context: The financial pressures facing dairy producers have yet to be eased. In the short to medium term, fresh milk will likely remain in surplus. In the long term, as capacity continues to be reduced and the economy potentially recovers, the oversupply might fade away. This year, dairy prices are expected to fluctuate at low levels, with the degree of recovery depending mainly on improvements in demand.
Milk prices continued to decline in the first two weeks of August, leading to widespread anticipated losses for dairy farming enterprises in H1 2024.
The average price of fresh milk in ten major production provinces, including Inner Mongolia and Hebei, was C¥3.21 per kilogram, down 14.6 percent y-o-y, yet the actual cost of dairy farming is generally between C¥3–3.5 per kilogram, according to the Ministry of Agriculture and Rural Affairs.
The direct cause of the drop in milk prices is oversupply. Song Liang 宋亮 indepent dairy industry analyst explained that the COVID-19 pandemic in 2020 caused milk prices to drop, leading dairy enterprises to cull cattle, which temporarily pushed milk prices up, excessively stimulating an increase in farming.
By 2023, milk prices plummeted again, and enterprises once more culled cattle, but this time primarily eliminating cows that needed to be phased out rather than heifers. According to the National Bureau of Statistics, China’s milk production reached 41.97 million tonnes in 2023, a significant y-o-y increase of 6.7 percent, with growth slowing to 3.4 percent in H1 2024.
On the demand side, factors such as reduced consumer spending have played a role. Song noted that China's dairy industry had been moving toward high-end products, leading to higher prices. However, with declining consumer purchasing power post-pandemic, this trend has become unsustainable, making it difficult for upstream farming enterprises to cover their costs.
Faced with the oversupply situation, upstream dairy farming enterprises have generally resorted to culling cattle to reduce capacity. However, due to the impact of low milk prices, cattle prices have continued to decline, leading to losses for the enterprises. Since July, several listed dairy farming companies have issued performance forecasts, anticipating a shift from profit to loss or an expansion of losses in H1.
- Modern Dairy stated in a profit warning that it expects a net loss of C¥180–240 million, compared to a profit of C¥220 million in the same period last year
- China Shengmu predicted that its net profit would shift from profit to a loss of C¥130–150 million
- The AustAsia Group attributed the expected expansion of losses to revaluation losses, forecasting a loss of C¥600–700 million