The Dark Side of Taiwan's Dairy Industry

The Taiwanese dairy industry, often perceived through the lens of expensive milk, hides a concerning reality of pressure and exploitation faced by local dairy farmers within the supply chain. The circumstances are so dire that Taiwanese milk can almost be considered "blood milk," referencing the hardships endured by its producers.

The Plight of Taiwanese Dairy Farmers

When consumers purchase milk in supermarkets, they are often unaware of the struggles and sacrifices of the dairy farmers behind the product. Many businesses selling products like milk buns and ice cream are hesitant to reveal the source of their milk. The question arises: is the government truly supporting dairy farmers, or is it enabling dairy companies to exploit them?

Profit Distribution in the Dairy Supply Chain

Data from the Ministry of Agriculture reveals a stark imbalance. The production cost of raw milk is approximately NT$27 per kilogram. Farmers receive around NT$30 per kilogram. However, after processing into marketable milk, the price rises to NT$60-70 per kilogram. Finally, the retail price in supermarkets is over NT$90-100 per kilogram. These figures demonstrate that dairy farmers receive the smallest profit margin, while large corporations, with government backing, dominate the dairy market, controlling prices for both consumers and farmers.

The "Bao Yang" Relationship: Exploitative Contracts

The problem is complex with details impacting farmers in a negative way.

• Excess Milk: Historically, dairy plants would sign "price and quantity guarantee" contracts with farmers to manage milk surpluses. However, farmers are sometimes forced to dump excess milk, creating a false impression of scarcity.
• Unclear Contract Terms: Contracts should protect farmers, but, in reality, contracts are written to favor the dairy processors, allowing them to buy as much or as little milk as they want.
• Exclusivity: Farmers are typically bound to a single dairy plant. This imbalanced "bao yang" (similar to a sponsorship) relationship restricts their options. Dairy plants can support many farmers, but a farmer can only be tied to one plant.

The Contractual Trap: Production Quotas and Restrictions

Price and quantity guarantee contracts often contain hidden clauses:

• Inability to Sell Excess Milk: Farmers are forbidden from selling surplus milk to other buyers.
• Consequences for Underproduction: Farmers may be penalized if their milk production falls below the agreed-upon quantity.
• Rejection of Excess Milk: Plants only agree to buy only the agreed upon quantity, leaving the farmer with excess. If milk production exceeds the contracted amount, the dairy plant is not obligated to purchase the surplus, and the farmer is prohibited from selling it elsewhere.

Legality of Direct Raw Milk Sales

While some believe it is illegal to sell raw milk directly to consumers, the "Dairy Industry Management Regulations" prohibiting this practice were repealed in 2001. Current regulations focus on milk quality. This knowledge is often unused for fear of retribution.

The "Protection Fee" Analogy

Dairy farmers are in a difficult situation. They cannot "be protected" by different "forces" at the same time, leaving them at the mercy of the dominant players in the industry.

Domination by the "Dairy Industry Four"

The Taiwanese dairy market is highly concentrated, with a few major players dominating the industry. This near-monopoly limits farmers' options and makes them vulnerable to exploitation. Any effort to sell to other buyers is met with swift retribution.

• Restrictive Contract Clauses: Contracts contain clauses that sound good in theory (e.g., "contractual spirit," "long-term development," "milk quality") but are actually designed to prevent farmers from selling surplus milk to other buyers.
• Punitive Actions: Dairy plants actively prevent farmers from processing, selling, or providing milk to third parties, effectively cutting off alternative income streams.

Dairy plants often argue that allowing farmers to sell independently or to other companies would damage their brand or compromise their supply during peak demand. However, these arguments are often dismissed because farmers only sell excess milk after fulfilling their contractual obligations.

Dairy plants essentially operate as "obsessive and controlling partners." Farmers need to be encouraged to report unfair and potentially illegal contract restrictions.

"Raise, Nurture, Slaughter": The "Yang Tao Sha" Strategy

Dairy plants use a strategy called "yang tao sha," which translates to "raise, nurture, and slaughter," to control dairy farmers. This strategy is often used in the stock market to exploit investors.

