CITIC Construction Investment: The pullback does not change the logic of the long cycle; the current time may be a good opportunity to layout in the dairy industry

According to the Zhitong Finance APP, CITIC Construction Investment has released a research report stating that in the short term, the overall stock prices of livestock-related targets have adjusted due to the slowdown in the reduction of dairy cattle inventory over the past two months. However, short-term factors will not impact the cyclical logic itself, and the logic of the meat and milk resonance under the cattle cycle remains unchanged. The adjustment under the short-term data shock has instead become a very good timing for positioning in this round of major cyclical speculation opportunities. Looking ahead, with the seasonal weakening of demand and the continuous increase in operational pressure on related ranch operators, the reduction trend of dairy cattle inventory will continue, and the turning point for the raw milk cycle is approaching. The main points of CITIC Construction Investment are as follows: Since mid-August, livestock targets represented by YOURAN DAIRY have experienced significant adjustments, raising some concerns in the market. The reasons for this round of livestock adjustment are mainly as follows: 1) The earlier specific month's dairy cattle inventory reduction data exceeded expectations, leading to a rapid short-term rise in the sector, resulting in significant profit-taking pressure; 2) Entering August and September, the heat stress phenomenon affecting dairy cattle on the supply side impacted short-term production, combined with short-term pre-holiday stocking on the demand side, temporarily improving the supply-demand situation, leading to a slowdown in the month-on-month reduction pace of dairy cattle. However, this round of short-term negative data has no impact on the logic of the current meat and milk major cycle resonance. The trend of dairy cattle inventory reduction will continue into the off-season, and beef cattle have entered a phase of sustained price increases. Under the mechanism of meat and milk resonance, the trend of rising meat and milk prices in the coming years remains clear. From the perspective of beef cattle, prices continue to reach new highs, and the characteristics of the cycle's right side are evident, with the supply tightness of beef cattle expected to further intensify in the coming years. According to the latest data from the Ministry of Agriculture and Rural Affairs, as of October 11, the average wholesale price of beef in China has reached 66.04 yuan/kg. Although it has slightly adjusted from the pre-National Day high of 66.32 yuan, it remains close to a recent high level. The post-holiday demand has not significantly affected beef prices, and the overall upward trend in beef cattle prices is very clear. Meanwhile, according to the latest disclosed prices of carcass beef and beef wholesale prices by the Ministry of Commerce, influenced by the stocking for the double holidays, the prices have reached 64.58/71.26 yuan, both hitting recent highs. Based on the current price trend, it can be clearly judged that beef cattle prices have entered a clear right-side cycle. At the same time, combining the beef cattle inventory data disclosed by Steel Union, as of July 25, the number of beef cattle in China was 109,800, a reduction of about 20% compared to 139,300 in January 2024. Generally, during a loss cycle, farmers will prioritize culling cows to meet the funding needs for fattening bulls, which suggests that the reduction in cow inventory is expected to be significantly higher than the overall 20% reduction in beef cattle. Corresponding to the breeding cycle of beef cattle, the deep reduction of cows in 2023-2024 will greatly boost beef cattle prices in 2026-2027, and beef cattle prices are likely to accelerate upward and reach new highs in the next two years. From the perspective of raw milk, although there has been a short-term slowdown in inventory reduction, the overall logic of the major raw milk cycle turning point remains unchanged. From the latest raw milk prices, as of September 30, the purchase price of raw milk in China's main production areas has stabilized at 3.04 yuan/kg, remaining in a low range. Taking the situation in Shandong as an example, the raw milk purchase price of 3.04 yuan/kg in Q2 2023 is below the comprehensive cost of 3.45 yuan, indicating that the overall price is still below cash costs, and the industry remains in a deep loss phase, with the overall destocking trend unchanged. In the short term, the Q3 silage season has significantly increased the financial pressure on related farms, which is expected to accelerate the destocking pace of dairy cattle. Meanwhile, the certainty of rising beef cattle prices in the coming years will greatly enhance the willingness of farms to cull cattle, further promoting the destocking of dairy cattle and accelerating the process of raw milk prices hitting bottom. Risk Warning Risk of significant increase in raw material costs: Livestock-related companies primarily use soybean meal, corn, and other feed raw materials. If, for various reasons, the prices of bulk commodities such as corn rise sharply in the future, even if raw milk prices rebound after hitting bottom, the overall profitability of farms will still be impacted. Risk of slower-than-expected destocking pace of dairy cattle: If the destocking of dairy cattle does not meet expectations for various reasons, it may affect the pace and strength of the rebound in raw milk prices, thereby impacting the profitability of related companies. Risk of animal disease outbreaks: If large-scale epidemics occur in the future, it could lead to a significant decline in the short-term inventory of dairy and beef cattle, resulting in substantial impairment risks for the company's biological assets