Over the past two decades, these two factors have repeatedly plagued dairy farms: rising feed costs squeezing profit margins, and weak terminal consumption leading to oversupply of raw milk. This has bred a formidable industry cycle. For farms, the price of raw milk directly influences herd size—high prices prompt expansion, low prices lead to dumping milk and selling cows. Like the pig cycle, it's an open secret and a stubborn impasse. Years ago, under optimistic consumption expectations, domestic dairy enterprises launched an expansion wave upstream, with '10,000-cow farms' everywhere, including leading and regional dairy companies. The aftermath: herd sizes expanded, raw milk output swelled, surpassing 40 million tons for the first time in 2022, making China the world's fourth-largest milk producer. The hidden danger has now surfaced: raw milk is in surplus. Farms are now forced to sell milk at low prices, and dairy companies are compelled to spray-dry milk for storage. Large-scale farms are suffering widespread losses, while small and medium farms without bargaining power are already living beyond their means. This is arguably the toughest time since 2008.
Cost Pressure
While sipping Tetra Pak milk, you might not realize that upstream farms and downstream dairy companies are having an exceptionally tough year. Seven listed farm companies saw raw milk output rise across the board, yet their performance plummeted: four suffered huge losses, and three saw net profits sharply decline. If industry representatives are in this state, small and medium farms and even individual farmers are having an even harder time. Earlier this year, a statement from the Shandong Dairy Association revealed a harsh reality—raw milk is relatively oversupplied, downstream dairy companies' spray-drying rate exceeds 20%, and dairy farms are struggling around the breakeven point. Shandong is not the most concentrated dairy farming region, producing only about 7% of national milk; in Hebei, where farms are dense, the situation is more evident. In the first quarter of this year, the province's reference price for fresh milk transactions was 4.10 yuan/kg, with a floor of 3.93 yuan/kg, but due to shipment pressure, the actual minimum price had been lowered to 3.85 yuan/kg, same as Shandong. According to Ministry of Agriculture and Rural Affairs data, in the first half of this year, the average price of fresh milk in major dairy provinces was 3.96 yuan/kg, down 5.7% from 4.20 yuan/kg in the same period last year. While milk prices fell, feed raw material prices rose. Soybean meal, corn, and alfalfa are the main feed ingredients for farms, accounting for a significant portion of feeding costs. In the first half of this year, domestic soybean meal and corn prices remained high, with average prices up 4.8% and 1.4% respectively compared to mid-2022. Alfalfa hay prices surged even more. According to customs data, the average CIF price of imported alfalfa hay in the first half of this year was $573.43 per ton, up 23.5% year-on-year. Against the backdrop of rising feed costs, industry insiders estimated last year that the average raw milk price must stay above 4.3 yuan/kg to ensure a basic profit margin of 8%. Falling milk prices and uncontrollable costs are fatal for farms. YouRan Dairy is the first domestic raw milk company with revenue exceeding 10 billion yuan and the world's largest raw milk supplier. In the first half of 2023, its average feed cost for high-quality fresh milk and specialty fresh milk was 2.49 yuan/kg, up 2.5% year-on-year. During the same period, the average raw milk price was 4.39 yuan/kg, down 5.2% year-on-year. The more raw milk sold, the greater the loss; the company posted a net loss of 992 million yuan in the first half. These large-scale farms still have shareholders and partner clients to share risks, but some small and medium farms and individual farmers are even more unable to make ends meet.