• Encouraging Expansion: Dairy plants provide subsidies to farmers, encouraging them to increase their herd size and milk production, which seems helpful on the surface.
• Increased Dependence: By expanding their operations, farmers become more dependent on the dairy plant for income.
• Strict Regulations: Dairy processing regulations require specialized facilities, making it difficult for farmers to process their own milk.
• Financial Vulnerability: If a dairy plant stops buying milk from a large farm, the farmer faces significant financial losses due to the cost of feeding and caring for the cows, while milk cannot be stored.
• Loss of Autonomy: Farmers are essentially trapped by their dependence on the dairy plant, unable to sell excess milk to others for fear of contract termination.

The subsidy is effectively a "sugar-coated" trap. Sometimes, even the number of cows a farmer owns is determined by the dairy plant. The entire situation raises questions about whether the government protects farmers or helps dairy plants exploit them.

Unequal Contract Terms and Power Dynamics (2003 Example)

A draft raw milk purchase contract from 2003 reveals a significant power imbalance, with terms heavily favoring dairy plants and restricting farmers:

• Restrictions of milk source
• Detailed Requirements: Precise numbers for the number of milk cows, female cows, and calves must be specified.
• Prior Approval for Expansion: Farmers must obtain the dairy plant's approval to increase their herd size.
• Strict Quality Standards: Farmers must maintain high milk quality standards.
• Restrictions on Processing and Additives: Farmers are prohibited from processing their own milk or adding anything to it.
• Unfettered Access for Inspection: Dairy plants have the right to inspect farms at any time, and farmers cannot refuse or obstruct these inspections.
• Penalties for Underproduction: Farmers are penalized if their milk production falls below the contracted amount.
• Limited Obligation to Purchase Excess: Dairy plants are not obligated to purchase milk exceeding the contracted amount.

These contract terms treat dairy farmers with suspicion, while protecting dairy plants. This imbalance of power means that farmers are often afraid to sell excess milk to other buyers, fearing contract termination. They feel forced to accept subsidies and expand their herds, even if it puts them at risk. This is classic "raise, nurture, and slaughter."

Artificial Price Control Through Subsidies

The average milk price is controlled with a government subsidized pricing.

• Price Stagnation: Dairy plants often claim that their purchase prices are higher than the published prices due to subsidies, which effectively freezes the milk price.
• Inconsistency: The subsidy system allows dairy plants to adjust prices and potentially reduce or eliminate subsidies for farmers who are non-compliant.
• Below-Cost Purchase: Without subsidies, the purchase price may be below the production cost, putting farmers at a financial disadvantage.
• Disadvantage for over production: Over-produced milk may be purchased at half the usual price.

Hiding the Milk Source

The entire system creates a constant atmosphere of control, causing smaller businesses to hide milk origins.

• Retail Price Disparity: Raw milk is sold to dairy plants for NT$30/kg, processed milk sold to supermarkets for NT$60-70/kg, and retailed to consumers for NT$90-100/kg.
• Transparency Concerns: Products like milk buns and ice cream often don't specify the milk source due to the exploitative dynamics within the industry.
• "Business-Use" Milk: Locally sourced milk sold to restaurants and beverage shops is often priced at NT$60-70/kg (after removing retail fees). Businesses using this milk are more willing to disclose its source.
• Benefits of direct sales: The dairy farmer will get more than they sell to the processors, while the food and drink industry will also get more affordable milk than they would have buying the processed equivalent.

The Danger of Direct Sales

Direct sales can benefit both farmers and businesses. However, dairy plants are quick to stop direct sales from fear of losing sales.

• Risks for Farmers and Businesses: While technically legal, direct sales can expose farmers and businesses to retaliation and safety concerns. For this reason, companies prefer not to reveal where the milk is from, and smaller farmers have no option but to deal exclusively with larger processors.
• Limited Impact of Branding Efforts: Attempts to create farmer-owned brands have had limited success, with some farms even charging higher prices than retail outlets.

Recommendations for Change

To improve the situation, the Taiwanese dairy industry needs systemic changes:

• Farmer Cooperatives: Model the industry to include farmer cooperatives like New Zealand's Fonterra.
• Government Oversight: The government should actively supervise contracts and protect farmers' interests.
• Shifting the Focus: Focus on ensuring farmer's rights instead of overly protecting large firms.