Dairy prices rise as supply shrinks

Yu Guangjun, head of the economic institute of Inner Mongolia Academy of Social Sciences, said the recent price hike marks a hiatus from price wars in the past, when dairy producers competed for market share by cutting retail prices.

Yu said the practice hurt dairy farmers. Some sought to reduce production costs by adding additives to milk to boost protein readings.

Such practice led to the milk powder scandal in 2008, when melamine-tainted infant formula powder killed six infants and sickened thousands of others. It also brought down one of China's largest dairy companies Sanlu.

But the current price hike does not benefit milk farmers either, as a premium goes to intermediary milk farms. They source raw milk from farmers and resell it to dairy companies.

According to Yuan Yunsheng, secretary general of the Hebei Dairy Association, these intermediary farms have made a fortune.

Most of the farms have signed contracts with dairy companies as their suppliers, but in the face of runaway milk prices, farms do not honor their contracts and companies also scoop supply originally designated for others.

"Forget about contracts, forget about taking what's not yours, whoever offers the highest price gets the milk," said a milk farm manager in Inner Mongolia.

In the wake of the 2008 milk scandal, authorities encouraged companies to build their own supply base to better monitor the quality of raw milk.Yet without sufficient funding and land, the country's goal to supply 70 percent of milk from farms operated by companies by the end of 2011 did not materialize. The rate is less than 40 percent.