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If you want to play the China commodity card, don't invest in black gold, buy the white powder. Not that marching powder from the Andes, but body-building milk protein from Antipodean dairy cattle. Excitement about Chinese demand for milk has sent prices for milk powder soaring, high enough for Canada's Saputo Inc. to make an eye-watering $515-million Australian ($498-million) offer for Warrnambool Cheese and Butter Co., a medium-sized Australian dairy producer.

Saputo's bid has just been trumped by a $533-million (Australian) offer from Murray Goulbourn, an Australian rival, and another Australian, Bega is still in the wings after starting the bidding war in September. The latest offer values Warrnambool at some 72 times its most recent earnings, a rating that might be at risk of causing lactose indigestion, you might think. A review by KPMG, commissioned by the dairy, valued Warrnambool at $7 Australian per share, a modest assessment compared with the latest offer by Murray Goulbourn of $9.50.

The Australian regulator has suspended the Canadian bid to allow time for the revised Australian offer. You might think that Saputo should swallow its pride, pocket its cash and allow the Australians to burn their inflated currency, yet there is more to this than an Australian milk shake. The issue is the extraordinary rise in the value of traded milk powder. The biggest player in this market is Fonterra Co-operative Group Ltd., the New Zealand dairy co-op, and for the last five years the Kiwi company has been surfing a China wave that never seems to break. Since January of 2009, the Fonterra auction price for whole milk powder has risen to $4,900 a tonne from about $2,000, and most of this increase can be traced back to a continuing shortage of milk in China.

Commodity dairy producers in the Antipodes and in the European Union spotted the changes in the Chinese diet at the beginning of the last decade – the surge in demand for animal protein was not unexpected. More wealth generated more demand for meat, and Chinese pig farmers have been profiting hugely. However, dairy products were new to Chinese, and a (mistaken) belief that lactose intolerance was widespread led to surprise as Chinese children happily guzzled milkshakes at U.S. burger chains.

Meanwhile, an unfounded belief that powdered baby formula is better than the human alternative has stimulated further demand for milk products, such as lactoferrin. Foreign producers of formula have profited hugely, not only with aggressive and often dubious promotion but also due to widespread distrust of domestic producers following a scandal in 2008 when a Chinese brand was found to be contaminated with melamine, an industrial chemical, causing several deaths and a major health panic.

Chinese demand for milk has been rising annually at double-digit percentage rates, and imports have been increasing at a faster rate because the Chinese dairy industry is still in its infancy. Soaring feed costs have made matters worse, forcing some dairy farmers to slaughter their herds. According to a report from Rabobank, it will take another two years for China's dairy farming industry to reach the scale where it can begin to stem the growth in imported milk volumes. Dairy imports into China have been increasing at a rate of between 20 and 30 per cent over the past two years and now account for a fifth of the Chinese market. Moreover, as China relaxes its one-child policy, the market for milk products should get a little extra boost.

This is a big opportunity for global agribusiness players and as the market becomes more sophisticated, Chinese food producers will seek to diversify their sources, just as they have done in other raw materials. We can expect Chinese dairies to go shopping abroad, just as Chinese miners and oil drillers are scouring the earth for raw materials, including in Canada. Even if Saputo decides the Australian market is getting a bit frothy, we should not be surprised to find Chinese food companies looking hungrily at Canadian cattle in years to come.

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