The Zhitong Finance App learned that Everbright Securities released a research report saying that the early expansion of the upstream animal husbandry industry compounded the weakness in downstream demand after the epidemic, and the gap between supply and demand caused raw milk prices to drop all the way down. Over the past 25 years, along with continuous degeneration of cows and stability on the demand side, raw milk prices have fluctuated at the bottom. Entering 2026, the price of beef cattle has risen further, the deactivation of stocks continues, and raw milk prices have shown signs of recovery. Moreover, during this round of removal, head ranches are more resilient to risks, small and medium-sized ranches have been cleared one after another, and industry concentration has increased. As leading ranches, Youran Animal Husbandry (09858) and Hyundai Animal Husbandry (01117) are leading ranches, backed by leading dairy companies represented by Irimon Cows. In recent years, they have bucked the trend and expanded their inventory. The subsequent steady upward cycle of milk prices is expected to expand their competitive advantage. Combined with improved expectations for biological asset impairment, the profit side is expected to unleash greater flexibility.
The main views of Everbright Securities are as follows:
The nature of ranching and the laws of industry
The trading boundary for raw milk is defined by storage time, transportation distance, testing conditions, and delivery network. Perishable characteristics combined with continuous production determine that raw milk stocks cannot bear routine inter-period adjustments. Purchase and sale contracts can stabilize daily delivery, but raw milk that exceeds the upper limit of capacity cannot be consumed. Therefore, raw milk prices are highly sensitive to marginal supply, and adjustments usually occur earlier than herd and yield adjustments. The delay in supply-side adjustments is also constrained by both asset specificity and breeding cycles. In the early stages of total herd contraction, structure and efficiency can still support the growth of raw milk production. The elimination of reserve cows has almost no effect on current production. The elimination of low-yielding cows can increase the average yield of stock herds, and the increase in yield will drive an increase in total production. When the total contribution of the total number of cows, the proportion of adult cows, the increase in average yield, and the proportion of raw milk that can be sold is negative, the total milk volume enters the contraction stage.
Supply is expanding faster than demand is being absorbed, and declining variable costs are delaying clearance
At the price level, the depth and duration of this round of milk price adjustments has surpassed the previous round. The decline has deepened by about 10 pcts, stayed low for a longer time, and supply is more difficult to digest. Although milk prices have weakened since 2022, the country's milk production has continued to increase, supply adjustments lag behind prices, and the decline in feed costs has further extended the transmission chain. At the supply level, the increase in the supply of raw milk in this round was far greater than in the previous round. The average annual rate of expansion of production was close to six times that of the previous round, resulting in a supply expansion with higher intensity, more concentrated increments, and a longer duration; imported dairy raw materials further increased supply pressure in the first half of the cycle. At the demand level, the period from 2022 to 2025 was the first continuous decline in retail sales of dairy products since 2001. Among them, white milk had stronger essential properties, and the trend volume and price declined steadily. Yoghurt has stronger optional properties, and sales have declined even more drastically. The penetration rate of fresh milk continues to increase, but the price-for-volume logic contributes limited to sales.
Demand stabilizes at a low level, and contraction in supply determines a turning point in the cycle
The stage of worst demand is probably over. Combined with the sales strategies and revenue performance of leading dairy companies, we can see a steady recovery in terminal sales performance. Yili shares experienced a year-on-year decline in revenue TTM in 24Q2, and the decline narrowed to 5% in 26Q2. Mengniu Dairy's 24H1 revenue TTM changed to -4% year on year, then the decline reached more than 10%. The 26H1 year-on-year decline narrowed to 3%. According to Euromonitor's forecast, after five consecutive years of year-on-year decline over 22 years, total sales of dairy products are expected to recover from a low level after stabilizing in 2027, corresponding to a CAGR of 1.1% for 26-30 years. The probability that demand will continue to deteriorate rapidly declined, but subsequent incremental contributions were limited. The bank believes that demand is more likely to be a factor in stopping the industry's decline, rather than a separate force driving a reversal of the raw milk cycle. The transformation of the industry in the past two years still requires supply-side contraction to provide stronger support. The focus of eliminating the supply-side herd is gradually shifting to reserve cows. When efficiency improvements cannot offset the removal of cows, the supply-side is expected to reverse contraction more clearly.
Risk analysis: milk prices continue to decline, feed prices rise, risk of epidemic diseases.