AS Shanghai is reducing its dairy herd, the city's demand for milk and other dairy products continues to increase.

Shanghai is the biggest consumer of dairy products in China. The dairy needs of each person average 26kg every year, four times the Chinese average.

The 90,000-strong dairy herd in Shanghai is an important milk resource. Each cow can produce at least seven tonnes a year. Most of the milk will be processed by Guangming (Bright) Dairy and Food.

What concerns Shanghainese is that the reduction of the dairy herd will cause a widening gap between demand and supply.

Chen Xin, secretary of the Shanghai Milk Association believes there will not be a price rise in milk in Shanghai following the reduction of the city's dairy herd.

Most herds will be moved to neighbouring areas connected to Shanghai by expressways. It would only take two or three hours to transport the milk from the new pastures to the city.

Shanghai is the main consumer of livestock and poultry in the Yangtze River Delta. Half the products come from the neighbouring and nearby provinces of Jiangsu, Zhejiang and Anhui and imports from these regions will rise over the next five years.

Lower labour costs in those areas will offset the transportation charges and any other extra costs.

"A rise in the price of milk may not occur. The increasing communication and economic exchanges in the Yangtze River Delta will ensure a good supply of dairy products in Shanghai," according to Jiao Yang , the spokeswoman of the Shanghai Municipal Government.

The entry of other dairy companies will also help to keep prices down and ensure continued competition. Emerging dairy giants based in North China, such as Yili and Mengniu Milk, are gradually taking a greater share of Shanghai's dairy products market which used to belong to Guangming.

The long-life milk made by Yili and Mengniu, which is suitable for long distance transportation and storage, is becoming increasingly popular with customers.

Most of the raw milk from Shanghai's pastures are used to produce fresh milk.

"If the price of fresh milk rises, people will turn to long-life milk. So a rise in price is not a wise approach," Chen said.

The fierce competition has forced dairy companies to try to lower their prices. "A bottle of raw milk is cheaper than a bottle of water," said Wu Aiwei, a dairy farmer.

Yili's and Mengniu's pastures are in Xinjiang and Inner Mongolia, the two provinces in Northwest and North China specializing in animal husbandry. Yili has invested 260 million yuan (US$35 million) in Xinjiang to build up its milk resources. The price of milk in Xinjiang is half that of Zhejiang and Shanghai.

Shanghai Guangming has also invested 200 million (US$24 million) to established Shanghai Holstein Technology to ensure its milk supply.

Shanghai Holstein has built 21 big dairies in 17 provinces in China. However, the extra supply from this source will not make up for the loss caused by the reduction of the local dairy herd.

"What concerns us most is the quality of the raw milk from other places," said Chen.