The dairy industry is experiencing the longest &#34;winter&#34; in nearly a decade.
Under the weak recovery of terminal demand, the current downward cycle of milk prices has lasted for more than three years, without a rebound in sight.
According to Wind data, as of January 23, 2025, the average purchase price of fresh milk in major domestic production areas has fallen to 3.12 yuan/kg, a year-on-year decrease of 14.3%.
The operational pressure on farms is significant.
In July 2024, Li Shengli, the chief scientist of the national dairy cow industry technology system, publicly stated that the profit margin per kilogram of milk has entered negative territory for the first time since records began, with over 80% of the industry facing losses.
Regional dairy companies with their own farms are under profit pressure.
Tianrun Dairy (600419.SH) expects a net profit of 35 million to 50 million yuan in 2024, a year-on-year decline of 64.8% to 75.36%. During the reporting period, the company increased efforts to dispose of low-yield dairy cows and bulls, and made provisions for inventory write-downs and biological asset impairments according to accounting standards.
Maiqiu'er (002719.SZ) and Huangshi Group (002329.SZ) are expected to be in a loss position in 2024.
The performance of the two giants is also under challenge. After reaching annual revenue scales of around 100 billion yuan, YILI and Mengniu inevitably face a slowdown in growth.
YILI (600887.SH) has increased profits without increasing revenue, with a year-on-year revenue decline of 8.61% in the first three quarters of 2024, while net profit increased by 15.9%. However, considering the impact of declining raw milk costs, this profit growth may be difficult to sustain.
Mengniu Dairy (2319.HK) faces a relatively more severe situation, with revenue and net profit both declining by 12.6% and 19% year-on-year, respectively, in the first half of 2024.
In March 2024, Mengniu announced a change in leadership, with former senior vice president and head of the ambient business unit, Gao Fei, succeeding Lu Minfang as the fifth president in Mengniu's history.
Is the industry prepared for the next upward cycle?
<h2>Long Cycle</h2>
The main issue currently facing the dairy industry is oversupply caused by insufficient demand.
Nielsen data shows that from 2021 to 2023, the year-on-year growth rates of all-channel revenue for dairy products were 7.9%, -6.5%, and -2.4%, respectively.
In the first three quarters of 2024, the all-channel sales of dairy products in the retail market decreased by 1.8% year-on-year, with sales of white milk (ambient milk, fresh milk) products declining by 3.5% year-on-year.
Huachuang Securities believes that during the pandemic, dairy consumption achieved a pulse-like penetration, with some of the growth being overdrawn in the later stages, while the unit price of dairy products in China is already relatively high compared to purchasing power, and the weakening economy is expected to have a certain impact on consumption.
Compared to retail terminals that can flexibly adjust pricing strategies, upstream farms have a certain lag in responding to changes in demand.
From 2020 to 2022, domestic raw milk prices remained high, leading to a wave of large-scale farm construction in the industry.
According to Holstein statistics, from 2020 to 2022, there were 562 new or planned projects in China, with a designed stock of over 3.77 million heads, of which 69.5% were farms with over 10,000 heads.
After a two-year construction cycle, the industry's reserve production capacity is gradually being released. The newly established large farms in recent years have improved production efficiency and management capabilities
In the first half of 2024, Australia Asia Group (2425.HK) achieved an average annual milk production of 13.7 tons per cow, an increase of 0.3 tons year-on-year; Modern Dairy (1117.HK) and Youran Dairy (9858.HK) reached production levels of 13 tons and 12.6 tons, respectively.
This is above the industry average. According to data from the China Dairy Industry Association, the average annual milk production per cow in 2023 was 9.4 tons.
Large-scale farms have strong risk resistance and low cost sensitivity, and the speed of capacity elimination is slower than that of small and medium-sized farmers.
As a result, compared to the previous two declines in milk prices, the adjustment period in this cycle is longer and the magnitude is greater.
Wind data shows that the average purchase price of raw milk in major domestic production areas has entered a downward channel since September 2021 and has continued for nearly 40 months, with milk prices dropping nearly 30% from their peak.
Under the continued mismatch of supply and demand, the purchase price of raw milk is falling below the cost line for farms.
Leading dairy farming companies such as Australia Asia Group, Youran Dairy, Modern Dairy, and China Shengmu (1432.HK) reported losses of 636 million yuan, 331 million yuan, 207 million yuan, and 144 million yuan, respectively, in the first half of 2024.
In September 2024, the Ministry of Agriculture and Rural Affairs and six other departments jointly issued a notice to stabilize beef and dairy production, proposing strengthened support requirements for both production and consumption.
