Critical Impact of Latest Quality Issues and China Dairy Market Economic Overview : Comparative Analysis

Although general Chinese economy now is growing fast and takes leading positions in the world, its dairy industry comes across several difficulties. It sustained a number of losses after a series of well-known incidents involving food safety. It is certain that paramount mission of the current market conditions requires extensive studies of critical impact caused. The situation with different dairy products varies, and that’s why the author describes in details the milk, cheese, and yoghurt markets. Also it is compared to the markets of Western Europe, Russia, India, New Zealand, Australia, America and Canada. This work attempts to analyze contemporary market situation in a retrospective contemplation of the corresponding dynamics and course of economic and public events, including basic trends, business analytics and adjacent studies in an endeavor to discover and situate a better economic mechanism for the given field. The most considerable result is development of economic and business recommendation that are bound to improve the problematic situation.


Introduction
China currently has one of the largest economies, its sustained rapid growth drives it to the 2nd place in the world measured by major indexes such as purchasing power parity, nominal GDP and growing pace (CAGR and other relative methods) (Report, 2013).Since the very moment this country fully joined the world's open market, it started intensively develop all kinds of industries and dairy was no exception from that.Currently fluid milk production is growing in a stable manner annually by 5-7%, maintaining overall development of the industry.The nearest world trend and curve behavior is observed in corresponding data from Brazil which can be explained through the specific character of market (figure 4).It is clear that China fluid milk output keeps growing, in spite of the incidents listed above, especially in comparison to other Asian countries' dynamics.For instance, the corresponding market in Japan displays shorting output in last five years, resulting to only 20% of dairy market in China; currently it produces more fluid milk than Australia and New Zealand (9.9 and 21.4 thousand ton accordingly), but only about 30% of the US output.

Method
It is considered appropriate to measure economic efficiency of dairy industry by comparing fluid milk production per adult to number of cows measured annually.Judging from this point, China has quite high efficiency measuring on the average 4.1 tons / cow.To compare, Brazil has relatively same output amounts but it measures only 1.5 tons per cow, which means that it takes almost three times more cattle to cover the market needs, while India produces nearly 60 thousands tons of milk with the corresponding index 1.15 put into the consideration when the industry requires eight times higher cattle number (figure 5).
Figure 5. Dairy industry efficiency measured as output per cow, thousand tons Indeed, further comparison of the numbers of adult cows engaged in milk production shows the following data.There are 8.7 million head of cattle in China in 2014 while Brazilian market is served with 23.0 millions, North American (US, Canada) production is carried out by 16.6 million animals, European Union counts 23.5.There are 50 millions milk cows in India, 8.2 in Russia and 6.9 in Oceania (Australia, New Zealand).
Another index for comparing is fluid milk consumption because it shows how much of the market is covered by national producers.Fluid milk is used in many key industries of dairy such as milk powder or cheese manufacturing.Aside from that, due to large population, China has a relatively large consumption data measuring in 15.1 thousands of tons ( 2014), comparing to Brazil (12.4), Russia (10.0), Australia (2.5).But it consumes less than the US (28.9),EU (33.6) and India (57.4 thousand tons).
Almost all the cheese on the Chinese market is imported; average annual import measures at 18-20 thousands tons with annual growth of 15-20%.Most of the cheese comes from New Zealand and Australia, taking nearly 70% of China's cheese market.A certain amount of cheese has American origin; it measures at approximately 10%.Some domestic producers provide a relatively small amount of cheese to the market, shared mostly by five large corporations (Woolsey, 2010).
Yoghurt is another popular product with emerging market that gains about 15% annually.Though demand for this product was impacted by reduced customer trust since the events with dairy industry in 2009-2010, it still remains a prpmising direction; yoghurt is considered to be a healthy product among young parents and people who incline to Western diets.The most well-selling products of this kind are self-stable reconstituted yoghurts that are made of milk powder.Imported yoghurts are less popular than cheeses but this branch of market also displays stable growth rate of 1-1.5% per year.Except the common products, there are some niches on the markets explored by some local companies such as "Qinghai's Old Yoghurt" that appeals to minority culture; producer's profits tripled in 2009 after the introduction of this product in 2008, and keeps growing fast.
In figure 6 there is represented skimmed milk powder production in China in comparison to its consumption and imports.In 2010 the market demand was satisfied with local products but further on the most of the growing needs had to be fulfilled with imported products, leaving domestic production levels almost intact for last five years.Consumption growth is measured at approximately 30% annually, 20% of which are tied with imported materials and only 10% -domestic products.World market shows relatively slower consumption growth with average 10-15% per year, in some countries (US, Canada) the market was going down by 4-5% annually.
Figure 6.Skimmed milk powder production, consumption and import dynamics in China Whole milk powder production, consumption and imports dynamics is shown on figure 7.China is a major consumer and producer of this type of dairy product, relatively all the demand is fulfilled with domestic supply.However increased needs did not boost production due to limited capabilities and shortage of milk cows, therefore imported-tied demand compensation occurred.
Average consumption growth is 100 thousand tons per year, which is three times greater than entire demand for milk powder in the United States.Another major consumer of this diary product is Brazil, 500-600 thousand tons per year.Taiwan alone has a demand for 30 thousand tons yearly, it roughly equals Australian annual consumption of milk powder.However current economic conditions may not allow calling this corporation successful; its statement is negative with profits declining from 49 to -227 million yuan in three years.Operating income was negative through all the period, resulting in severe exposures.Meanwhile operational revenue kept growing with total assets number being nearly intact in the scale of events.According to the corporation management's official statements, the losses were primarily due to increased raw milk prices; this reason might follow the point that most of the products were targeting at the low-cost niche and the company had no premium-class products to offset the costs.Another reason listed in the analytics is that the company had a number of unsuccessful investments with declining revenues; the stocks value confirm this idea rather than higher milk prices that were supposed to hit all the participants of the market which as we know did not occur (figure 11).

