CITIC Construction Investment: The raw milk cycle reversal signal shows that upstream and downstream are welcoming the business repair window
The Zhitong Finance App learned that CITIC Construction Investment released a research report saying that recently the price of loose milk overtook the contract price, the daily powdered fresh milk fell to its lowest level in 2 years, the price of milk in the main production areas rebounded slightly, and there were obvious signs of a reversal in the raw milk cycle. As the upstream continues to degrade, it is expected that raw milk production will gradually shrink, downstream deep processing capacity will be put into operation to increase demand. It is optimistic that raw milk prices will begin a period of moderate increase. Leading Animal Husbandry Group will have flexible performance and recommend Excellent Animal Husbandry (09858). During the period of rising milk prices, the competitiveness of liquid milk companies increased, upstream related impairment decreased, and investment returns increased, which is beneficial to performance improvement.
CITIC Construction Investment's main views are as follows:
The raw milk cycle reversal signal is obvious
Since May, due to factors such as foot-and-mouth disease and heat stress, the price of loose milk has risen, surpassed the contract price, and the daily powdered fresh milk has been reduced to 4,000 tons. Milk prices in major production areas rose slightly to 3.06 yuan/kg after one year of bottoming out, which was a year-on-year correction. As the peak season approaches, the supply and demand for raw milk tend to balance, and I am optimistic that milk prices will rise further during the Mid-Autumn Festival and National Day.
Supply and demand continue to improve, and I am optimistic that milk prices will start to rise moderately
On the supply side, the proportion of upstream cows and the aging structure are aging. Contract milk prices are still below the full cost of society, which will drive the continued degeneration of adult cows, and the high proportion of elderly cows will increase or slow down yield. It is expected that raw milk production will gradually tighten in the future. On the demand side, deep processing of dairy products will contribute to industry growth. Since 2025, there are more than 70 projects planned or under construction. High growth in B-side demand and domestic substitution of high-value-added raw materials drive the development of the deep processing industry. As production capacity utilization increases, it is expected that about 4 million tons of fresh milk will be digested in the future.
Under the resonance of supply and demand, we are optimistic about the sustainability of this round of milk price increases. Considering the continued increase in the scale of the industry, animal husbandry groups are deeply tied to large dairy companies, which will smooth out the volatility of the milk price cycle and are optimistic that this round of raw milk will begin to rise moderately.
Beef supply tightens in the second half of the year, and meat price increases are expected to accelerate
Domestic beef prices increased only slightly in the first half of the year due to the accelerated use of import quotas and the accumulation of inventories by importers. Domestic beef will be phased out starting in 2024. Destruction is intense, the will to fill the list is still weak, and the supply of domestic beef will continue to decline. The 2026-2028 beef import quota system was implemented. In 2026, Australia's quota has been used up, Brazil's quota is over 90%, and Argentina's quota is over 50%. Considering other countries' supply capacity, beef import quotas will begin to be scarce starting in the second half of the year. Looking ahead, domestic supply is further scarce, remaining import quotas are reduced and inventories are reduced, and meat prices can be expected to rise during the peak season.
Midstream dairy companies: during the period of rising milk prices, optimistic about leading business recovery
The period of rising milk prices was beneficial to the operation of leading dairy companies. Upstream-related impairment was drastically reduced, investment income from animal husbandry joint ventures increased, and the company's performance improved. The price of loose milk has risen, and the cost performance ratio of small and medium-sized dairy companies' products has decreased.
Risk Alerts
Production capacity removal falls short of expectations: At present, the industry has reached a consensus on capacity removal, and the milk price cycle will continue in the second half of the year; if leading animal husbandry companies are slow to degrade and social ranches are still willing to operate at a loss and wait for milk prices to rise again, the capacity removal process will slow down, further affecting ranch business performance.
Demand falls short of expectations; even if the animal husbandry industry cuts production on a large scale, if demand continues to weaken and demand for downstream raw milk decreases, the inflection point of milk prices will be further moved back.
Prices of raw materials fluctuate; raw materials account for more than 70% of sales costs, imports of raw materials such as soybean meal, alfalfa, and oat grass account for a relatively high share, and corn prices have rebounded this year. If the price fluctuation of raw materials increases, it will affect ranch breeding costs.
The risk of deep processing falling short of expectations: With the rapid development of the cheese, whipped cream and butter industries, entrants, including large dairy companies, continue to pour in, and market competition intensifies. If there is malicious price competition, it will have a negative impact on the overall profit performance of the industry.