The size of the head ranch is far from the profit, and survival has become the top priority

In March of spring in the Chinese lunar calendar, the weather is warming up, but the dairy farming industry seems to be shrouded in "cold winter".

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A few days ago, YouRan Dairy and Modern Farming, the country's leading ranching companies, successively disclosed their 2023 performance announcements. As the leading companies in the industry, YouRan Dairy and Modern Farming both failed to perform well in 2023. The relevant announcement shows that YouRan Dairy revenue increased 3.6% to 18.694 billion yuan last year, while the scale increased but lost 1.05 billion yuan; In the same period, Modern Farming also appeared "revenue increase but profit does not increase" situation, the company's annual revenue increased by 9.5% to 13.458 billion yuan, while the profit is 175 million yuan, a sharp decline of 68.9%, in a break-even state.

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Does it point to the deteriorating fundamentals of the dairy farming industry as a whole? Looking forward to the future, when can the head company look forward to a new round of profit upcycle?

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The factors affecting the profitability of leading enterprises are still difficult to eliminate

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From an industry perspective, YouRan Dairy and Modern Farming are both the leaders in dairy upstream farming, both of which maintain large leads in dairy herd size and raw milk production.

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Despite being at the top of the industry, combined with the financial reports of the two companies, it is clear that size is not an absolute guarantee of profitability. In 2023, the dairy farming industry faces multiple challenges such as falling milk prices and high feed costs, and the difficulty of making profits even for leading companies is still rising.

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Let's start with YouRan Dairy, where the company's revenue is primarily comprised of two businesses: raw milk and systematic solutions for ruminant farming. In 2023, the company's raw milk business revenue increased by 18.9% year-on-year to 12.903 billion yuan, raw milk sales increased by 26.5% year-on-year to 2.945 million tons, and the average unit price of raw milk fell by 6.0% year-on-year to 4.38 yuan /kg. During the same period, the company's systematic solutions for ruminant farming business revenue was 5.79 billion yuan, down 19.5%.

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In terms of profit, YouRan Dairy's raw milk business achieved a gross profit of 3.696 billion yuan last year, corresponding to a gross profit margin of 28.6%, down 2.8 percentage points year-on-year, mainly due to the downward impact of raw milk prices. However, the company's systematic solutions for ruminant farming saw an increase in gross margin, driving the company's overall gross margin to 23.9%, an increase of 0.5 percentage points year-on-year.

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Looking at Modern Farming, the company's income is mainly composed of three businesses: raw milk, offline feed business and digital intelligent platform. In 2023, the company's raw milk business revenue of 10.264 billion, an increase of 3.2%. Raw milk sales rose 9.4% year on year to 2.55 million tons, and milk prices fell 5.6% year on year to 4.03 yuan/kg. In the same period, the revenue of new business segment was 3.20 billion yuan, an increase of more than 30%. It is reported that the company's new business includes the original feed business, but also includes the new digital intelligence platform business.

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Despite steady revenue growth, Modern Farming's earnings have been under pressure over the past year. In terms of raw milk business, the gross profit of the business in the year was 2.913 billion yuan, corresponding to 28.4% gross profit margin, which was 2.7 percentage points lower than the same period last year. It is understood that this is mainly because the gross profit brought by the increase in raw milk sales during the year could not offset the impact of the decline in the average selling price. For the same period, gross profit from new business was $215 million. As a result, the company's consolidated gross margin for the full year was 23.2%, a decrease of 3.4 percentage points from the same period last year.

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Affected by the decline in the market price of beef, the decline in the price of raw milk, and the growth of the size of the dairy herd, Modern Farming also reduced the fair value of biological assets by as much as 1.28 billion yuan in 2023. Under the influence of multiple factors, the company's net profit for the whole year was 175 million yuan, and the interest rate was only 1.3%.

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The industry is still depressed, survive and bide its time

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After 2023, will the New Year be easier for the upper pastures?

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It should be noted that since this year, soybean meal, corn and imported alfalfa and other bulk raw materials and feed prices have shown a downward trend. Taking soybean meal as an example, according to iFinD data, the spot price of soybean meal has continued to fall from a stage high of more than 5,000 yuan/ton in August last year to the current 3,400 yuan/ton, a drop of more than 30% in a few months. Coincidentally, the current spot price of corn has also fallen to near 2,300 yuan/ton, which is the lowest price in nearly three years. The price of key raw materials has fallen in tandem, which obviously helps the ranching enterprises to ease the cost pressure.

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Despite the sharp drop in cost pressures, at the same time, weak dairy consumption appears to remain unchanged. Public data show that after the price of fresh milk (raw milk) peaked in the third quarter of 2021, it is all the way down, and the average price of fresh milk (raw milk) in the current main producing areas is around 3.47 yuan/kg, which is 20% lower than the 21-year high.

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Downstream demand is weak, superimposed on the relative surplus of milk sources, outstanding contradiction between supply and demand, the downward trend of milk prices is difficult to reverse in a short time.

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Although the situation in the domestic dairy industry is still grim, the leading enterprises in the industry still seem to have strong confidence in the future. Earlier, at the 2023 performance presentation meeting of Modern Farming, Sun Yugang, president of the company, said that the growth rate of domestic raw milk supply will slow down, and consumers' demand for natural food (less processing) will increase, which will promote the use of fresh dairy products in the industry; At the same time, the revision of the national standard for sterilized milk will improve the quality of dairy products, and the national Milk Drinking Program for students will benefit more than 37 million students. All these indicate that the dairy industry is developing in a more robust and sustainable direction. And in the long run, it is normal for milk prices to stabilize, and every downward cycle is an opportunity for large-scale enterprises to grow. With the gradual withdrawal of socially inefficient pastures, large-scale animal husbandry can win great development by taking advantage of scale, seizing opportunities and increasing market share.

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As of mid-April, raw milk prices have not yet seen signs of falling, and it can be expected that upstream pastures dependent on cycle survival will have to continue to face the situation of "unprofitability" for a longer period of time. In the reshuffle period of the industry, for the ranch enterprises that can still stick to it, profit may no longer be a priority, survival is the most important thing.

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?(Source: ZhiTong Net)