Features

Oh dairy me, what can the matter be? The dairy industry in China is in a state of disarray. At the same time, the world’s fastest growing nation not only wants their milk, but they would like the kiwi liquid gold from the land of milk and honey, without the pipeline botch ups, if you please. That pure-white goodness from the bottom of the world, a substance which New Zealand seems to be quite skilled at pumping out in excessive volumes.

This is the commodity of kings. The new oil. Or, as we say in China, 牛奶 (Niú nāi). With nutrition ratings soaring, and calcium aficionados nudging Asian consumers into milk-driven mania, there is little doubt that this is a product that is here to stay. Yet a host of scandals now plague the industry, including the current botulism dilemma, which handed Fonterra some serious reputational hits, whilst pushing their profits down 53 per cent when compared to the same period the year before. In light of the hygiene scares, which spurred Chinese importers into a foreign milk-induced frenzy, they now realise how much they too want to play the dairy game, and on their own terms. How New Zealand responds to this demand is critical and has obvious repercussions for the nation’s balance sheet, as well as our sustainability story. Thus there is little doubt that there is more at stake in the agribusiness game than mere calcium.

The drivers of this industry indicate that there are deeper issues at hand, and the impact of rising costs of production are endangering any attempt at sustainable dairy development. The triggers of this concerning trend, namely higher feed costs, higher energy and increasing competition on the global land market, are contributing to a milk shortage that is casting a long shadow. As well there are a growing number of industry exits due to low gains and high operational costs. However demand is still skyrocketing and the estimated nine-million-ton supply shortage of raw milk is naturally raising alarm bells. Moreover consumption is expected to increase another 50 per cent by 2015. Which means more than a lot of weird, wild and wonderful new dairy products to grace the shelves of Chinese supermarkets (which, after having lived in the buzzing metropolis of Shanghai, by the way, delivers a constant stream of consumer surprises every time you decide to peruse the dairy food aisles of your nearest mother of a Chinese supermarket). Whilst some of the demand can be met by imports, the majority must come from China. Indeed, the prevailing procurement model that has primed China for reliance on American alfalfa feed is well overdue for a rethink. China is ready for a solution.

Fortunately, there appears to be a prospective pundit in the race to achieve the dairy dream; a beacon of hope hailing from the cleaner pastures of New Zealand. Who are they? Progressive companies like New Zealand biotechnology company, Taranaki Dairy Technologies, which is now in its fourth year of carving a niche for itself in the China dairy sphere, and is treading an impressive path towards agricultural sustainability. TDT is currently testing the feasibility of a dairying model that replenishes the land by drawing upon the fundamentals of the classic kiwi dairy framework.

The sustainable path TDT is treading not only produces positive long-term environmental outcomes, but is geared towards greater financial benefit for the farmers. Its hallmarks are astonishingly attractive: low cost and high profit. What farmer wouldn’t be drawn to that kind of forecast?

The ability to achieve higher profit margins is due to the diminished use of inputs, which relies on the use of grass-based pasture. Furthermore, TDT’s refined manure management methodologies contribute to the closed system theory being so ecologically sound. Irrigating the natural way with less energy-intensive resources offers farmers the opportunity to improve soil quality whilst benefitting from enhanced profit margins. This farming style harks back to the New Zealand pastoral concept of each farm producing the feed required for the herd using primarily grass-based perennial pasture, and dealing with the effluent in the most efficient way possible. For the China context, the beauty of the feeding method lies in the balance of perennial grass and alfalfa with locally grown maize silage, topped off with a small amount of grain and additional protein. The grass or alfalfa grown by the farmer will either be used as fresh cut or made into silage, which preserves the nutrient qualities. In addition to this soil nourishment is the tried and true spray irrigation technique, which draws upon the liquid fraction of the effluent, which crucially reduces fertiliser costs.

Transposing this technique to TDT’s imminent Tangyuan project presents exciting possibilities, especially considering the financial prospects. The fiscal incentives speak for themselves. Milk production via the TDT technique costs the farmer one RMB less per kilogram of milk. Scaled up, these savings could seriously impact on the profitability of domestic farms and the future viability of their dairy industry in China. With the ability to enlarge the Tangyuan farm model to 5,000 milking cows at full capacity, the forecasts predict future profits in excess of 400 million RMB per year, and an IPO in five years time, which is no mean feat. Basically, this flagship farm will demonstrate just how effective more sustainable models can be in the context of China’s dairy industry.

The opportunity for China to learn from New Zealand’s know-how in the dairy domain has become increasingly evident. The agreement last year marking a “new stage” of development for China and New Zealand’s agricultural co-operation is testimony to such strategic dialogue. The plan, signed by Minister for Primary Industries Nathan Guy and his Chinese counterpart, Han Changfu, sets the stage for various co-learning and information-sharing opportunities. From animal science research, farm management practises to productivity enhancement; mutual awareness of the importance of agriculture is at the core of the countries’ bilateral relationship. The obvious contrasts in farming practise and deep cultural understanding pose obvious challenges to the efficacy of these arrangements. However there is no doubt such cooperation will prove to be fruitful given the respect for New Zealand’s environmental protection, development of modern agriculture and our consciousness of striking a balance between urban and rural land.

Indeed our national dairy superhero, the Fonterrameister, is doing everything it can to cast its long shadow over our Chinese trading partner. The company’s recent announcement of a cool $300-million-deal with a US-based pharmaceutical and healthcare goliath, Abbott, marks the dairy giant’s second foreign joint venture. This follows Fonterra’s other major coup early in July, where they hooked themselves up with UK dairy company Crest to successfully market those magical infant formula ingredients, galacto-oligosaccharide and demineralised whey. The “farm hub,” which aims to produce “high quality dairy,” is expected to start production in 2017 assuming it wins consent from Chinese authorities. Fuelling these moves is the crazy infant formula demand spikes, thanks to the growing prosperity and greater prevalence of working mothers. Taking a partnering approach with the US is interesting, in light of their questionably unsustainable models of dairying. Although the big guns at Fonterra claim that the partnership approach will enable rapid development to hit their target of delivering one billion litres of milk in China by 2020, the underlying conditions of this merger call for closer examination.

