Nestle announced earlier this week that it would lead the investment in Heilongjiang province along with the government of Shuangcheng city and other investors to establish a dairy farming institute that was set to become one of China's biggest fresh milk supply operations within five years.
"By partnering between government, Nestle and local investors, who can also be farmers, we can create a platform to make a very significant investment into modernising the milk district," Heiko Schipper, Nestle's managing director for food and beverages for greater China, told Reuters.
"You create a concept of shared value where Nestle guarantees buying milk from farmers, and in such a way guarantees a cash flow," Schipper said.
"Also the government supports through subsidies and subsequently banks feel more comfortable lending to farmers," he said. "So it's a shared-value platform where each partner has a role."
Nestle's deal with the government of Shuangcheng city, a major milk-producing region just south of the provincial capital of Harbin, includes establishing a series of training farms to teach dairy farm management and technology.
A series of scandals has tainted China's rapidly growing domestic dairy industry, including the deaths of six children and nearly 300,000 made ill in 2008 from powdered milk from a number of producers which was laced with melamine to make it appear to have higher protein levels.
Also last month China Mengniu Dairy Co Ltd said it destroyed milk that had been found to be contaminated with aflatoxin, a carcinogen.
Nestle's investment "is a way that they can stress that they represent international-level standards and that they're introducing them to China," said James Roy, senior researcher with the Shanghai-based firm China Market Research.
"These safety issues are really at the forefront of Chinese consumers' minds when they're shopping, especially for food, especially for their families," Roy said.
While improving safety is not the main catalyst for Nestle's investment, quality and safety control will be strict, Schipper said.
"We've always had here in China a direct relationship with farmers," he said.
"Nestle would never buy from a middleman. We know each and every farmer individually because he delivers his milk directly to us," Schipper said. "We want to have full traceability and a direct relation with the individual farmers, because that is a key component in ensuring quality."
China is trying to nearly double annual milk production to 64 million tonnes by 2020 from 38 million tonnes currently, as part of a long-term plan by the ministry of agriculture to improve nutrition.
The latest expansion by Nestle, whose business in China is considerably smaller than that of the biggest Chinese dairies but still ranks among the six largest, could be followed by other dairy firms.
"We expect to see a trend that most operators ... invest in and operate some bigger-scale dairy farms and will invest more to secure their supply," said Jason Yuan, a Shanghai-based analyst with UOB Kay Hian Research.
Nestle "needs to source locally," Yuan said. "Due to increasing concern over quality, to own and operate their own raw milk sources is definitely a good way to ensure the products' quality."
Nestle's announcement comes three months after farmers in Shuangcheng alleged that the Swiss company was buying milk from them at below-market prices. (Reuters)
