Adjustments in China's Raw Milk Industry Unlikely to End in Q3

Modern Dairy recently issued a profit warning, forecasting a net loss of RMB 180 million to RMB 240 million for the first half of the year. Due to continued declines in milk and cattle prices, several raw milk listed companies have also issued profit warnings, with their semi-annual performance facing losses. Although domestic raw milk production growth has slowed due to heat stress from the weather, downstream demand remains insufficient, and the industry is expected to continue its deep adjustment in the third quarter.

According to Modern Dairy's announcement, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for the first half will be between RMB 210 million and RMB 270 million, an increase of 16% to 21%. However, the company increased the culling of low-yielding cows to improve herd structure, which, along with falling cattle prices, resulted in a fair value change in cows minus sales costs loss that increased by RMB 580 million to RMB 640 million compared to the same period in 2023. As a result, the overall loss for the first half is expected to be between RMB 180 million and RMB 240 million, while the previous year saw a profit of RMB 220 million.

China Shengmu Organic Milk Limited expects a loss of RMB 130 million to RMB 150 million for the first half, compared to a profit of RMB 23 million in the same period of 2023. A2 Dairy Company Limited's announcement shows that it expects a comprehensive loss of RMB 600 million to RMB 700 million, nearly doubling the loss of RMB 310 million from the previous year.

A2 Dairy Company Limited reported that the prices of raw milk and beef cattle fell by 16% and 17%, respectively, during the first half, leading to a fair value change in cows minus sales costs loss of RMB 550 million to RMB 650 million, up from RMB 415 million in the same period of 2023.

After a challenging 2023, the situation in the domestic raw milk industry did not improve in the first half of this year, particularly in terms of milk prices. According to statistics from the Ministry of Agriculture and Rural Affairs of China, the average price of fresh milk in major producing provinces such as Inner Mongolia and Hebei was RMB 3.22 per kilogram in the fourth week of July, down 0.3% from the previous week and 14.1% year-over-year. At the beginning of 2024, the domestic milk price was around RMB 3.66 per kilogram.

Data from the Shandong Dairy Association show that milk prices in the province continued to decline in the second quarter, averaging RMB 3.38 per kilogram, down 11.8% year-over-year and 6.9% quarter-over-quarter. The cost of one kilogram of milk from adult cows in Shandong Province was RMB 3.57 per kilogram in the second quarter.

At the 2024 China Dairy Industry Development Strategy Seminar, Dr. Li Shengli, Chief Scientist of the National Dairy Cattle Industry Technology System, revealed that the oversupply of raw milk in 2024 was more severe than in 2023. The continuous decline in raw milk purchase prices led to the first negative margin between milk prices and costs since records began, with the industry's loss ratio expanding to over 80%.

Industry observers believe that adjustments in the raw milk industry are unlikely to end in the third quarter. Recently, several regions announced reference prices for raw milk purchases in the third quarter, which remain at relatively low levels. For example, the Shandong Dairy Association set the guidance price at RMB 3 to RMB 3.7 per kilogram; the Shaanxi Provincial Animal Husbandry Association's Dairy Branch set the guidance price at no less than RMB 3.05 per kilogram; and Hebei Province set the reference price for raw milk in the third quarter at RMB 3.25 per kilogram.

It is understood that the continued weakness in milk prices in the third quarter is still related to insufficient market demand. Unusual weather conditions have led to significant heat stress in dairy cows, resulting in reduced milk production, causing a decrease in raw milk supply in May and June. For example, raw milk production in Shandong Province decreased by 0.4% and 1.6% in May and June, respectively. It is expected that the pressure on raw milk supply will further reduce in July and August. However, since it is summer vacation, student milk production and consumption have stopped, increasing the sales pressure on downstream dairy companies.

In addition, dairy farms need to stockpile silage feed for the coming year in August. This year, some corn-growing areas have been affected by drought and flooding, causing silage feed prices to remain high, estimated at RMB 600 per ton or higher. Considering that each cow requires 6 to 8 tons of silage, although some farms can receive silage loan support, the financial and production cost pressures on farms remain significant.

Independent dairy analyst Song Liang told reporters that the dairy products consumption market is still in a downturn, and the adjustment of supply and demand in the domestic raw milk market is ongoing, with the progress yet to be seen. Therefore, raw milk companies still face operational pressure, and whether the market can return to balance mainly depends on the industry's capacity reduction situation.

Reporters have noticed that some local dairy farmers and authorities have started to help themselves by promoting the processing of local raw milk for community and government agency consumption, helping to digest surplus raw milk. Some interviewed dairy farmers have called on dairy companies to produce more affordable milk products, sell them at thin margins but in large volumes, expand the milk consumption base, and alleviate industry pressure.

(Source: Yicai Global)