Results
Therefore it is clear that having problem-plagued products brings moderate and severe negative impacts on all the companies working in the industry; at the same time having absolutely clear products, even those that were confirmed at a higher level does not bring warranty of high profits in a long time period.Current market situation with 4 major players leaves only 30% of the space for other companies and it is not promoting fair competition for customers' weal, it keeps opportunities to protect the large profits and keep the dairy industry within a dangerous trend.
Judging from history of enterprises and existing theories, pure economic solutions of this problem are not available.Administrative measures taken alone will not be efficient either.China needs a new economic approach in dairy security that could make it profitable to use pristine materials in spite of higher costs, and this model needs administrative methods for mediation and protection.Producers need to understand that using that sort of strategy may be expensive at the beginning but another option involves losses over 50% of market value that may be devastating, especially considering the overall trend when customers slowly incline to foreign products.
The solution may be in a system that provides better taxing options and other benefits to large companies that create smaller enterprises and target at premium products market or goods.These ventures could eventually become larger companies as it happened to Yili, or occupy a small part of the market with loyal customers.Both results are beneficial to the industry, people and corporations, considering a relatively small amount of assets required for implication of such ventures, bringing consumers back with the belief that Chinese dairy industry can eventually be stable.
Meanwhile the problem remains sharp not only in China; for instance, Michael McMenamin's 1980 book "Milking the Public: Political Scandals of the Dairy Lobby from L.B.J. to Jimmy Carter" describes a series of industry-driven questionable interests carried out through the political system.Being put into the corresponding conditions, producers and enterprises naturally incline to diverge the restrictions and standards.
On the bright side, that sort of negative experience brought the government and the public to the point where everyone needs to pay more attention to food security.This creates pressure on the corporations that need to inform people about problems in time and to recall faulty products as quickly as possible.
There is certainly the need for further research, information exchange, consolidation and collaboration between scientists, governments and civil societies to transform the current system towards decentralized agroecological structure.Probably the ultimate goal of modern civilization is not to maximize profits at any cost but to build a well-balanced world.

Table 1 .
Overall dairy market overview and its dynamics are listed in table 1. Overall China dairy market overview in 2010-2014 Average consumption value, CNY per person 198.5 277.0 347.5 466.2 574.4