Alex Frangos/The Wall Street Journal
April 23, 2012
FEIDONG, China—In one of the largest transoceanic cattle drives in history, as many as 100,000 heifers from Uruguay, Australia and New Zealand will board multistory cattle-carrying ships this year—bound for China.
The global roundup is a key part of China’s effort to satisfy growing domestic demand for milk and remake its dairies after a deadly tainted-milk scandal in 2008 devastated production and caused distrustful consumers to turn to imported milk.
China’s dairy industry has a long way to go: Chinese cows are only half as productive as their American cousins. But just as it built up dominance in electronics, textile and toy manufacturing, the Chinese government has set its sights on becoming a dominant milk producer. It has set production goals, created tax and other financial incentives for big dairy producers and encouraged foreign investors to come in with capital and technology. And it is buying up high-producing foreign cows by the boatload.
Since 2009, China has become the world’s most important buyer of dairy cows, driving up prices for calves world-wide and putting pressure on other markets such as alfalfa and bull semen. China has imported nearly 250,000 live heifers, or cows that haven’t yet reproduced, since 2009, according to data tracker Global Trade Information Services. Last year it spent more than $250 million on 100,000 foreign heifers, about 25 ships worth.
Some farmers in countries that are exporting their prized heifers worry that in coming years China could go from customer to rival in the global milk market.
“It’s building the herds of our competitors,” says Nick Renyard, owner of a 550-head dairy in Victoria State, Australia. “It’s like selling the family silver, you can only do it once.”
The cow pipeline is expected to stay full for several more years as Chinese dairies try to meet government production targets that could eventually wean the country from imported milk.
“We have to solve our dairy problem ourselves,” says Deng Jiuqiang, the millionaire founder and chairman of China Modern Dairy, which has quickly become the country’s largest milk producer. Modeled on America’s biggest dairies, Modern Dairy has 15 industrial farms and another four under construction. The company now has 128,759 head of cattle and is importing about 22,000 more per year until it reaches its goal of 300,000, including imports and breeding, around 2015.
Modern Dairy, which benefits from government subsidies and tax incentives, received critical funding from U.S. private-equity firm KKR KKR -3.62% & Co., along with several other investors, which put $150 million into the company. KKR stationed two full-time consultants on its farms, advising on, among other things, the best mix of fodder to feed cows to maximize production.
“China has a short history of dairy. I’m confident we can be doing as well as the U.S.” Mr. Deng says.
To get to that point, China’s dairy industry will have to overcome the lingering distrust from the melamine scandal of 2008. Milk was in short supply at the time and the government, concerned with rising inflation, leaned on milk sellers to hold down prices, crimping profits.
Traders and processors watered down the milk and added toxic melamine powder to pass crude protein tests. At least six babies died, and tens of thousands suffered kidney problems.
In reaction, China quickly implemented an overhaul. Provincial governments banned backyard farms and insisted small-time operators move their animals into approved group facilities known as cow hotels that could be more easily monitored by inspectors.
To encourage growth of big farms, the government has mandated that the country’s top milk processors—those who buy from the farms and turn raw milk into boxed milk, yogurt, ice cream and cheese—purchase a substantial percentage of their milk from big farms.
Foreign companies and financiers have jumped on China’s dairy bandwagon. Hong Kong-based private-equity firm Olympus Capital and Mueller Milch, a large German dairy, have invested in Chinese dairies. New Zealand dairy cooperative Fonterra, the world’s biggest exporter of milk products, is building its third dairy farm in China stocked with Kiwi cows.
Modern Dairy, like other big Chinese dairy farms, enjoys substantial state support. The company received government subsides of $7.6 million in 2010 and 2011, most of which was earmarked to purchase cows, according to company securities filings. (It set aside $113 million from its 2010 initial public offering to purchase heifers.)
At its $100 million Feidong facility, a digital photo montage in the showroom shows Premier Wen Jiabao and Mr. Deng, Modern Dairy’s founder, touring a Modern Dairy farm.
“The local government is very supportive,” says Chief Executive Gao Lina, a former government official and Communist Party member. The government provided the land and gave 3,000 yuan ($475) per cow. As an agricultural producer, the company pays no income taxes.
Chinese on average drink about 2.5 gallons of liquid milk a year, less than a third as much as Japanese and South Koreans, and far behind the 20.8 gallons drunk in the U.S., according to the International Dairy Federation, a Brussels-based trade group. That is after a 90% increase in consumer spending in the past five years, to $32 billion, according to market researchers Euromonitor International. Euromonitor expects the milk consumption gap will narrow as more Chinese move to cities, diets change and spending on dairy grows at a similar pace in the years ahead.
Modern Dairy, which wasn’t implicated in the melamine scandals, could never meet that demand relying on the country’s existing herd.
China’s 12 million cows are generally poor producers. About 15% of the nation’s cows were lost after the melamine scandal as financially ruined farmers sold them for meat. The ones left are prone to illness and have short lives. Chinese cows, imported from Europe decades ago but never scientifically bred, produce on average four tons of milk a year, compared with nine tons for American cows.
