestle, from milk production by creating their own brand and their own sales channels.
As the Chinese move towards a free market economy, consumers will demand quality goods and services at competitive prices. Demand for healthy food and other items, which are suppressed through rationing, will increase. As such, the aggregate demand curve for various items will shift to the right. As the consumers become more aware of the new or western trends, they will demand better quality. Demand for ‘inferior’ good will go down. Substitution of low price items such as tea with milk or bikes with cars will occur. To meet the increasing demand, employers will recruit people with better skills to make production more efficient. Wages will go up. Capital investment will increase. Producers will also advertise more to increase demand of their goods.
China's milk scandal, 2008
China’s 2008 milk scandal brought notice to some extreme realities behind the nation’s surprising economic growth. The milk and milk products were contaminated with an industrial chemical know as melamine, which is used in fertilizers and plastics. This resulted in death of at least four babies and sickened thousands more. Melamine was used as it can be used to disguise milk that has been watered down as it is rich in nitrogen and cheap to buy. If the chemical is consumed by humans, it can cause kidney stones and other serious fatal conditions.
This raised bigger questions about industrial work ethics and Chinese business practices and how the scandal might have been suppressed by officials due to the fear of bad publicity during summer Olympics, which were hosted by China.
There were many lessons learned from such events but we must also know the reasons behind such drastic measures. As I have explained above that the milk was only available for babies and there was heavy quota on top of that. Consumption in dairy products had seen a recent growth as the income of people rose and the awareness of the benefits of milk increased. Even more for children.
As demand for diary products increased, Chinese milk producers started facing difficulties to meet up the excess demand and relied on; not so well managed small scale farmers, which had poor quality cattle and the proper standards were not met.
One Beijing-based analyst has described the situation as a "medieval farming system serving a product to a 21st century market"
In such conditions, milk suppliers were faced with a dilemma of producing more milk at lower prices and incentive to cut corners became even greater. This led to use of cheap resorts such as Melamine. Even though such actions were taken in the times of need but they resulted in a bigger impact for China. The second biggest dairy producer of China collapsed. It was found out that the high ranked officers of the company already knew about the health effects of using such products but they took no action against it.