China Galaxy Securities: Upstream milk prices are expected to bottom out, while downstream focuses on structural opportunities

According to the Zhitong Finance APP, China Galaxy Securities released a research report stating that the average price of fresh milk in major production areas remained low at 3.02 yuan/kg in August. Considering the current market supply and demand pattern, industry development dynamics, and seasonal factors, the possibility of this price further declining is relatively low. The current price level of 3.02 yuan/kg is very likely to become the bottom price in this round of fresh milk price cycle, and subsequent prices are expected to gradually enter a stabilization and recovery phase. This year, the overall downstream dairy product market is weak, with a cumulative year-on-year decrease of 1% in dairy product output from January to July, and it is expected to remain stable in August. However, cheese consumption shows a good growth trend, with a cumulative year-on-year increase of 12% in cheese imports from January to July, where the penetration of cheese in the catering sector is the main driving force behind the growth in consumption.

The main views of China Galaxy Securities are as follows:

Upstream raw milk prices are expected to bottom out

The average price of fresh milk in major production areas remained low at 3.02 yuan/kg in August. Considering the current market supply and demand pattern, industry development dynamics, and seasonal factors, the possibility of this price further declining is relatively low. The current price level of 3.02 yuan/kg is very likely to become the bottom price in this round of fresh milk price cycle, and subsequent prices are expected to gradually enter a stabilization and recovery phase. The reasons are as follows:

First, from the supply side, the current milk price level has put most domestic dairy farms in a cash flow loss situation, and the trend of capacity reduction in the industry will continue to remain unchanged, with the pace of capacity reduction expected to accelerate further. As the silage procurement season approaches in September and October, farms will face a new round of concentrated capital expenditure pressure. Silage, as an important source of roughage for dairy cows in winter, usually requires a large procurement volume and a one-time payment of high procurement costs, which undoubtedly adds to the burden for farms that are already in a tight cash flow situation.

In this context, some farms with weaker financial strength and lower risk resistance may choose to further eliminate low-yield dairy cows, reduce their breeding scale, or even exit the market, which will directly accelerate the industry's capacity reduction process. The gradual contraction of supply will provide important support for the subsequent stabilization of fresh milk prices.

Second, from the demand side, the peak consumption season for downstream dairy products is gradually approaching, and the market demand for raw milk is expected to show seasonal growth, which may drive a seasonal increase in raw milk prices.

Overall weak downstream demand, but cheese consumption shows good growth

This year, the overall downstream dairy product market is weak, with a cumulative year-on-year decrease of 1% in dairy product output from January to July, and it is expected to remain stable in August. In the liquid milk sector, the differences in consumption structure are particularly prominent. Among them, ambient milk, as an important component of the liquid milk market, has recently shown a significant weakness in consumption. Affected by changes in consumer habits, intensified market competition, and other factors, the market demand for ambient milk has struggled to grow, and even in some regional markets, there has been a decline in demand, which has weakened its role in driving the overall consumption scale of liquid milk.

In contrast, low-temperature milk and yogurt, with their freshness and nutritional value advantages, have shown a certain growth trend in sales, becoming highlight categories in the liquid milk market. However, in terms of market share, the consumption proportion of low-temperature milk and yogurt is relatively limited and has not yet formed a scale effect sufficient to reverse the overall market pattern of liquid milk In summary, the current consumption of liquid milk in the domestic market has reached a stage bottleneck, and the overall market scale growth has stagnated, making it difficult to achieve breakthrough growth in the short term. The industry has entered a stage of stock competition. Cheese consumption shows a good growth trend, with cumulative cheese imports from January to July increasing by 12% year-on-year, among which the penetration of cheese in the catering sector is the main driving force behind the growth in consumption.

Investment Recommendations

We are optimistic about the reversal opportunities in the upstream dairy cycle and recommend Yuanran Dairy (09858). For the downstream, we recommend New Dairy (002946.SZ) in the low-temperature liquid milk sector, cheese leader Milkground (600882.SH), and pay attention to H&H International Holdings (01112), which has a heavy overseas debt burden and will benefit from the Federal Reserve's interest rate cuts.

Risk Warning

The risk of continued weak downstream demand and intensified market competition