Playing by new rules

The milk powder scandal, which has made thousands of children ill and panicked parents, is under investigation and will likely reshuffle China's dairy industry.

Melamine-tainted formula has killed four infants and caused urinary tract problems, including kidney stones. About 13,000 children remained hospitalized last week, with 104 in serious condition.

Premier Wen Jiabao asked for an overhaul of the domestic dairy industry at an executive meeting of the State Council on September 17. Officials at the meeting also promised to provide medical treatment for sick infants. Hospitals nationwide have set up a free screening program.

All the milk products in the market underwent tests after the tainted milk powder was reported. According to the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), 69 batches of milk products made by 22 dairy companies, including well-known brands Sanlu, Yili, Mengniu and Yashili, were found to contain melamine, a toxic industrial chemical used to make plastics and tan leather. Sanlu milk powder, which contained 2,683 milligrams of melamine per liter, ranked highest by far.

On September 19, health inspectors said they also found melamine in some liquid milk and yogurt, with Bright Dairy liquid milk containing the highest amount at 8.6 milligrams per liter. AQSIQ said no hospitalizations related to liquid milk have been reported so far.

On September 17, AQSIQ revoked the "Famous Brand" titles for the well-known milk companies, including Mengniu, Yili and Bright, and cancelled many national inspection exemptions that food producers previously enjoyed.

The scandal has brought down several high-ranking officials, including AQSIQ Director Li Changjiang, who resigned on September 22. Three officials in Shijiazhuang, capital of Hebei Province, Party Chief Wu Xianguo, Mayor Ji Chuntan and Vice Mayor Zhang Fawang, also stepped down after locally based Sanlu Group became the epicenter of the scandal.

Jumping into action

The scandal illuminated existing problems in China's dairy industry and food safety system. Milk farmers sell their product at a relatively low price to milk providers, who then sell it to milk companies at a higher price. To boost their profits, some milk providers diluted the milk with water and added melamine, which made the milk appear rich in protein in order to pass nutrition tests.

On September 15, the Ministry of Agriculture dispatched inspection teams to six major milk-producing regions: Beijing, Hebei Province, Inner Mongolia, Heilongjiang Province, Xinjiang Uygur Autonomous Region and Henan Province.

The officials planned to meet with dairy farmers, animal feed producers, operators of milk collection stations and supermarket managers and use their input to make proposals on the stable development of the domestic dairy industry.

To ensure food safety, AQSIQ will assign inspectors to each milk-producing company to monitor every step in the production process. The national watchdog group has received more than 700 commitment letters from dairy companies with no tainted milk products reported. The companies promised to create a safe and clean dairy market for Chinese consumers. Another 21 companies involved in the scandal also made commitments, pledging to compensate consumers and take responsibility for the care of those who became sick.

Apart from food safety, there is concern about milk farmers who face huge financial losses. After the scandal broke, milk companies with tainted products stopped buying from domestic milk farmers. As the epicenter of the scandal, Hebei Province has especially suffered. According to preliminary statistics, from September 14 to 16, there was 5,936 tons of raw milk wasted in Hebei Province with an average price of 3,000 yuan ($439) per ton. Except for a small amount that was sold for 200 yuan ($29) per ton, milk farmers destroyed all their supplies and some even killed their cows.

"This situation is becoming more and more serious," Minister of Agriculture Sun Zhengcai said on September 21. Sun revealed that his ministry is working with related bureaus and associations to carry out emergency measures for milk farmers suffering financial losses.

Meanwhile, local dairy associations are encouraging companies to purchase more raw milk in order to relieve farmers and protect the production capability of the dairy industry. Sun also said his ministry will soon organize an inspection team to check the safety of cow feed.

Reshuffle of the dairy industry

The milk powder scandal is undoubtedly a heavy blow to China's dairy market. According to figures from ACNielsen, in 2006 the three main dairy companies-Mengniu, Yili and Bright-shared 65.6 percent of the total market. Now, Mengniu holds about 40 percent on its own.

All the tainted milk brands have now been cleared from store shelves, but they've lost consumer confidence forever. Brands that were not involved in the scandal, such as Sanyuan of Beijing and Feihe of Heilongjiang Province, have seen an increase in both sales and consumer confidence.

On September 18, investors were selling the shares of all companies involved in the scandal, which quickly fell to the daily limit in the A-share market. Yili's share price dropped by 1.34 yuan and Bright's by 0.47 yuan on the same day.

In the immediate aftermath of the scandal, more people turned to foreign brands for their milk products. Mead Johnson, Wyeth and Abbott all declared that they would not raise their prices in September and would spare no effort to ensure adequate supply to China's market.

A representative for U.S. producer Wyeth told Xinhua News Agency on September 22 that the company's milk powder orders in China had increased more than 400 percent since the scandal broke. American brand Abbott and French brand Dumex both plan to increase their supplies in China.

Despite foreign competition, domestic milk powder is cheaper and will continue to dominate the low-end market, said dairy analyst Chen Lianfang.

"We've received many calls from distributors offering to sell our baby milk powder in the past few days and we are ready to increase output," said Ma Guowu, sales director of Beijing Sanyuan Foods Co., Ltd.

According to Ma, sales of Sanyuan's liquid milk doubled on September 17, three days after AQSIQ declared the company's products safe.

Ma echoed Chen's optimism. "We should not be too pessimistic," he told Xinhua. "China has a vast low-income population and we'll focus on meeting their demand with cheap, but quality milk powder."