On October 9th, Cailian News (Reporter Zhang Chenjing) reported: 'The milk price is not good. There is still too much milk in the market. Some time ago, even loose milk was only a little over 1 yuan per kilogram.' Several ranch managers recently told Cailian News in this way.

From 'getting raw milk is like conquering the world' to the current oversupply of raw milk, since the 'dumping milk and slaughtering cows' at the beginning of 2023, the ranch crisis has not been resolved. Since the beginning of this year, more and more ranches are facing the difficult situation of 'do we need to continue slaughtering cows.'

In 2019, dairy companies increased upstream production capacity, which will be released in two years. Combined with the rapid increase in milk yield per cow, the imbalance between domestic supply and demand of raw milk has caused the milk price to slide all the way down. Social ranches are about to face the second loss-laden winter in this cycle. Cailian News reporters learned from interviews in the industry that the recovery of the supply and demand in the raw milk industry depends on the process of reducing dairy cows and the consumption of milk powder. The current growth rate of raw milk production has further slowed down, and prices are expected to stabilize in the second quarter of 2025.

Oversupply

'The milk price has long been unable to cover costs. The latest price is only 2.6 yuan per kilogram, but the feeding cost is generally 2.2 yuan per kilogram. In addition to fixed costs such as facilities, the comprehensive cost is around 3.2-3.5 yuan per kilogram.' Zhang Ming, a production manager at a ranch in northern China, told Cailian News reporters.

The situation for Xu Ping, who supplies milk to top dairy companies, is slightly better. He told Cailian News reporters: 'The ranch is still losing money. Our milk price is still above 3 yuan per kilogram. Recently, we are collecting milk normally according to the contract, and there is no refusal to collect milk. But generally from after the Chinese New Year until the second quarter, not necessarily all will be collected.'

This year, the oversupply of raw milk is more serious, and prices have been continuously declining since the beginning of the year, with no signs of rebound.

The domestic raw milk cycle can be divided into three rounds: the end of 2008-2013, the middle of 2014-2021, and from 2021 to the present. This round of the raw milk cycle has fallen from the peak of 4.38 yuan in 2021 to 3.14 yuan/kg at the end of September 2024, with a drop of over 28%.

In July this year, Li Shengli, Vice President of the China Dairy Association and professor at China Agricultural University, stated at a strategic seminar on China's dairy industry development that the surplus of fresh milk is significantly higher than in 2023. The profit space per kilogram of milk has entered negative territory for the first time since the national dairy cow industry technology system was established, with industry losses exceeding 80%. Sharing data shows that from April to May this year, leading dairy companies sprayed fresh milk powder at an average of 0.02 million tons per day, accounting for about 25% of the milk intake. By the end of June, the powdered milk inventory of leading dairy companies was no less than 0.3 million tons.

It is worth mentioning that in the past year, the industry has continued to reduce excess capacity, but has yet to reverse the situation of oversupply. According to data from the Ministry of Agriculture and Rural Affairs, China's raw milk production reached a historical high of 41.97 million tons in 2023, growing by another 3.4% in the first half of this year.

Song Liang, the head of the China State Farms Dairy Industry Alliance expert group, stated in an interview with Caixin that roughly 1.2 million cows were eliminated from last year to this year. However, the speed of dairy cow yield improvement is faster, with the average yield now exceeding 12 tons, leading to an increase rather than a decrease in total raw milk production. The speed and steps of dairy cow elimination vary from place to place, making it difficult to reverse the overall supply-demand relationship.

Difficult to find a turning point.

After a continuous adjustment period of raw milk prices lasting for three years, the impact of oversupply of raw milk has fully manifested in the financial reports of large-scale ranches.

According to the financial reports for the first half of 2024, among the four listed ranches upstream, except for Pudong Ranching (09858.HK) which saw a year-on-year increase in revenue, Ch Modern D (01117.HK), Austasia Group (02425.HK), and China Shengmu (01432.HK) all experienced year-on-year declines in revenue. In terms of net income, all four of the above recorded losses.

In the interim report, China Shengmu stated that the problem of industry oversupply continues to exist. Dairy product manufacturing companies are scaling back raw milk purchases due to low demand, while upstream enterprises still have historical high production capacity, leading to a continuous decline in raw milk prices. The dairy farming industry is facing a survival dilemma of difficulty in selling milk and low raw milk prices, resulting in widespread industry losses.

