Unlike in countries that have an integrated system of cattle farming, and processing and selling dairy products, such as Australia and New Zealand, in China it is often dairy companies that hold the upper hand in purchase and pricing. The existing system of separate farming and processing enables dairy companies to "hoard milk in times of low production", and "refuse supplies from farmers in times of overproduction". No wonder, the dairy farmers in China get less than 10 percent of the total profit of the industry and are left with no choice but to quit the industry to reduce their losses.

But applying market rules alone cannot break the vicious circle. Since the modern dairy industry is new to China, the lack of a controlled market order will only worsen price fluctuations, which would be good neither for dairy farmers nor for the industry as a whole.

Many dairy farmers use bank loans to purchase cows. So they cannot repay their loan instalments by dumping their milk. In contrast, their overseas counterparts also have stakes in dairy companies, which prioritize farming over production, insulating the industry to a large extent from the impact of market fluctuations. In the long run, this model has to be adopted by China's dairy industry.

Limiting the import of dairy products is impossible because of global trade rules. Moreover, the value of a product depends on its cost and quality. Therefore, what the Chinese government could do to prevent excessive imports of dairy products is to exploit the technical barrier without violating the World Trade Organization's fair trade principles.

Also, short-term measures such as encouraging dairy companies to increase the purchase of milk from domestic suppliers, and produce more high value-added products, should be taken. In the longer run, however, a modern management system that integrates dairy farming and production would help establish a fair farmer-company relationship.

The author is a professor at the School of International Trade and Economics, University of International Business and Economics, Beijing.