China faces milk shortage

It's hard to find milk in this grocery store in northern China. And it isn't any easier to find more in the supermarkets.

"Pure milk, especially low-end milk products are in short supply about one-third less than the same period last year," Guo Hongyan, director of Guoda Supermarkets, says.

The problem lies at the dairy farms.

Keeping cattle is getting more expensive, with rising feed and maintenance costs. Some dairy farmers are slaughtering cattle. Main dairy producing areas have seen 10-20% falls in cattle numbers, according to the Chinese Academy of Agricultural Science.

"The output last year was four tonnes and a half, this year, it might only be two and a half tonnes. That’s two tonnes less," dairy farm owner Cheng Zhongjie says.

In the face of the milk squeeze, many dairy companies are raising prices of their products.

That cheers the international milk brands, as they see domestic companies losing the low-price advantage.

"International brands make up a very good supplement in Chinese market. But on the flip side, too many imported products would be a shock for domestic brands. However without such imports, domestic output is not enough to fulfil market demand," Chen Yu, researcher at Ministry of Argriculture, says.

But the question is whether the Chinese dairy industry is in a healthy condition.

Fitch Ratings says now is time for industry consolidation, as larger players could cope with the tight raw material supply and stiff competition.