As the year approaches its midpoint,the situation in the upstream dairy industry becomes increasingly challenging.According to the latest data from the Ministry of Agriculture and Rural Affairs,as of May this year,domestic raw milk purchase prices have been falling year-on-year for 27 consecutive months,marking the longest period since 2010.However,reporters from Yicai have learned that due to the overall reduction in raw milk production being less than expected,the industry's recovery process may be later than anticipated.

Raw milk prices have been declining for 27 consecutive months

Due to the oversupply of raw milk in a phased manner,domestic raw milk prices have been continuously falling since 2022.According to the May report on the supply and demand of live agricultural products published by the Ministry of Agriculture and Rural Affairs,the situation of oversupply in China continues,and the domestic fresh milk price has been falling year-on-year for 27 consecutive months,the longest duration since 2010.In May of this year,the purchase price of fresh milk in the main dairy-producing provinces in China was 3.39 yuan per kilogram,a decrease of 2% month-on-month and 12.4% year-on-year.

Hebei dairy farmer Wang Peng told Yicai reporters that at the beginning of the year,the Hebei Dairy Association provided a reference price of 3.6 yuan per kilogram for the transaction of fresh milk in the first quarter,and dairy companies basically followed this price for purchase.However,this price has fallen to the level of the first quarter of 2018,which is the lowest point of the last round of milk price adjustment.

At that time,the industry was not optimistic about the future market prospects,but believed that the milk price had already fallen to the bottom.However,it was unexpected that during the off-season for milk consumption in April and May,social farms also entered the most difficult period in recent years,with milk prices decreasing every month.

Wang Peng operates a large modern dairy farm in Hebei,so the sale of raw milk is relatively stable,but the current contract milk price is only "a little more than 3 yuan." Other dairy farmers in other areas of Hebei told reporters that due to the low milk price,coupled with the continuous restriction on milk collection by dairy companies or the expiration of contracts without renewal,local small and medium-sized social farms,including the aforementioned dairy farmers,have all been eliminated.

After the continuous decline in milk prices,Wang Peng's dairy farm has also taken measures to reduce the breeding ratio of reserve cows and eliminate unprofitable dairy cows to reduce costs and survive.However,with the further decline in milk prices,it has also broken through his cost line.

Wang Peng told reporters that in a general herd,young cows and lactating cows each account for half,and under the current milk price situation,only raising lactating cows can maintain profitability.Therefore,he has eliminated all the calves,although this will have an impact on the subsequent operation of the farm,but it is more important to survive first.

Since the second half of 2022,due to the recovery of market consumption being less than expected,coupled with the rapid growth of raw milk supply,the domestic raw milk industry has entered a deep adjustment.In 2023,the performance of major domestic raw milk listed companies has declined to varying degrees or suffered losses.Among them,Modern Dairy (01117.HK) and China Saint Agricultural (01432.HK) saw their net profits decrease by 68.9% and 79.3% respectively,while Youran Dairy (09858.HK) and AAC (02425.HK) suffered net losses of 1.05 billion yuan and 490 million yuan respectively.

The industry calls for the overall planning of raw milk supply.Previously,the industry consensus on the trend of raw milk prices was that it would not rebound until the third quarter of this year,as the market's production capacity would accelerate the clearing process.However,the current de-capacity is not ideal.

Li Shengli,the Chief Scientist of the National Dairy Cattle Industry Technology System and a professor at China Agricultural University,once revealed at an industry forum that the country needs to reduce the daily raw milk production by 8,000 tons to significantly alleviate the current overcapacity of raw milk.

However,the reporter noticed that according to the monitoring by the Ministry of Agriculture and Rural Affairs,the domestic fresh milk production at dairy stations increased by 9.4% year-on-year from January to April.Data from the second week of June showed that the average purchase price of domestic fresh milk has not yet stopped falling,standing at 3.3 yuan per kilogram,a year-on-year decrease of 13.4%.

"The decline in milk production is not fast," independent dairy industry analyst Song Liang told the First Financial Daily reporter.The social dairy farm inventory adjusts quickly,but currently,a considerable part of the capacity comes from large-scale farms built by dairy companies and capital investments,which have strong economic strength and risk resistance,coupled with high individual production levels,making capacity expansion relatively fast,and thus not easy to de-capacity.Recently,the feed prices have also been falling,and some large-scale farms have adopted strategies to tough out the cycle,hence the overall production decline is slower than market expectations.

Public market information shows that the domestic protein feed prices have generally fallen,with soybean meal prices dropping from over 5,000 yuan per ton at their peak in 2023 to around 3,000 yuan per ton,with some provinces offering even lower prices due to large-scale market listings.

It is worth noting that since raw milk is a key raw material for dairy companies,and it takes a long time from establishing a farm to forming production capacity,there is also a game of strategy among dairy companies in controlling raw milk capacity.

Song Liang told the reporter that the domestic raw milk production will gradually slow down in the second quarter of this year,and it may decrease in the third quarter.However,for the raw milk supply and demand relationship to regain balance,more time is needed,and it will depend on the market conditions next year.

"The current situation is heartbreaking," Song Liang said,as the Chinese raw milk industry has experienced multiple supply and demand imbalances over the past decade,repeatedly playing out the cycle of "milk shortage - raising cows - overproduction - culling cows," which has also led to a significant waste of resources.

Song Huiteng,Chairman of Jiangsu Jiahui Biotechnology,told the First Financial Daily reporter that in the past,the supply and demand of the raw milk industry lacked control,and dairy companies bought raw milk on demand like in a farmers' market,leading to high risks on the breeding side.At the same time,the increase and decrease of breeding capacity were also disorderly and lacked planning.

Therefore,Song Liang also called for the competent authorities to coordinate according to the agricultural resources of each province,establish a raw milk supply quota system,produce based on sales,strengthen farm approval management,and protect the interests of breeders.Previously,the European Union also managed the raw milk industry with a quota system.On the other hand,the country should establish a raw milk production and marketing early warning mechanism to help the industry effectively avoid market risks.