Breeding Chinese cows with American bull semen would eventually improve the stock, but it would take decades to accomplish, according to animal husbandry experts.
“You can’t keep breeding short animals and hope to get tall animals,” says KKR’s Julian Wolhardt.
Modern Dairy and its investors figure the only way to bring Chinese cows up to speed is to replace them. Output per cow at Modern Dairy has increased from 6.1 tons per year in 2008 to 7.8 tons in 2011 thanks to the new cows and investments in American-style facilities and feeding techniques.
Mr. Deng founded China Dairy in 2004, hoping to catch the wave of rising demand. In the early part of the decade, he made his riches as an executive at Mengniu, one of China’s largest milk processors. The company struggled to get enough quality milk from China’s network of small farmers and milk collection stations. Mr. Deng set off on his own to become a producer with assurances that Mengniu would be his main customer. Today, Modern Dairy sells 98.5% of its milk to Mengniu.
Wearing a red cashmere sweater while eating a lunch of steamed buns, pickled garlic and spicy lamb salad in the farm’s executive dining room, he recalled his visits to American dairies in Texas and Ohio. He was most impressed that Americans had figured out how to densely pack cows into sheds.
“You don’t have to own lots of land, and you can be more efficient,” he said. China’s high population density limits grazing land. Grazed cows, like those in Australia and New Zealand, produce less milk than those confined to sheds, where feeding is controlled.
The result is farms like Modern Dairy’s Feidong facility, a sprawling set of buildings that from the outside looks more like an electronics factory than a farm. Cows live in football-field-size covered sheds, rarely venture outdoors and are milked three times a day on German-made, bovine merry-go-rounds, with automated pumps that measure each cow’s milk flow by the second and send that data to central computers.
Mr. Deng motions with his hands toward the sheds. “On this side we have 10,000 cows. On that side we have another 10,000 cows,” he says.
Getting the right cows has been difficult. Since an outbreak of mad-cow disease in the U.S. in 2003, China has banned live cattle imports from North America, which has the world’s most productive large herd.
Mr. Deng turned to Australia and New Zealand. And more recently, as demand outstripped supply in those countries, to Uruguay, the country farthest away from China on the globe. The three countries are currently the only ones approved by Chinese authorities.
Modern Dairy impregnates the immigrant heifers exclusively with American bull semen that arrives by air in pencil-size “doses” stored frozen in liquid nitrogen canisters.
Since 2002, China has gone from America’s 45th-largest recipient of bovine semen to the 9th-largest, accepting 366,000 doses last year, around $10 to $30 a slug. (The more expensive doses have been “sexed,” raising the likelihood for a female offspring.)
America also sends the food the cows eat because China doesn’t have the supply of high-protein alfalfa that top producing cows need. Demand from Chinese cows has helped U.S. alfalfa prices double in the past year.
China’s generous offers for heifers are helping farmers in Australia, New Zealand and Uruguay. But it is also raising concerns in some overseas farming communities.
“Its extraordinary money they are offering,” says Roma Britnell, an Australian dairy farmer who recently sold 50 calves to a Chinese buyer. She used the A$62,500 ($65,000) proceeds to pay down debt on the farm she and her husband bought in 2000.
“I would not say that it created turmoil, but almost,” says Hector Laca-Viña, a Uruguayan agronomist. China imported 15% of Uruguay’s young dairy herd last year, skimming from Uruguay’s future productivity. Farmers were well compensated, with prices hitting $1,400 a heifer, up 50% in two years.
Aboard the cattle-carrying ships bound for China, heifers and calves are penned and bed down on piles of sawdust or similar material, according to cattle shippers. Regulations require emergency provisions in case the ship gets stranded. Dehydration is a problem and ample ventilation is needed to prevent buildup of deadly gasses. Onboard veterinary staff and stockmen attend to the animals’ health. Dead animals are generally buried at sea.
Upon arrival in China, the animals spend 45 days in quarantine before traveling by truck to the farm. They are artificially inseminated to produce a calf and start their milk production.
At the Modern Dairy Feidong farm, which is modeled after U.S. farms, cows spend their lives in sheds that hold up to 3,000 head, sleeping and eating in pens lined with recycled and sterilized manure that serves as bedding. An automatic scraper slides across the concrete floor to remove fresh manure. Uniformed guards watch the perimeter outside.
New age music, including a version of “Time to Say Goodbye,” made famous by Andrea Bocelli, plays from loudspeakers while the cows are being milked. Chris Sun, KKR’s representative, says it is meant to calm the cows, though there is no scientific proof that it works.
At a similar Modern Dairy farm in Shaanxi province of central China, lives Mr. Deng’s proudest achievement. She goes by the number 08080434.
Her mother was an Australian cow imported to China. Her American father did his part via imported frozen semen. Her output in 2011 was 22 tons of milk, more than four times the national average.
Mr. Deng says the future of his business isn’t the milk, but the cows. In 2015 when Modern Dairy’s farms are fully populated, he plans to start selling the offspring to other farms.
“Our goal is to renew the biological capital,” he says. “It’s more profitable to sell the cows than the milk.”
Thanks to John M. for alerting me to this story.