Chinese dairy Mengniu to phase out small suppliers

BEIJING, June 14 Thu Jun 14, 2012 12:28am EDT

BEIJING, June 14 (Reuters) - Leading Chinese dairy firm Mengniu plans to spend up to 3.5 billion yuan ($550 million) by 2015 to source all its fresh milk from large-scale farms, phasing out the small farmers who currently provide about one-fifth of its milk, the company said on Thursday.

The Chinese government ruled in 2009 that dairy processors must control at least 70 percent of the raw milk they use, in an attempt to address widespread problems of contamination and poor quality in the industry, after at least six babies died of kidney failure after drinking formula made from milk adulterated with the chemical compound melamine in 2008.

Mengniu currently buys about 82 percent of the milk it processes from large-scale farms, according to the company's announcement on its Twitter-like Weibo feed.

"We are trying to eliminate small farmers to shift to scale farms," a Mengniu public relations official, Chris Kwok, told Reuters.

"Scale farms have advantages. Quality of cattle, control and feeding will all be enhanced. Scale means more modern methods."

China's food industry suffers from "non-standard management" and hidden safety risks, the State Council or cabinet said on Wednesday. It pledged more government supervision along the supply chain, streamlined testing standards, stricter punishments, and prizes for food safety warnings from the general public.

Some of the larger industrial farms supplying Mengniu are at least partly owned by the firm while others have exclusive supply contracts, Kwok said.

Mengniu said it would spend 30 million yuan this year to improve controls over the purchasing and producing of its milk.

It plans to start building between eight and 12 farms containing up to 10,000 cows each this year.

Mengniu supplier Modern Dairy said late last year that it would add four farms by June of this year, increasing the number of cows at the 20 farms under its control to 150,000 cows. KKR & Co holds a 24-percent stake in Modern Dairy.

Dairy farms with more than 1,000 cows receive 1.5 million yuan in central and local government subsidies, the China Daily said on Thursday. ($1 = 6.3691 Chinese yuan) (Reporting By Lucy Hornby; Editing by Chris Gallagher)

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