Checking into China's cow hotels: Have policies following the milk scandal changed the structure of the dairy sector?

China's milk scandal is well known for causing the nation's largest food safety crisis and for its effect on thousands of children. Less, however, is known about the effect on the other victim: China's small dairy farmers. Although small backyard producers were not the ones that added melamine to the milk supply, the incomes of dairy farmers fell sharply after the crisis. In response, one of the actions taken by the government was to encourage small dairy producers to check into production complexes that were supposed to supply services, new technologies, and provide for easy/bulk procurement of the milk produced by the cows of the farmers. Because both farmers and their cows were living (and working) away from home, in the rest of the paper we call these complexes cow hotels. In this paper we examine the dynamics of China's dairy production structure before and after the milk scandal. In particular, we seek to gain a better understanding about how China's policies have been successful in encouraging farmers to move from the backyard into cow hotels. We also seek to find if larger or smaller farmers respond differently to these policy measures. Using data from a sample of farmers from dairy-producing villages in Greater Beijing, our empirical analysis finds that 1 yr after the milk scandal, the dairy production structure changed substantially. Approximately one quarter (26%) of the sample checked into cow hotels after the milk scandal, increasing from 2% before the crisis. Our results also demonstrate that the increase in cow hotel production can largely be attributed to China's dairy policies. Finally, our results suggest that the effects of government policy differ across farm sizes; China's dairy policies are more likely to persuade larger farms to join cow hotels. Apparently, larger farms benefit more when they join cow hotels. Overall, these results suggest that during the first year after the crisis, the government policies were effective in moving some of the backyard farmers into cow hotels (although 60% farmers remained backyard producing)