Raw Milk Oversupply
In 2019, the focus of the domestic dairy industry gradually shifted to upstream farms, and downstream dairy companies began to increase investment in this area, sparking a capacity expansion boom. Most well-known domestic dairy companies participated, including not only leading players like Yili, Mengniu, and Bright, but also second- and third-tier companies like New Hope Dairy, Sanyuan, and Junlebao. Their common goal was to secure milk sources as early as possible and increase the proportion of self-controlled milk sources. In the eyes of dairy companies, those who control milk sources control the world, gaining greater say in the market and products. Thus, these companies are ubiquitous in China's golden milk source belt. In the past two years, farm expansion has reached its peak. In 2021, 166 new and expanded farms were built domestically, over 60% of which were 10,000-cow projects, with a designed herd size of 980,000 cows and total investment of 39 billion yuan; in 2022, new and expanded farms had a designed herd size of 1.47 million cows, with total investment of about 42 billion yuan. Before this round of capacity expansion, domestic raw milk prices had bottomed out and risen; the expanded upstream farms brought a significant increase in raw milk output. In 2021, national milk production reached 37.78 million tons; in 2022, it increased to 40.27 million tons, ranking fourth globally. However, the optimistic expectations that underpinned the earlier expansion now contrast sharply with the current consumption environment. In 2022, the domestic liquid milk consumption market saw its first decline in nearly eight years, down 8%; revenue growth for dairy enterprises above designated size fell by 10.6 percentage points, and per capita dairy consumption dropped by 0.6 kg year-on-year, with terminal consumption further shrinking. Public data predicts that this year's raw milk surplus will exceed 1.1 million tons. With weak downstream demand, upstream farms are already panicking. Farms are cutting prices to accelerate cash recovery, while downstream dairy companies are forced to spray-dry milk for storage. As milk prices fall and feed costs remain high, entering the critical feed stocking period in the second half of the year may accelerate cash flow tensions for farms.
Farm Crisis
In fact, the crisis for upstream farms began to show signs last year. All seven listed farms saw revenue growth, but in terms of net profit attributable to shareholders, YouRan Dairy, Western Dairy, China Shengmu, and Modern Dairy all saw declines. Among them, YouRan Dairy's net profit fell 73.38% year-on-year. In the first half of this year, the situation worsened: YouRan Dairy, Manor Farm, AustAsia Group, and Original Ecology Farm suffered huge losses, while Western Dairy, China Shengmu, and Modern Dairy saw significantly reduced growth rates. The poor performance is naturally linked to the continued decline in raw milk prices, high raw material costs, and reduced downstream demand. In this 'sandwich' of pressures, farms are in significant pain. The revenue growth of farms in the first half of this year mainly came from increased raw milk output. For example, AustAsia Group's average annual milk yield per mature cow rose to 13.4 tons, up 3.1% year-on-year, likely the highest among these farms, surpassing China Shengmu's 10.94 tons per cow, YouRan Dairy's 12.2 tons, and Original Ecology Farm's 11.3 tons. AustAsia Group is the fifth-largest farm operator in China, with 87.4% of revenue from raw milk. It is backed by major shareholders like Junlebao, Mengniu, Bright, as well as New Hope Dairy and Meiji China, making it highly favored. Since its Hong Kong listing at the end of last year, its performance has been poor. According to its 2023 interim report, raw milk sales volume increased 10.7% year-on-year to 344,000 tons, but the average selling price fell 7.6%, and the feeding cost per kilogram of raw milk rose 7.1% to 2.55 yuan, with gross margin down 9.1 percentage points year-on-year. YouRan Dairy, despite support from its second-largest shareholder Yili, saw raw milk sales volume rise from 1.1277 million tons in the first half of 2022 to 1.4025 million tons in the first half of this year, with revenue reaching 6.157 billion yuan, up 18.0% year-on-year, but the average selling price was only 4.39 yuan/kg, down 5.2% year-on-year. The gross margin for raw milk was 28.3%, down 4 percentage points year-on-year. Similarly, Original Ecology Farm, with three major clients—Feihe, Mengniu, and Yili—contributing 99.6% of revenue, failed to rescue its dismal performance, posting a net loss of 264 million yuan in the first half.
Under such pressure, it remains challenging for large-scale farms to turn around. In contrast, the prospects for small and medium farms and individual farmers are even bleaker.