China Galaxy Securities: The de-capacity of the upstream dairy industry is expected to accelerate, and the turning point of the raw milk cycle is approaching

According to the report released by China Galaxy Securities, based on data from the National Bureau of Statistics, the dairy product output from January to May 2025 is expected to decrease by 2.1% year-on-year, with positive growth in the monthly output for March, April, and May. In terms of upstream capacity, the price of raw milk peaked in 2021, with fresh milk prices in major production areas reaching as high as 4.35 yuan/kg. Since 2022, it has entered a downward cycle, and currently, the fresh milk price in major production areas is 3.04 yuan/kg, the lowest since 2011. Starting from Q2 2024, upstream farms began to reduce capacity, and by June 2025, the national number of breeding cows has decreased by about 7% from its peak. Under the current milk price level, dairy farms are generally experiencing cash flow losses, and the trend of capacity reduction is relatively certain. The main points of China Galaxy Securities are as follows: Downstream demand is expected to stabilize after experiencing extraordinary fluctuations Domestic dairy product consumption demand includes daily consumption and holiday gifting demand. In the medium to long term, as per capita consumption still has room for improvement, the industry is expected to show a slight and steady growth trend year by year, driven by the deepening of daily consumption habits and structural adjustments in dairy product categories. In recent years, the industry demand has experienced extraordinary fluctuations, including: ① During the pandemic, the promotion of health-related categories and home daily consumption led to a year-on-year increase of 9% in domestic dairy product output in 2021, significantly higher than the average growth rate of 3-5% in previous years; ② From 2024 to the present, affected by the weak consumption environment, dairy product output has decreased by 2% year-on-year, marking the first decline since 2014. In terms of specific categories, the consumption trend of liquid milk remains weak, while the output of milk powder has stabilized with changes in the birth population, and the output of other dry dairy products is showing a slow upward trend. According to the National Bureau of Statistics, the dairy product output from January to May 2025 is expected to decrease by 2.1% year-on-year, with positive growth in the monthly output for March, April, and May. Looking ahead, it is expected that domestic dairy consumption behavior will gradually stabilize; considering that dairy products belong to the health category, on April 7, 2025, the Ministry of Commerce, the National Health Commission, and 12 other departments issued the "Special Action Plan to Promote Healthy Consumption," which does not rule out the possibility of introducing relevant consumption stimulus policies to accelerate demand recovery, such as promoting the national "Student Milk Drinking Program" and related industrial policies to promote deep processing of dairy products. The speed of upstream capacity reduction is expected to accelerate In recent years, due to extraordinary fluctuations in downstream demand, raw milk prices have experienced significant volatility, leading to irrational expansion and capacity reduction in the upstream dairy farming industry. The national number of breeding cows has turned from decline to increase since Q4 2019, reaching a peak in Q1 2024, with a 40%+ increase in the number of breeding cows and a 30%+ increase in annual raw milk output over a capacity expansion cycle of about 4.5 years, while the annual output of downstream dairy products has only increased by about 18% during the same period. Raw milk prices peaked in 2021, with fresh milk prices in major production areas reaching as high as 4.35 yuan/kg. Since 2022, it has entered a downward cycle, and currently, the fresh milk price in major production areas is 3.04 yuan/kg, the lowest since 2011. Starting from Q2 2024, upstream farms began to reduce capacity, and by June 2025, the national number of breeding cows has decreased by about 7% from its peak. Under the current milk price level, dairy farms are generally experiencing cash flow losses, and the trend of capacity reduction is relatively certain Looking ahead, several factors will accelerate the reduction of upstream capacity: ① The price of beef is rising. Due to supply contraction, beef prices have rebounded since hitting a low in early 2025, and the prices for cull cows at dairy farms have also increased simultaneously. The rise in cattle prices will accelerate the culling of low-yield cows at dairy farms. ② Increased financial pressure on ranches. Dairy farming is a capital-intensive industry, and farms have a high dependence on external funding. The continuous losses over the past two years have generally tightened the finances of dairy farms, and the financial pressure during the autumn silage procurement season is expected to accelerate the exit of dairy farms lacking funding sources. The accelerated reduction of upstream capacity, combined with seasonal factors, is expected to lead to a bottoming out of raw milk prices in the second half of this year, ending nearly four years of decline. Due to the current round of raw milk prices falling to historical lows, small and medium-sized farms are experiencing deep losses, and it is expected that the proportion of replacement heifers in the herd structure is significantly lower than during stable periods. In the future, as downstream dairy product demand stabilizes, considering the long breeding cycle of dairy cows, there may be a gap in capacity, which could lead to a longer-lasting upward cycle in raw milk prices compared to previous cycles. Investment Recommendation: The dairy industry is currently in a situation of oversupply, with weak downstream demand and a contracting upstream supply side. Looking forward, it is judged that the demand for dairy products, after experiencing extraordinary fluctuations, will gradually return to normal, and there may also be related consumption stimulus policies to directly boost demand; under the backdrop of low milk prices, the reduction of upstream capacity is certain. Recently, due to rising beef prices and increased financial pressure on ranches, it is expected that capacity reduction will accelerate. The turning point of the raw milk cycle is approaching, and a longer-lasting upward cycle is expected in the coming years. Currently, it is recommended to focus on investment opportunities in upstream livestock stocks, with a recommendation to pay attention to YOURAN DAIRY (09858), Modern Dairy (01117), and TIANRUN DAIRY (600419.SH). Risk Warning The risk of continued weakness in downstream dairy product demand