Small and medium-sized dairy farms in the society were the first to be impacted and are facing even more difficult days. Xu Ping revealed that the fluctuation in milk supply prices to leading dairy companies is small, currently higher than the settlement prices to small and medium-sized dairy farms. While small and medium-sized dairy farms are profitable when milk prices are high, they face higher risks in the downward cycle of raw milk, with more instances of milk rejection. The price of scattered milk in the second quarter was cheap at more than 1 yuan per kilogram.

What makes Zhang Ming and Xu Ping pessimistic is that there are still few signs of a milk price rebound. Zhang Ming said: "Currently, there is limited growth in consumption, and the previous powdered milk inventory remains high. We are quickly approaching the peak of milk production season for cows, and dairy companies will spray excess raw milk with powdered milk. If there is still so much milk, dairy companies will continue to depress prices.

(Photo provided by a dairy farm in the north)

Inner Mongolia Yili Industrial Group (600887.SH) recently stated that although the current raw milk production is still in a state of oversupply, both the number of dairy cows and the growth trend of raw milk production have slowed down. From September to October this year, upstream dairy farming will focus on silage procurement, leading to certain pressure on cash flow, which will further drive capacity clearance. The third quarter is also a peak demand season due to festivals, leading to an increase in demand for raw milk. It is expected that in the second half of the year, the number of dairy cows will continue to decrease compared to the first half, and the growth rate of raw milk production will further slow down, narrowing the gap between supply and demand. It is estimated that the price drop of raw milk in the second half of the year will be less than in the first half. It is expected to achieve a basic balance in the supply and demand of raw milk next year.

Mengniu Dairy (02319.HK) stated at the mid-term performance exchange meeting that it is expected that the supply of raw milk will still be in surplus in the first half of next year. By the approaching Mid-Autumn Festival and National Day holidays in 2025, the supply and demand in the dairy industry will reach a relatively balanced state.

Policy Relief

Recently, the Ministry of Agriculture and Rural Affairs and seven other departments jointly issued the "Notice on Promoting the Stable Development of Beef and Dairy Cattle Production", deploying measures to stabilize beef and dairy cattle production, aiming to help breeding households through difficult times.

The notice proposes promoting the consumption of beef and milk, advocating for "student milk consumption", encouraging eligible regions to boost milk consumption through issuing consumer vouchers, and strengthening credit and insurance policy support. It establishes a whitelist system for beef and dairy cattle breeding households. For breeding households facing temporary difficulties, support will be provided through reasonable extensions and renewals of loans, without blindly withdrawing, terminating, or restricting loans.

In Song Liang's view, the recovery of the raw milk industry supply and demand still depends on the process of reducing the overcapacity of dairy cows.

Currently, pastures and dairy enterprises are still increasing the intensity of culling cows and adjusting the structure of the cattle herd. Leading dairy companies such as Mengniu Dairy had inventory impairment of 0.346 billion yuan in the first half of the year, Zhuangyuan Pasture (002910.SZ) had a loss in the first half of 2024 exceeding the full year of last year, Tianrun Dairy (600419.SH) had a loss of 27.9078 million yuan in the first half of the year, mainly due to increased efforts in disposing of low-yield cows and bulls during the reporting period.

Personnel from Tianrun Dairy told reporters from Caixin that the consumption promotion policy will have some relieving effects. The large-scale culling of cows has been completed in the first half of the year, and this pressure will reduce in the second half of the year.

Regarding the current overcapacity situation, Song Liang further suggests implementing a national overall livestock breeding quota system, achieving integration of farming and animal husbandry based on land, water, and fodder levels. In addition, coordinating with the Ministry of Industry and Information Technology and the agricultural sector, establishing a predictive warning mechanism for the overall supply and demand relationship to obtain accurate data.

For the industry, it will also face the second winter of this cycle with losses, and preparations need to be made for the upcoming winter fodder storage phase due to the tight capital chain. The days ahead for social pastures may become even more difficult.

"Aside from waiting for milk prices to rebound, there is no other way. The cost of exiting is too high." Some dairy farmers told reporters from Caixin, "Once a cow was worth 0.04 million yuan, now even the better ones can only be sold for 0.01 million1. With thousands of cows to cull, they can only grit their teeth and continue, if they exit now, they will be completely overwhelmed with debt."

(Names Zhang Ming and Xu Ping are pseudonyms used in the article)