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Chinese consumers can expect higher dairy prices in December due to a shrinking supply of raw milk from the country's fragmented milk farms.
Most domestic dairy companies put up prices last week, ranging from five to 20 percent.
This was mainly in the low-end milk market.
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Milk profits are usually small and are sensitive to price volatility.
The price of premium products and milk powders are largely unaffected as high profit margins are able to absorb rising costs.
Analysts have ruled out any price-fixing by major diary companies and instead blame an ongoing shift involving individual raw milk suppliers.
Up until now, domestic dairy companies sourced most of their raw milk from individual dairy farms.
But this exposes companies to volatility in supply markets.
The upward pressure on retail prices has not shown any sign of weakening since it began to increase in July.
Statistics from China's Ministry of Agriculture showed that the average price of raw milk has risen for 14 straight months.
SOUNDBITE: LIU GENPING, Milk farm manager, Hebei
"The average price of raw milk was about 3.3 to 3.5 yuan per kilogram before April, and it rose to 4.2 to 4.3 yuan in August."
A Dairy producer told CNC that from a cost perspective, raw milk at 4 yuan, or 0.67 U.S. dollars, is reasonable, but it has now rocketed to five or even six yuan per kilogram, and that's out of control.
One expert said the recent price hike marks a hiatus from price wars in the past, when dairy producers competed for market share by cutting retail prices.
That practice hurt dairy farmers.
Some sought to reduce production costs by using additives in milk to boost protein readings.
Such practices led to the milk powder scandal in 2008, when melamine-tainted infant formula powder killed six infants and left thousands more sick.
It also brought down one of China's largest dairy companies Sanlu.
SOUNDBITE: YUAN YUNSHENG, Secretary general, Hebei Dairy Association
"How did the melamine-tainted milk powder scandal happen? Just because dairy companies were battling for raw milk, which led to price hikes. Competing for a market share, they cut retail prices. So some sought to reduce production costs by using unsafe additives to get more profits."
But the current price hike does not benefit milk farmers either, as a premium goes to intermediary milk farms.
They source raw milk from farmers and resell it to dairy companies.
According to Yuan, these intermediary farms have made a fortune.
Most of the farms have signed contracts with dairy companies as their suppliers, but in the face of runaway milk prices, farms do not honour their contracts and companies also scoop up supply originally designated for others.
SOUNDBITE: Intermediary milk farm manager, Inner Mongolia
"Forget about contracts, forget about taking what's not yours, whoever offers the highest price gets the milk. If the price is too low, no one would raise dairy cows."
In the wake of the 2008 milk scandal, authorities encouraged companies to build their own supply base to better monitor the quality of raw milk.
Yet without sufficient funding and land, the country's goal to supply 70 percent of milk from farms operated by companies by the end of 2011 did not materialize.
The rate currently stands at less than 40 percent.
While large-scale proprietary farms are yet to become major suppliers of raw milk, domestic dairy producers are quickly losing their individual milk farmers, whose number have declined by 600,000 from 2008 to 2012.
They are expected to lose another 10 to 20 percent this year.
SOUNDBITE: Milk farmer, Heibei
"Many farmers in our village sold their cows because of low milk prices and high costs."
SOUNDBITE: SUO SANKUAN, Milk farmer, Inner Mongolia
"I had 20 dairy cows in the past, and now I have only 10. I sold the others."
This is largely due to a sector-wide reshuffle carried out after the scandal with the aim of weeding out unqualified individual dairy farmers.
An analyst said the move created a shortfall of 4 million tonnes of raw milk supply, or half of the domestic dairy production capacity.
Experts say individual milk farmers will continue to be a major supplier to dairy producers for a long time, so protecting their interests and giving them more incentives to encourage cattle rearing is the key to easing the current issues.
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But Gu Jicheng, secretary general of the Dairy Association of China, said to truly transform the country's dairy industry, companies should pay the same attention to building their own supply base as they do to production.
