In the first half of 2024, dairy farming companies are in a downward cycle. Nine listed and listed upstream dairy companies have losses of 80%, and only two have maintained profitability. China Shengmu, Modern Dairy, Junhua Agriculture and Animal Husbandry, and Australia Asia Group have all seen a three-digit decline in net profit.

The continued decline in milk prices caused by weak demand for dairy products and a temporary oversupply of raw milk (milk source, raw milk, fresh milk) is considered the main reason for the poor performance of dairy farming companies at this stage. Affected by the closure of small and medium-sized ranches to slaughter cattle and a surge in cattle supply, beef cattle prices have also fallen. Against this background, the process of de-capacity in the dairy farming industry has accelerated, and reducing costs, increasing efficiency, and maintaining cash flow have become an industry consensus.

01 Raw milk prices continue to decline

Affected by the continued decline in milk prices, dairy farming companies were generally in a state of loss or net profit decline in the first half of the year. Among the 9 upstream dairy companies that have disclosed their semi-annual reports, only Yuanshengmu and Saikexing achieved profitability.

In its semi-annual report, Youran Pasture stated that in recent years, the production capacity of newly built ranches has been released, and the supply of raw milk has increased, resulting in a continuous supply of raw milk exceeding demand, and both milk and cattle prices have reached historical lows in recent years. China Shengmu also stated in its semi-annual report that dairy product manufacturers have reduced the purchase of raw milk due to sluggish demand, while the production capacity of upstream companies is still at a historical high, and the price of raw milk continues to fall. The dairy farming industry is facing a survival dilemma of difficulty in selling milk and low raw milk prices, and the industry has suffered large-scale losses.

According to data from the Ministry of Agriculture and Rural Affairs, my country's raw milk production will increase by another 3.4% in the first half of 2024 after reaching a historical high of 41.97 million tons in 2023, but the consumption of dairy products in the market is not optimistic. According to data from the National Bureau of Statistics, in 2023, my country's liquid milk production fell for the first time since 2018, and in the first half of 2024 it decreased by 3% to 14.33 million tons. According to data from Junhua Agriculture and Animal Husbandry's semi-annual report, insufficient consumption has become a prominent problem in the development of the dairy industry. Per capita milk consumption has decreased compared with the previous year, the price of dairy products has fallen, and the sales volume of leading liquid milk companies has fallen by about 6%.

Li Shengli, vice president of the China Dairy Association and professor at China Agricultural University, shared survey data at the China Dairy Development Strategy Seminar held in July this year, showing that from April to May 2024, the average daily powdered fresh milk of leading dairy companies reached 20,000 tons, accounting for about 25% of the milk collected. As of the end of June, the inventory of milk powder of leading dairy companies was no less than 300,000 tons, and the surplus of fresh milk was significantly higher than in 2023.

The direct result of the imbalance between supply and demand is the downward trend in milk prices. Data from the Ministry of Agriculture and Rural Affairs show that from January to June 2024, the average price of fresh milk in my country's main dairy producing provinces was 3.49 yuan/kg, down about 11.9% from mid-2023. As of the end of the reporting period, the purchase price of raw milk has fallen year-on-year for 28 consecutive months, the longest duration since 2010.

Reflected in the semi-annual reports of listed companies, the average selling price of Modern Dairy's raw milk decreased by 10.5% to 3.66 yuan/kg; the average selling price of China Shengmu's raw milk decreased by 7.7% to 4.25 yuan/kg; the average selling price of Australia Asia Group's raw milk decreased by 15.8% to 3,629 yuan/ton; the average unit price of Youran Dairy's raw milk decreased by 5.2% to 4.16 yuan/kg; the average selling price of Yuansheng Dairy's fresh milk decreased by 4.4% to 4,648 yuan/ton.

The decline in domestic milk prices and the increase in the cost of imported dairy products have also led to a decline in my country's dairy imports. According to Chinese customs data, in the first half of 2024, my country's dairy product imports were equivalent to 8.06 million tons of fresh milk, a year-on-year decrease of 15.6%. Among the products with large import volumes, 383,000 tons of bulk powder were imported, a year-on-year decrease of 20.7%; 295,000 tons of whey products were imported, a year-on-year decrease of 11.6%; and 200,000 tons of packaged milk were imported, a year-on-year decrease of 24.3%.

02 Industry capacity reduction to maintain cash flow

Facing the industry's difficulties, Li Shengli believes that the dairy farming industry should learn from the pig industry case and appropriately reduce production capacity during the adjustment period.

my country's dairy farming industry has bottomed out since 2018, and the upward cycle of milk prices has continued until 2021. The Australia Asia Group believes that the upward milk price at that time brought optimistic long-term prospects to dairy farming companies, leading to a wave of concentrated construction of large ranches from 2020 to 2022. According to incomplete statistics, there will be 166 new ranch expansion projects in 2021, involving 980,000 heads of cattle; about 148 in 2022, involving more than 1 million heads of cattle. In 2023, as more and more ranches come into production, the oversupply of milk will become more serious.

