China's dairy tide rising

AustAsia Modern Dairy Farm Company, led by Australian ex-pat Edgar Collins, has since 2008 built five dairies in Shandong Province, south-east of Bejing, that collectively house about 53,000 cows from Australia or New Zealand.

Eventually the five-farm hub will have about 60,000 cows on rotation. Meanwhile, another AustAsia dairy hub of a similar scale is being built north-east of China’s capital.

Each farm produces more than 200 tonnes of fresh milk a day, sold as a premium product into the Chinese market for a price that Mr Collins estimates as being 50-70 per cent more than farmgate prices in Australia.

When both five-farm hubs are in full production in the next few years - two dairies of the second hub are already under construction - AustAsia will be supplying China with more than 2000 tonnes of fresh milk a day.

That gives the company a commanding presence in the Chinese premium raw milk market that Australia or New Zealand, no matter how good their systems, can’t contest.

“If you want to ship fresh milk from Australia or New Zealand, it’s basically not economic,” Mr Collins told Fairfax.

“Some have been doing it in bits and pieces, but they would send to China in one year what one of our farms does in one day. If you want to build a business of scale, there’s significant advantage in producing the product where the market is.”

The Australian dairy market is fatally compromised by the supermarket duopoly, in Mr Collins’s view.

“I think it’s a relatively expensive place to produce milk, and by the time you go to the trouble of producing it and sell it in a supermarket, it’s cheaper than water. To me there’s something wrong with that.”

“Farmers are really just price-takers in a market that is oversupplied.”

Mr Collins’s dairy experience extends back to his youth at Malanda, in north Queensland, where his father ran a dairy after selling business ventures in New Guinea.

In 1992, Mr Collins entered into a joint venture with Japfa, the Singapore-based pan-Asian agribusiness company, to build a beef production enterprise in Indonesia.

By 1997, that project had spun out a small dairy, initially of about 150 cows, in East Java. The dairy venture developed into the Greenfields consumer brand, launched in 2000.

Under Greenfields, the company sells premium fresh milk and other dairy products throughout Indonesia, and exports about 40pc of its output to other markets in South East Asia.

With an unbeatable knowledge of large-scale dairying in Asia, it was a logical step for Mr Collins to lead Japfa’s push into China.

That began in 2004 with a 10,000 head dairy at Hohhot, in Inner Mongolia, about 400km west of Bejing. It was China’s first large-scale dairy.

Four years later, Japfa sold its share of the Hohhot venture to another partner and reinvested the cash and accumulated knowledge into AustAsia Modern Dairy Co.

Events determined AustAsia’s approach to the project. In September 2008, news exploded across China that baby formula had been tainted with the chemical melamine, to boost apparent protein content.

Six babies died of kidney failure, 300,000 were ill, and two people were eventually executed for their role in the scandal.

“We initially thought we’d build things out organically in China,” Mr Collins said, “but the melamine crisis really caused a shortage of milk supply in the market, and we foresaw that would be the case for at least another 3-5 years. It was there for at least five years in the end”.

“That’s when we decided to build five large-scale farms, which we completed late last year.”

In a country running scared of its own food - a second melamine-in-milk scandal erupted in 2010 - process integrity has been paramount to the AustAsia venture.

“We test everything that goes in, everything that goes out,” Mr Collins said. “Integrity is the basis of the whole business.”

Incoming feed is tested for chemical residue, strict quarantine and biosecurity protocols are maintained around the cattle, and milk output is monitored by the dairies and again by cautious customers.

Those protocols are central to AustAsia’s professional public relations program. When this reporter accompanied a group of 28 University of New England students on a visit to AustAsia’s Bianyuan Town dairy in late 2014, the students were hosted in a well-crafted interpretative centre, complete with a scale model of the facility, that overlooked the dairy parlours.

Testing protocols and milk integrity featured heavily in the introduction to the dairy, in a way they would not in Oceania.

It’s this understanding of the nuances of how to do business in Asia that is AustAsia’s real intellectual property, Mr Collins reflected.

“You can go to the US or Australia and talk to farmers and get all the knowledge you need, but I think being able to implement that in Asia and make it work is a completely different skill set.

“Over 15-18 years, our business has built that capability.”

Australian agribusiness has a tendency to regard China only as an export destination, but the AustAsia Modern Dairy experience suggests that having an investment footprint within the People’s Republic offers some considerable advantages.

“The big companies in China are very keen to move out of China and invest in the upstream part of their business, but you don’t see the Australians going to China,” Mr Collins said.

“I don’t see beef companies investing up there. They are sitting in Australia, saying we’ll send you the product, it’s good product, and you guys need to be happy with that.

“But I don’t think that’s enough if you want to do business with China in the long-term.

“If you’re a company that just sends boxed product to China, that’s quite different to being able to say; we’re in China, 20 per cent of our business is here, we’re making an effort to develop the domestic industry.”

For a nation where business culture is built around the primacy of relationships, making a statement about being in-country is more important than many would realise, Mr Collins added.

New Zealand dairy giant Fonterra has made the effort to invest in China. It has made some big mistakes, in Mr Collins’s estimation, but it has built valuable political capital.

China is not a familiar or easy environment for those used to Australian business, but the AustAsia experience shows that the rewards of engaging with it can be immense.

“To build the business we’ve built in China - for us to go through the bureacracy and bull in Australia - I think it would have taken us 10 years, and we’ve done it in China in 3-4 years,” Mr Collins said.

“You just have to invest smartly, but there are ways and means of doing that. There are a lot of companies that have invested in China and done extremely well.

“Not a lot of Australians, but other big companies.”

To build its large-scale dairy enterprise in China, AustAsia has drawn on the products and expertise of dairy industries across three countries.

Holstein heifers to start AustAsia’s milking herd were shipped live from Australia and New Zealand (plus a handful from Uruguay), but the subsequent breeding program - exclusively AI - is using semen from the United States.

Mr Collins said that’s partly to “clean up” the genetics, on the expectation that AustAsia initially bought everyone’s second-best heifers; but also because the US dairy model, with its emphasis on milk yield as the primary metric, is a good fit for AustAsia’s Chinese dairies.

AustAsia’s best Chinese farm is currently producing 39 litres per cow per day. The others are catching up fast, Mr Collins said.

Cows are managed on the 'free stall' model that has them permanently housed under open cover. Each farm milks about 5500 cows a day, on a three-shift daily rotation that leaves four hours out of 24 for cleaning up.

From a Western perspective, staffing numbers are equally as boggling. There are about 205 staff on each farm, which means that automation can be kept to a practical minimum.

“Everything in our designs is built around keeping cows happy,” Mr Collins said.

“All our milking parlours are over-specced, and that allows easy movement of cattle. We’ve put extra money into those things rather than over-complicating elsewhere. If you get a few things wrong, it can become very expensive.”

Much discussion around China emphasises scarcity, but Mr Collins said in forage supplies, at least, supply to the mega-dairies is easily sourced from surrounding farms.

Other feedstuffs like corn, dry distillers grain and oilseed meal are bought on the Chinese market, but high-quality lucerne is shipped in from the United States.

Overall, only about a third of AustAsia’s feedstuffs are imported.

Matthew Cawood visited AustAsia’s Bianyuan Town dairy as a guest of the University of New England’s 2014 Business School China tour for students.