Dairy prices rise as supply shrinks

While large-scale proprietary farms are yet to become major suppliers of raw milk, domestic dairy producers are quickly losing their individual milk farmers, whose number has declined by 600,000 from 2008 to 2012 and is expected to lose another 10 to 20 percent this year.

This is largely due to a sector-wide reshuffle carried out after the scandal with an aim to weed out unqualified individual dairy farmers.

The move has created a shortfall of 4 million tonnes of raw milk supply, or half of the domestic dairy production capacity, according to Song Liang, senior analyst with the Distribution Productivity Promotion Center of China Commerce, a Beijing-based think tank.

"Individual milk farmers will continue to be a major supplier for dairy producers for a long time, so protecting their interests and giving them more incentives to encourage dairy cow rearing is the key to ease the current tight supply," said Huugjilt, secretary general of Dairy Association of Inner Mongolia.

To truly transform the country's dairy industry, companies should grant equal attention to building their own supply base as they do to production, according to Gu Jicheng, secretary general of the Dairy Association of China.