(Yicai) July 4 -- More than 80 percent of China’s milk producers are operating at a loss as severe overcapacity has led to prices slumping below the cost of production for the first time ever. Capacity needs to be reduced further to address these difficulties, industry insiders said at a seminar yesterday.

The price of fresh milk had tumbled for 27 straight months as of May, falling below cost price for the first time and causing industry losses to expand more than 80 percent. As of mid-June the price had plunged 13.4 percent from a year earlier to CNY3.30 (USD0.45) per kilogram.

The production costs and selling prices of raw milk have inverted for the first time since records began, said Li Shengli, chief scientist at the National Dairy Industry Technology System. And this year there is an even bigger oversupply of fresh milk than last year. To stem the tumbling prices, milk production should be moderately reduced.

Dairy farmers have started to cull their herds to reduce production and cut costs. The number of dairy cows in Ningxia Hui Autonomous Region dropped 11 percent in May from the end of last year to 810,000, reducing milk production by 27 percent to 9,500 tons a day. Hebei and Shandong provinces as well as other major dairy producing areas have also slashed production.

The price of fresh milk reached CNY2.40 (USD0.33) per kilogram in June from under CNY1 per kg, after three months of capacity cuts, the National Dairy Industry and Technology System said. But output will still need to shrink by around 5 percent for supply to come back in line with demand.

Chinese dairy firms are turning excess milk into powder to ease the overcapacity. As of June, leading milk producers had more than 300,000 tons of milk powder in stock, Li said.

China should store excess milk powder when the industry is faced with cyclical difficulties, said Wei Lihua, chairman and president of Junlebao Dairy.

Editor: Kim Taylor