Data from the National Bureau of Statistics shows that China's milk production is expected to decline by 2.8% year-on-year in 2024, marking the first decline after six consecutive years of growth. As upstream capacity gradually decreases, the market generally predicts that the industry will reach a supply-demand balance by 2025.
However, some research indicates uncertainties on the demand side.
Shenwan Hongyuan believes that in a pessimistic scenario, assuming that demand remains at a low single-digit decline (-2%) in 2025, and that imports, due to import substitution, maintain a double-digit decline (-10%), then milk production would need to decline by 7% year-on-year in 2025 to achieve supply-demand balance.
<h2>Tightening the Belt</h2>
Due to sluggish terminal sales, leading companies have increased promotional efforts since 2022. Despite being in a declining milk price cycle, dairy companies have not enjoyed much cost benefit.
Lower costs have instead attracted many retailers to develop their own brands, relegating dairy companies to mere contract manufacturers, further intensifying price competition.
Data from the Ministry of Commerce shows that the retail prices of milk and yogurt have declined by 5.2% and 4.5%, respectively, since the beginning of 2023.
Regional dairy companies passively involved in the price war have found themselves in a situation of declining revenue and profits.
In the first three quarters of 2024, only 2 out of 19 listed dairy companies in A-shares achieved simultaneous growth in revenue and profit, while 4 companies were in a loss state.
In this process, leading companies also bear the additional pressure of raw milk powder production.
Research by Li Shengli, chief scientist of the National Dairy Industry Technology System, shows that in April-May 2024, leading dairy companies sprayed an average of 20,000 tons of fresh milk per day, accounting for about 25% of milk collection.
According to Li Shengli, the selling price of one ton of milk powder is about 15,000 to 19,000 yuan, but the cost of spraying one ton of powder is about 35,000 yuan, meaning that companies lose more than 10,000 yuan for every ton of milk powder sold
Mengniu stated in its 2024 interim report that the decline in net profit during the period was mainly affected by the impairment of raw material powder and losses from joint ventures. In the first half of 2024, the company recognized an inventory impairment of 346 million yuan, compared to only 23 million yuan in the same period of 2023.
The existing issues in the industry have been further exposed during the downturn cycle.
At the China Dairy Industry Conference in July 2024, Mengniu President Gao Fei mentioned three major &#34;chronic diseases&#34; that have long plagued the industry's development: first, insufficient diversification of product categories; second, contradictions in supply and demand balance; and third, low resilience in the industrial chain.
Currently, the revenue base of dairy giants is still largely contributed by the liquid milk segment.
In the first three quarters of 2024, YILI's liquid milk division generated revenue of 57.524 billion yuan, a year-on-year decline of 12.1%, accounting for 64.6% of total revenue.
Mengniu's liquid milk segment revenue in the first half of 2024 was 36.262 billion yuan, a year-on-year decline of 12.9%, accounting for as much as 81.2% of total revenue.
Dairy industry analyst Song Liang believes that against the backdrop of peak penetration of ambient white milk, the growth of liquid milk in recent years has mainly been contributed by low-temperature milk and high-end yogurt.
He pointed out that the growth rate of these categories began to adjust in 2023, with high-end yogurt being severely impacted by price wars.
The cheese market, which has been expected to grow, has yet to find growth beyond cheese sticks. Changes in population structure are limiting the long-term growth potential of the milk powder business.
Overall, the performance demands of large-scale dairy companies are shifting from scale to profit.
During the Olympic marketing period in the first three quarters of 2024, YILI's selling expenses were 17.152 billion yuan, a year-on-year decrease of 0.26%; annual capital expenditure is expected to decrease from the previous 6-7 billion yuan to around 4 billion yuan.
Mengniu's selling and distribution expenses in the first half of 2024 decreased by 8.8% year-on-year, with product and brand promotion and marketing expenses reduced by approximately 620 million yuan, a year-on-year decrease of 12.1%; capital expenditure in 2024 is expected to not exceed 3 billion yuan and will gradually decrease in the future.
The saved funds may be converted into returns for investors.
In May 2024, YILI announced a stock repurchase plan of 1 billion to 2 billion yuan. In 2023, YILI distributed dividends of 7.639 billion yuan, accounting for 73.25% of net profit. The company emphasized that it will maintain a dividend payout ratio of no less than 70% in the coming years.
Mengniu increased its dividend payout ratio from 30% to 40% in 2023 and announced a share repurchase of no more than 2 billion Hong Kong dollars within a year in August 2024.
<h2>Competing for the B-end Market</h2>