Yet the New Zealand industry is not flawless. A few noteworthy blemishes on its dairy record are bound to arise sometime in its lifecycle, a fact which is making China all the more eager to develop its own successful industry. It is now taking what it can from those who have projected their dairying success on the world stage. Indeed the Chinese Government is giving “top priority” to funding rural environmental development, in recognition of the chronic pollution affecting the vital elements of the dairy trade: soil; water; and air. The impact of coal pollution on dairy farms, particularly in the coal-rich Shanxi region, is a cause of major concern. Pastures coated in coal-dust, and the resultant heavy metals cows are absorbing, tell a dark tale about the quality of milk that farmers are able to reap from their poor heifers.

To add salt to China’s unsustainable wound is the seemingly blind reliance on the dominant procurement farming model. The herd instinct mentality of the industry giants is fostering a growing dependence on feed grown offshore. Instead of strategic use of low cost fertile grassland, this model feeds on the hunger of the US trade imbalance, and the desire to fill those empty shipping containers on the way back to China and satisfy the American growth engine. With feed prices actually surpassing the price of milk, resulting in a milk feed price ration below one, and imported clover costing 30 per cent more than domestic products, the impact on the livelihoods of Chinese dairy farmers is a real concern. Inject into this agricultural equation a generous dose of American soft power, through the likes of the US Grain Council Initiative which is singlehandedly funding Agricultural Universities for Chinese students, and you have a recipe for a farm our dear old Uncle Sam would be proud of.

Not only is this unsustainable in terms of China’s access to manageable inputs, but the environmental costs of this process are wholly inequitable for all stakeholders. By insisting on this trading arrangement, the US is basically shipping the world’s most valuable resource from the already parched Western states to the Mainland, in order to keep pace with the burgeoning demand for “good quality pasturage”. This virtual water dilemma raises a plethora of downstream problems and is not an easy fix. Such is the desperation in some states like Southern Nevada that a three-billion-dollar pipeline to import groundwater has been proposed. This pipeline would only deliver less than half of the embedded water this district shipped to China in alfalfa bales in 2012. How a-maize-ingly inefficient! Not only does this liquid scheme seem simply ludicrous, but it emphasizes just how inequitable this resource arrangement truly is. The perversity of a situation in which American taxpayers are paying to protect the unquenchable Chinese thirst for milk, reflects the growing incoherence of American agricultural policy, and the need for China to shift gear to a more sustainable model of dairy farming.

But it gets worse. On top of the obvious carbon footprint and escalating transportation costs, the procurement model pitched to the Chinese farmers as the ultimate dairying tactic also presents high effluent disposal costs. The model being imposed on them is at odds with the New Zealand-based method of using the liquid faction of the effluent as a natural irrigator to provide rich soil nutrients. Instead, the procurement model places value on artificial efficiency over proper processing of waste. The “solution” simply involves hauling off tons of dung and overlooking the critical disposal dilemmas. This phenomenon is sparking tensions amongst rural communities, and planting the seeds for conflicts between the dairy companies and local residents. Such is the case for the local farmers in Changwang, who are now forced to cope with cattle odour, manure lagoons, and tap water that turns yellow. Nice one, Uncle Sam. Meanwhile, any hope of alleviating the disposal dilemma through methane-burning electric power stations seems to be producing little more than hot steam, as the electricity produced costs three times more than what farmers can afford from the grid. Thus manure is clearly not being used effectively and is ultimately requiring more energy to either treat, transport or discharge into the increasingly polluted waterways; outcomes which are all symptomatic of unsustainable agriculture.

It is imperative that the dairy industry exhibits greater foresight. It really ought to look beyond the cost effectiveness of the trade imbalance towards a future that does not involve exporting virtual water to China bale by bale. It must fix its gaze past the paradigm of resorting to leasing parts of the EU’s poorest regions as part of the “farmland grab” to shoring up suitable land for forage production. This phenomenon – either concerning or innovative, depending on your views of Chinese expansionism – is paving the way for Chinese companies to rent thousands of hectares of land in far-flung corners of the globe like Bulgaria’s Northwestern Severozapaden region, to produce corn, forage and sunflower. As it so happens, this part of Bulgaria in the Vidin district has about the lowest GDP per capita in the EU and is ripe for the Asian picking. Such investment is expected to be in the realm of 30 million euros in the medium run, with further multimillion dollar injections into animal breeding as the project really begins to take off.

So, it seems pretty clear that China, as is the case for New Zealand, must hone its vision towards a future that does not rely on unsustainable methods of dairy production and instead foster a greener culture of waste management. It is vital that the country seeks to restore its vast landmass through a complete circular system of utilising the natural resources readily available to farmers. Such a method ought not to be conditional on US trading arrangements, but instead conditional on a more sustainable approach to farming and ultimately a higher quality dairy product.

It is precisely these reasons why more sustainable New Zealand-inspired models need to offer viable solutions to our Asian brothers. The dragon has been unleashed in the race to the bottom of the milk bottle. That damn calcium has well and truly entrenched itself in the heart and soul of the Chinese population. But the insatiable craving for calcium needn’t be an absolute curse. China can have its milk and drink it too. It might just take a bit of kiwi ingenuity to really get the liquid flowing.