Before China's dairy industry imploded in a swirl of tainted products, milk was a cash cow. Investors flocked to buy stock from leading dairies Mengniu, Yili and Bright as a way to tap into the growing purchasing power of Chinese consumers and the country's rising dairy exports, which totaled $232 million last year. In rural China, poor farmers scrimped to buy cattle to boost their incomes, becoming part of the food chain serving the Chinese middle class's new taste for milk, butter and cheese.
But as news has unfolded about how Chinese baby formula laced with the industrial chemical melamine has caused the death of four infants and sickened tens of thousands of others, milk consumption has fallen precipitously. Chinese supermarkets have cleared products from their shelves, but the crisis continues to spread beyond the country's borders. Dairy goods laced with tainted Chinese exports have been found in Taiwan, Singapore and Japan. A dozen Asian and African nations have banned Chinese dairy products. The European Union, which prohibits the import of Chinese milk, banned baby foods containing Chinese dairy products and said it will begin testing products such as toffee, chocolate and biscuits that contain 15% Chinese milk powder.
Several Chinese dairies are suspected of negligence in allowing the distribution of tainted milk products. But investigators trying to find the actual source of the contamination have targeted distributors who buy milk from farmers and sell to the big dairies. These middlemen are likely to possess the technology necessary to adulterate raw milk. Police in central Hebei province have arrested 18 suspects, including two brothers who ran a milk collection station, the state-run Xinhua News Service reported.
But one group is already being punished. More than 2 million Chinese farmers who sell to dairies and distributors are struggling to survive because the market has dried up. "We are trying to find other buyers, or sell directly to consumers, but no luck so far," says a farmer named He who owns about 1,000 cows on a Shanxi province collective farm. "I have 300-400 cows in production, and it's just not possible to store the fresh milk," he says. Over the past week, He has resorted to pouring out the surplus. Some farmers are considering slaughtering their animals to cut their mounting losses. He is trying to liquidate his herd. "We are selling them very cheap, but there haven't been any buyers," says He. "Still, anything is better than having to kill them."
Dairy products traditionally have not been an important part of the Chinese diet. But government and industry promotional efforts have boosted consumption. The average annual per capita milk consumption of Chinese has grown from just 2 kg (4.4 pounds) in 1980 to 22 kg (48.5 pounds) in 2006.
Rising demand contributed to the crisis, experts say. Melamine, which is used to make plastics and is banned from food because it causes kidney stones, was added to boost the apparent protein content of milk that was increasingly scarce and of poor quality. "Demand was outstripping supply so rapidly in the market that [producers] tried every way to increase supply," says Philippe Chan, Asia manager for Canadean, a beverage industry research firm. "That resulted in lots of raw milk not being not stringently controlled."
Although they are not currently suspected by authorities of using melamine, farmers may have played an indirect role in the crisis, says Joseph Cheng, who runs the Contemporary China Research Project at City University of Hong Kong. That's because farmers were squeezed between the rising cost of cattle feed and government-imposed caps on the price of milk. "The feed price rises, the milk price is low and they lose money," Cheng says. "What do you do? You feed the cattle with low-quality feed. Then the quality of the milk is very bad and the protein content not good enough." Somewhere along the line, melamine was added so the milk would meet the standards of the big dairies.
The Ministry of Agriculture says it intends to support the nation's threatened farmers. The government has proposed providing stipends to owners of milk cattle to prevent farmers from selling them or butchering them. But as herds disappear, it seems likely that China's $19 billion dairy industry will lose its ranking as the world's third-largest.
Mothers who fed their babies tainted formula began noticing as early as last year that their children were getting sick. Dairy giant Sanlu Group, one of the producers of melamine-laced milk powder, knew as early as June about the problem, but didn't publicly announce a recall until Sept. 11. In addition to the four deaths caused by the poison, 53,000 Chinese babies have been sickened and 12,000 have been hospitalized. Out of 109 Chinese companies whose products have been examined for contamination, 22 have turned out to be trading in melamine-tainted milk products.
with reporting by Lin Yang/Beijing