Dairy farmers will get government subsidies to make up losses in a move aimed at preventing price rises in the industry.
The State Council said it will offer farmers assistance including up to 500 yuan for each breeding cow.
Milk production has expanded quickly over the last decade. Output of milk products reached over 30 million tons in 2006, an increase of 24 percent on the previous year.
But nearly half the country's dairy farmers are making losses. Some farmers cull livestock or dump milk because they cannot sell it at higher prices.
Experts said the status quo in dairy is similar to that of the pork industry last year. Pork prices have soared this year because many farmers stopped raising pigs due to rising costs.
The cost of raising dairy cattle is increasing as raw material prices increase. The price of corn was 1,550 yuan per ton this May, up 15.7 percent on the same period last year. The cost of water, electricity and transport is also rising.
According to Wei Kejia, spokesman for the Dairy Association of China, around 40 percent of dairy farmers are suffering losses.
Profit margins have been further narrowed as dairy companies and retailers try to pay farmers less for their milk. Dairy companies have paid farmers 2 yuan per kg over the past few years, with no adjustment to compensate for the rising cost of raw materials, the association said.
Companies have lowered retail prices in a bid to win more market share, narrowing the profit margin of the whole industry. The association said milk companies made 5 billion yuan less revenue in 2006 due to price wars - about 91 percent of the entire industry's profits.
But that does not mean supply has surpassed demand, rather that there is further market potential to be developed, said Wei.
China is the world's third-largest dairy producer after India and the United States, with an output of over 30 million tons a year. But Chinese consume 25 kg of milk a year, only a quarter of the world average of 100 kg per capita.
China's dairy industry also falls below world standards. Only 29 percent of dairy farms have more than 20 cows. There are over 1,600 milk companies, but most of them are small and poorly equipped.
Source: China Daily
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