By Hao Daqin (郝大秦)
Economic Observer Online
Translated by Laura Lin
Original Article: [Chinese] 

Dairy farmers from Shuangcheng (双城市), a city in China's north eastern province of Heilongjiang, are refusing to provide milk to Nestle. They have been supplying milk for years but now some farmers would rather slaughter their cows than sell their milk. The aim is to resist the longstanding monopoly that the Swiss-based multinational has in northeastern China's largest milk producing city.

Though Nestle has said it will 'investigate' the situation, I'd argue that the conflict is a perfect example of the "making the cake bigger" and "dividing the cake more fairly" dilema that is apparent everywhere in Chinese society these days.  

In 2002, Nestle signed a contract with the municipal authority of Shuangcheng to have a monopoly over purchasing from all dairy farmers. Not only is the city prohibited from dealing with any other dairy company, its farmers are also obliged to onyl sell their milk to Nestle. The local government owns Nestle shares, and the mayor also holds an important position in the international company.

As a consequence, the city's dairy farmers have suffered from very low prices for their milk, while the local authority is busy sending public authorities and livestock department bureaucrats to catch farmers who try to sell elsewhere.

Initially, Shuangcheng's farmers benefited from the arrival of the Nestle factory, and the number of dairy farmers subsequently soared. Competition, of course, brought down prices. But the worst came with the poisonous melamine milk scandal in 2008, in which middlemen were found to have added the chemical melamine to dairy products to artificially inflate the percieved protein content. Six infants who drank contaminated formula died as a result, and a further 860 infants were hopsitalized.

Although the tainted milk came from a different company in another region, Nestle's factory in Shuangcheng also tested positive for melamine. Since then, the purchasing price offered by Nestle plummeted, and within two years cow numbers dropped from 28,000 to 21,000 and the price offered per liter of milk is between 20 and 60 percent less than what is being offered elsewhere.

The cake that Nestle brought to Twin City started out big.

The city received 60 percent of its tax revenue from Nestle in 2004. Even in 2010, the Nestle factory still contributes nearly 20 percent of the city's total fiscal revenue. The problem is that the city's revenue is more or less equivalent to the farmers' lost income from the suppressed prices. In other words, what Nestle pays in taxes is robbed directly from the local farmers' pockets.

Authorities in Shuangcheng thought they had created a cake that was big enough for everyone to share. But now the farmers feel they are suppling too many ingredients relative to the piece of the cake they get in return. They refuse to be exploited forever, no matter how big the cake is.

If the farmers are denied basic economic freedom, they will naturally choose an even more radical freedom - not to sell milk at all. And as everyone knows, you can't bake a cake without milk.

News in English via World Crunch (link)

Links and Sources
Xinhua: 世界知名企业克扣奶农之道——双城雀巢低成本奶业经营模式调查
Xinhua: Chinese milk farmers say Nestle pockets their pay