The fluctuation of milk prices is cyclical, and overcapacity is not a short-term dilemma.
According to Huachuang Research's report, compared to the quality standards and low prices of imported bulk powder, the quality of Chinese bulk powder is uneven, with low added value. The spray drying of raw milk by Chinese dairy companies often implies subsequent impairment pressure.
If raw milk can be deeply processed, not only will the profitability fluctuations brought by the raw milk cycle significantly converge, but it will also enhance the competitiveness of the dairy industry.
Currently, the B-end market, which has stable demand and is easy to scale, carries the expectation of stabilizing the cycle and increasing incremental growth for the industry. In 2024, companies are accelerating their pace in exploring related markets
YILI revealed at its mid-2024 performance meeting that it is exploring the establishment of a separate B-end business system to better integrate resources and optimize business operations.
Currently, YILI has reached cooperation agreements with chain restaurants such as Nayuki (2150.HK), Auntie Hu, Sally's, and Haidilao (6862.HK). Mengniu has also become a supplier for many companies, including Yum China (9987.HK), Weiduomei, Haolilai, and Nanchengxiang.
However, this field has already been entered by international dairy giants with more advantageous costs.
In May 2024, Fonterra announced the divestment of its consumer goods business to transform into a dairy supplier focused on B2B operations. In recent years, the food and beverage business in the Greater China region has become a major driver of the company's performance.
As of July 31, 2024, for the 2024 fiscal year, Fonterra's food service business in the Greater China region generated revenue of NZD 2.377 billion, accounting for over 58% of global revenue; the revenue growth rate in the Greater China region was 7.46%, higher than the overall growth rate of 4.79% for this business.
Hou Junwei, founder of Ruinong Consulting, believes that compared to international dairy giants, Chinese dairy companies have shorter supply chains in the domestic market, allowing them to respond more quickly and flexibly to the needs of B-end customers.
&#34;Currently, domestic milk prices are relatively low, and dairy companies have a relative cost advantage. However, as more companies enter the market, the possibility of vicious price competition in the future cannot be ruled out.&#34;
Song Liang also told TradeWind01 that B-end catering customers place a high emphasis on price. If dairy companies do not leave enough profit margin in their cooperation with B-end enterprises, merely to digest excess milk supply, it will not be conducive to the long-term stable development of the business.
Compared to Fonterra, which focuses on the baking channel in the core Chinese market, domestic dairy companies are more inclined to choose freshly made coffee and tea drinks, which are rapidly penetrating the market, as their primary B-end cooperation targets.
By the end of 2024, Junlebao announced a joint venture with Mixue Ice City to build &#34;Snow King Ranch,&#34; aiming for deep strategic cooperation in market expansion, product development, and supply chain collaboration.
Huangshi Group, known as the &#34;first stock of buffalo milk,&#34; which supplies dairy raw materials to Bawang Chaji and Lele Tea, launched the milk tea brand &#34;Zai Guili&#34; in 2024.
However, binding to trending markets does not necessarily lead to growth.
Earlier, Junlebao and New Dairy (002946.SZ) had also attempted to enter the booming chain of freshly made yogurt through acquisitions, but did not see significant results.
In January 2021, New Dairy spent 230 million yuan to acquire a 60% stake in Chongqing Xinhong Industrial Co., Ltd. (referred to as &#34;Chongqing Xinhong&#34;), the operator of &#34;A Yogurt Cow,&#34; and signed a performance guarantee agreement.
However, Chongqing Xinhong's performance did not meet expectations, with a total loss of 5.3996 million yuan over three years. Ultimately, New Dairy divested this project by the end of 2023.
In November 2023, Junlebao strategically invested in the Moli yogurt brand, holding a 30% stake in the company. However, the following year, Moli yogurt was reported to have used expired ingredients in its stores and faced rumors of closures.
Growth anxiety remains, and the industry is still exploring future directions

600887

CIADY

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- The dairy industry is experiencing its longest downturn in nearly a decade, with milk prices declining for over three years due to weak demand.  
- As of January 23, 2025, the average purchase price of fresh milk in major production areas fell to 3.12 yuan per kilogram, a 14.3% year-on-year decrease, leading to significant financial pressure on farms.  
- Major companies like Yili and Mengniu are facing challenges, with revenue declines and increased competition, prompting a shift in focus from growth to profitability amid ongoing market uncertainties.

Wallstreetcn

YILI

Mengniu Dairy

MENGNIU DAIRY

TIANRUN DAIRY

Royal Group

YOURAN DAIRY

CH MODERN D

YUM CHINA

NAYUKI

SWHY

CHINA SHENGMU

HAIDILAO

Milk prices have fallen for three consecutive years. Is the dairy industry at the "dawn before the dawn"?