Li Shengli estimates that based on a loss of 0.4 yuan per kilogram of milk and a daily milk production of 35 kilograms per cow, a 1,000-head cattle farm consumes 2.4 million yuan of cash flow each year. It is expected that during the adjustment period, more than 30% of calf farms will withdraw, and some large ranches will undergo restructuring and mergers and acquisitions. Appropriate clearance and compression of production capacity will help alleviate the oversupply of raw milk. Selling some medium- and low-yield cows or even reserve cows to ensure cash flow security is the first priority of the ranch.

China Shengmu stated in its semi-annual report that it is an industry consensus to optimize the herd structure, moderately retire old and low-yield cows, and better match the production development of the dairy farming industry with market demand. The Australasia Group also mentioned in its semi-annual report that in order to survive this downward cycle, ranch operators must focus on efficiency, continue to reduce production costs, and increase milk production. Paying attention to cash flow rather than profitability has become the most important part of daily operations. Since the second half of 2023, some small and medium-sized individual dairy farms with weak competitiveness and inefficiency have been forced to withdraw from the market, "limitedly" reducing the oversupply of raw milk in central China and northwest China. It is expected that by mid-2025, the raw milk market will restore the balance between supply and demand.

According to Li Shengli, in the first half of 2024, downstream dairy companies and upstream breeding companies are implementing capacity reduction plans. The number of dairy cows in Ningxia has dropped from 910,000 at the end of 2023 to 810,000 in May 2024, and some ranches no longer raise reserve cows. The number of cattle farms in Hebei has dropped from 833 at the beginning of 2024 to 745. In addition, large animal husbandry groups have eliminated nearly 50,000 adult cows and 100,000 herds by June. Since March, the country has eliminated nearly 4,500 tons of raw milk every day, a total of 150,000 lactating cows.

After reviewing the semi-annual reports of dairy farming companies, it was found that all major ranches are reducing costs and increasing efficiency, and increasing the elimination of inefficient cows, which has also increased the loss caused by the change in the fair value of dairy cows minus the cost of selling dairy cows (hereinafter referred to as "related losses"). In the first half of the year, Modern Dairy's related losses were 1.151 billion yuan, a year-on-year increase of 115.5%; China Shengmu's related losses were 451 million yuan, and the rate of self-breeding and expansion of dairy cows decreased by about 4.1% year-on-year; Australia Asia Group's related losses were 2.271 billion yuan, which was partially offset by the decline in feed costs.

03 Beef cattle prices are affected

In order to cope with the difficulties of the industry, in recent years, large-scale animal husbandry groups have generally reduced costs and increased efficiency while generally improving profitability and risk resistance through measures such as the layout of forage industry, beef cattle industry, breeding business, cattle breeding technical services, and the development of special fresh milk with stronger premium capabilities.

During the reporting period, Modern Dairy has established 4 forage planting bases, 5 feed forage processing plants, and jointly operated 3 feed production plants with large domestic feed companies. At the same time, it has laid out high-quality alfalfa and 3 processing production bases in the United States, which can supply more than 200,000 tons of high-quality forage annually. The revenue of the systematic solution business of ruminant breeding of You'an Dairy was 2.73 billion yuan, accounting for about 27.2% of the group's total revenue. The Ausia Group operates two large beef cattle farms in Shandong and Inner Mongolia, with a total inventory of about 39,500 heads. The beef cattle revenue increased by 42.4% to about 220 million yuan in the first half of the year.

However, due to the closure of small and medium-sized ranches to slaughter cattle, the surge in the supply of low-priced cattle, and the increase in the number of imported beef, my country's beef cattle industry has also entered a trough period. According to data from the Market and Informatization Department of the Ministry of Agriculture and Rural Affairs, in June 2024, the supply and demand relationship of beef, mutton and milk was loose, and the average market price of beef was 69.8 yuan per kilogram, a month-on-month decrease of 4.3% and a year-on-year decrease of 16.7%; the price of live cattle was 25.2 yuan per kilogram, a month-on-month decrease of 3.9% and a year-on-year decrease of 21.9%. Comprehensively judging, the supply of beef and mutton is in a loose situation, and the price will still fall slightly in the later period.

Affected by this, China Shengmu attributed its losses from the change in the fair value of biological assets less sales expenses in the first half of the year to the significant year-on-year increase in the number of retired inefficient cattle, coupled with the sluggish beef market price; the demand for beef cattle was weaker than expected and the selling price dropped sharply, and the loss of fattening cattle business increased year-on-year. During the reporting period, the gross profit margin of the beef cattle business of Australia Asia Group also turned negative, and the selling price dropped by 16.8% from about 32,012 yuan/ton in the same period last year to about 26,643 yuan/ton.

Australia Asia Group believes that China has become the second largest consumer of beef cattle, but the per capita consumption is still significantly low, and the demand for high-quality beef products is expected to increase significantly. Currently, Australia Asia Group has launched its own Wagyu heifer breeding program, integrating the operation of beef cattle farms with the raw milk business.