The Day the Milk Stopped Flowing

By LAN XINZHEN

The Day the Milk Stopped Flowing

By LAN XINZHEN

Government crackdowns may put the dairy industry back on the right track, but more action will be necessary to ensure dairy safety

DAIRY TYCOON: A worker inspects products at Inner Mongolia Yili Industrial Group Co. Ltd., one of China’s top dairy producers. Recent supervision will help eliminate small unqualified dairy producers and help stronger ones take up larger shares of the market

Food Safety 2011

China rolled out its annual working plan to beef up food safety in 2011 on March 25. It will specifically target dairy products, edible oils, meat, food additives and alcohol in its food safety campaign this year. The plan stressed ensuring food safety in those key categories by raising the benchmark for market entry, gradually phasing out unqualified producers and introducing an informationbased tracking mechanism and credit system in those industries.

Nearly half of China’s dairy enterprises will be forced to suspend operations or close their facilities following a watchdog inspection that found many dairy producers have been operating below quality safety standards.

Only 643 dairy producers, 55 percent of China’s 1,176 nationally registered dairy companies, passed a recent inspection of the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) and the State Administration of Industry and Commerce (SAIC), said Li Yuanping, spokesman for AQSIQ. A total of 426 dairy producers will be closed indefinitely; another 107 will be suspended until they comply with the AQSIQ’s standards.

The inspection was conducted in response to increasing concerns over dairy food scandals in recent years. The scandals have resulted in a consumer backlash, as many turn away from domestic producers and seek out foreign alternative dairy brands.

Scandals

The recent wave of dairy scandals started in 2008 when adulterated milk powder produced by Hebei-based Shijiazhuang Dairy Co. killed six infants and caused more than 12,000 other infants to be hospitalized. The milk powder was tainted with melamine that caused kidney stones and other complications. Several of the company’s top managers were sentenced to hefty prison terms and the company was ultimately dissolved following the public’s outcry.

The following year, Chenyuan Dairy Co. in east China’s Zhejiang Province was closed after leather protein was found in its products. Leather milk, using leather and hair as the main source of protein, can result in heavy metal poisoning. Authorities wouldn’t comment if anyone was sickened in that case.

Distrust for mainland dairy products has caused a surge of mainlanders to flock to Hong Kong and Macao to scoop up infant formula, causing a shortage in the two special administrative regions.

Corrections

The AQSIQ issued orders in November 2010, requiring all dairy companies to reapply for production licenses by the end of last March or face penalties. To obtain the licenses the companies first had to pass the AQSIQ’s inspection parameters. The AQSIQ sent 25 teams to supervise the quality testing.

Li said quality supervision departments have already cancelled production licenses to those producers who failed the inspections. Supervision over dairy pro-ducers will be handed over to local quality supervision departments following the inspections.

LOOKING FOR SAFE MILK: A shopper chooses infant formula milk powder in Lianyungang, east China’s Jiangsu Province. Consumers are shunning domestic milk producers because of recent scandals

For local level supervisors, the AQSIQ demanded that subordinate quality supervision departments strengthen supervision over dairy makers who have passed the test to ensure they continue to follow guidelines. The quality supervision departments must also strengthen their law enforcement to crack down on unlicensed production.

Dairy producers won’t be the only companies to feel the heat of the recent crackdowns—dairy retailers will also be slapped with penalties if they fail to meet new requirements. Starting in April, dairy retailers will be required to apply for one of two licenses: one will allow them to sell dairy products that contain baby formula and the other will allow them to sell formula-free dairy products, said the SAIC.

The enterprises engaged in dairy distribution should apply for relevant food distribution licenses starting April 1 this year. The SAIC said that starting from August 1 this year, any enterprise not possessing a proper license will be banned from future distribution business with an investigation and penalties to follow.

SAIC also ordered the administrative departments for industry and commerce at all levels to enhance supervision and inspection on the dairy market. The local level departments should conduct routine inspections on dairy facilities and perfect the database for dairy producer credit information.

A quality tracking system is also in the works. By this June, the system will be up and running to verify the validity of production and distribution licenses.

Challenges

A recent Bank of China International Ltd. report said the new measures, aside from positively affecting the dairy industry, will promote the healthy and orderly development for all dairy producers by reducing the probability of future scandals. Over time, consumer confidence could be restored.

With a large number of dairy producers being shut down, cut-throat competition in the industry will be alleviated, which will help cut costs and increase capacity utilization for dairy producers, said the Bank of China report.

Concerning foreign dairy competitors, domestic milk producers may be on an even footing with foreign ones, but when it comes to high-end imported infant formula, domestic makers are far behind. Rising consumer confidence in China’s own baby milk formula will benefit middle- and low-end milk powder producers, said the report.

Chen Lianfang, a dairy analyst at Beijing Orient Agribusiness Consultants, said this will surely have an influence on the dairy industry in that some small dairy producers will be driven out of the market. Those dairy producers that will disappear from the market will leave a market share of 20 percent.

But Chen does not think the inspections alone will guarantee a safer dairy industry.

“For those 643 that have passed the inspection and obtained the new production license, it is more of an approval and appraisal of their hardware equipment than company leadership,” Chen said. “Food safety should be decided more by company leaders and the workers. Their sense of social responsibility is more important than the machinery in their production lines.”

Record Milk Powder Import

According to China Customsstatistics, in the first 11 months of 2010, the value of China’s dairy

imports reached $1.77 billion, 95.13 percent higher year on year. Imports accounted for 97.79 percent of the total foreign trade of dairy products. During this period, the country’s dairy imports hit 668,279.79 tons, increasing 24.34 percent and accounting for 95.59 percent of the total foreign trade of dairy products.