The Dairy Product Industry is currently in a triple bottom of supply, demand, and inventory. The turning point of this cycle mainly depends on the destocking of inventory, and demand policies are expected to catalyze this. It is anticipated that by Q3 2025, supply and demand will reach a balance, driving profit recovery and market share growth for leading companies.
According to Zhitong Finance APP, GTJA has released a research report stating that the Dairy Product industry is currently at a triple bottom in terms of supply, demand, and inventory. The turning point of this cycle mainly hinges on the reduction of stock and demand policies that are expected to catalyze the situation, predicting a balance of supply and demand by Q3 2025, which will promote the recovery of profits and an increase in market share for leading companies. The raw milk cycle is expected to reach a turning point in 2025. From a growth perspective, the cycle reversal is bullish for leading companies, and there is still room for new categories, cross-sector, and internationalization. From a value perspective, the industry is at a mature stage, and the attractiveness of dividends will increase after profits stabilize. A recommendation for shareholding increase: Inner Mongolia Yili Industrial Group (600887.SH), benefiting targets: MENGNIU DAIRY (02319), New Hope Dairy (002946.SZ), Xinjiang Tianrun Dairy (600419.SH), CHINA FEIHE (06186), Youran Dairy (09858), CH MODERN D (01117).
The main points of GTJA are as follows:
Dairy Product Industry: Triple bottom of supply, demand, and inventory.
In 2024, the Dairy industry will be pressured by three factors: excessive supply, weakening demand, and high inventory. Fresh milk prices continue to fall, and low costs are leading to a deterioration in the competitive landscape of the industry. Marginally, starting from H2 2024, the growth rate of raw milk production will slow down and turn negative sequentially, with a slight recovery in prosperity and inventory adjusting to a healthy level, alleviating the situation of oversupply. Based on the current situation of these three elements, the reduction of stock is an important driving force for narrowing the supply-demand gap in this cycle, while demand driven by policies will accelerate this process.
The power of the cycle: After many ups and downs, a turning point is brewing.
Historically, milk price fluctuations have often been event-driven. Over the past twenty years of internal demand growth and fluctuating milk prices, leading dairy companies have leveraged the supply-demand cycle to establish and consolidate market share and supply chain advantages, enjoying the industry dividend of increased penetration and structural upgrades. On the other hand, when the degree of industrial integration is high and the upstream reduction is slow, the surplus of raw milk impacts dairy company financial reports, such as impaired losses incurred from consuming excess raw materials, additional costs incurred from price competition, and channel inventory adjustments. Over the past twenty years, raw milk has experienced multiple cycles, with this round of adjustments being the longest and having built up over time, intensifying the industry's desire for a turning point.
The darkest moments have passed, looking forward to a turnaround.
From the second half of 2023, demand has continued to weaken. The most pessimistic point for the industry (Q2 2024) has passed. At that time, strong supply, weak demand, and destocking combined caused industry expectations to reach their lowest point. Subsequently, in Q3 2024, there will be a phased recovery, and the expected decline in Q4 2024 to Q1 2025 is also likely to be lower than that in Q2 2024.
Looking ahead to 2025, according to GTJA's estimates, if the year-end dairy cow inventory decreases to 6 million heads or below, considering that demand is likely to stabilize under a low base, there may be a stronger demand, and it is expected to achieve a balance between raw milk supply and demand within the year. Combining the rhythms of supply and demand (the supply side facing concentrated test of ranch cash flow in August-September, while the demand side with more reproductive policies implemented plus demand released during the Mid-Autumn Festival and National Day in September-October), it is expected that the equilibrium point for fresh milk may appear in Q3 2025. By then, milk prices are expected to stabilize, promoting improvements in the industry landscape. From historical experience, leading companies typically show improvement in gross sales margins during upward milk price periods while reducing some expenses and losses, leading to profit recovery and market share increase.
Risk Warning
The decrease in dairy cow inventory not meeting expectations has led to a continuous drop in milk prices, ongoing decline in dairy product sales, and risks related to food safety.
Today, after hitting the high near 24,000 in the early session and entering bearish positions, the index fell sharply by nearly over 600 points, immediately recouping yesterday's losses significantly.
Moreover, today it broke the new high again, reaching a maximum of 24,076, but by the end of the market, it fell back by about 70 points, producing a bearish candle. The current trend has not yet been broken, but from the previous low until now, it has risen close to 6,000 points. It is believed that those with positions can continue to hold until there is a clear trend reversal for profit-taking. Those without positions can wait for a pullback to get in. Actually, it is hoped for a quick pullback, as it allows for entry and also provides a healthy breath.
Currently, the outlook remains the same as before. It is believed that even if there is a pullback, it shouldn't be too deep. However, if Futures fail to stabilize and close below 22,350, there may still be room for decline. The chance of Futures falling below 21,400 in the short term should be low, so it is considered that if a significant pullback occurs, it presents a good opportunity to incrementally go long. Recently, there has been a consistent approach to not hold positions overnight, only focusing on immediate trades, as there is no high chasing and no casual short selling.
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