China: Persistent Challenges in the Dairy Sector as Raw Milk Prices Remain Under Pressure
Source: DairyNews.today
The Chinese dairy industry continues to grapple with an ongoing crisis, marked by oversupply and low raw milk prices that have forced many farms to cull herds. "Milk prices are simply too low, and the market remains oversupplied. Recently, bulk milk prices dropped to just above 1 yuan per kilogram," noted several farm managers.
Once a market dominated by demand for raw milk, China’s dairy sector is now experiencing its second cycle of financial strain, with production outpacing consumption. Despite efforts to curb production, dairy farms across the country are being pushed to reduce herd sizes to mitigate financial losses, which have been exacerbated by recent price declines and mounting feed costs.
The Impact of Oversupply on Dairy Farms
The market imbalance dates back to 2019, when dairy companies began investing heavily in upstream production, significantly expanding capacity by 2021. Higher per-cow yields and a slowing demand for dairy have since intensified the raw milk glut, driving prices down to unsustainable levels. As of October 2024, raw milk prices averaged 2.6 yuan per kilogram—a price point that falls short of covering production costs, which range from 3.2 to 3.5 yuan per kilogram, according to Zhang Ming, a production manager at a northern dairy farm.
Xu Ping, a supplier for a major dairy company, echoed this sentiment. "We’re still operating at a loss, though our milk price is slightly above 3 yuan per kilogram. But after the Chinese New Year, the situation might worsen as dairy companies could reduce their purchase volumes in the second quarter." Price reductions have been ongoing since early 2024, and any significant recovery remains elusive.
Financial Strain on the Sector
China's raw milk market has seen three distinct cycles since 2008. In the current cycle, raw milk prices have dropped by more than 28% from a peak of 4.38 yuan per kilogram in 2021 to 3.14 yuan by September 2024. As Li Shengli, Vice President of the China Dairy Association, highlighted at the China Dairy Development Strategy Seminar in July, oversupply has driven profit margins into the negative. Over 80% of dairy farms are reporting losses, with some companies spray-drying up to 20,000 tons of milk daily to manage excess supply. By mid-year, the industry had stockpiled over 300,000 tons of powdered milk, a clear sign of the depth of the oversupply issue.
Smaller farms are bearing the brunt of this crisis, facing lower prices and more frequent rejections from buyers during downcycles. "Bulk milk prices for second-quarter purchases have been as low as just over 1 yuan per kilogram," Xu Ping reported, underscoring the challenging market dynamics.
Hope for Stabilization Amid Policy Support
Despite the industry's hardships, there is cautious optimism that the supply-demand imbalance may begin to ease in 2025. Major dairy companies such as Yili have noted that while oversupply persists, herd and milk production growth rates are starting to decelerate. With peak demand in the third quarter due to the Mid-Autumn Festival and National Day, industry players hope for a slight increase in milk consumption, though the effects may be temporary.
The Ministry of Agriculture and Rural Affairs, in collaboration with other departments, recently issued a “Notice on Promoting the Stable Development of Beef and Dairy Cattle Production.” This policy initiative aims to support dairy farms through credit and insurance measures, as well as consumption-stimulating efforts like school milk programs and government-issued dairy vouchers. The establishment of a whitelist system is also intended to protect farms from premature loan withdrawals by financial institutions, giving struggling producers a lifeline during this period of financial distress.
An Industry at a Crossroads
Nonetheless, the path to recovery remains complex. Song Liang, head of the Chinese Agribusiness Dairy Alliance expert team, noted that a full recovery will depend on how quickly the industry can reduce herd sizes and balance production with demand. Companies like Mengniu are already making operational adjustments, including significant inventory write-downs and targeted herd reductions, but these actions may take time to impact market prices.
As the industry heads into its second winter of financial losses, the strain on farm finances will likely intensify. Feed costs, winter stocking requirements, and the ongoing culling efforts will continue to weigh on dairy farms. Some farmers, faced with plunging cow prices and heavy debt, are opting to ride out the downturn, hoping for a rebound in milk prices. "Exiting now would only deepen our losses," said one dairy farmer. "We have to hang on, as selling off would mean financial ruin."
For China’s dairy sector, a turning point may still be on the horizon, with industry leaders and policymakers focused on addressing the persistent supply issues. Yet, until demand strengthens or production realigns with consumption, the challenges faced by the sector are unlikely to dissipate.
The Impact of Oversupply on Dairy Farms
The market imbalance dates back to 2019, when dairy companies began investing heavily in upstream production, significantly expanding capacity by 2021. Higher per-cow yields and a slowing demand for dairy have since intensified the raw milk glut, driving prices down to unsustainable levels. As of October 2024, raw milk prices averaged 2.6 yuan per kilogram—a price point that falls short of covering production costs, which range from 3.2 to 3.5 yuan per kilogram, according to Zhang Ming, a production manager at a northern dairy farm.
Xu Ping, a supplier for a major dairy company, echoed this sentiment. "We’re still operating at a loss, though our milk price is slightly above 3 yuan per kilogram. But after the Chinese New Year, the situation might worsen as dairy companies could reduce their purchase volumes in the second quarter." Price reductions have been ongoing since early 2024, and any significant recovery remains elusive.
Financial Strain on the Sector
China's raw milk market has seen three distinct cycles since 2008. In the current cycle, raw milk prices have dropped by more than 28% from a peak of 4.38 yuan per kilogram in 2021 to 3.14 yuan by September 2024. As Li Shengli, Vice President of the China Dairy Association, highlighted at the China Dairy Development Strategy Seminar in July, oversupply has driven profit margins into the negative. Over 80% of dairy farms are reporting losses, with some companies spray-drying up to 20,000 tons of milk daily to manage excess supply. By mid-year, the industry had stockpiled over 300,000 tons of powdered milk, a clear sign of the depth of the oversupply issue.
Smaller farms are bearing the brunt of this crisis, facing lower prices and more frequent rejections from buyers during downcycles. "Bulk milk prices for second-quarter purchases have been as low as just over 1 yuan per kilogram," Xu Ping reported, underscoring the challenging market dynamics.
Hope for Stabilization Amid Policy Support
Despite the industry's hardships, there is cautious optimism that the supply-demand imbalance may begin to ease in 2025. Major dairy companies such as Yili have noted that while oversupply persists, herd and milk production growth rates are starting to decelerate. With peak demand in the third quarter due to the Mid-Autumn Festival and National Day, industry players hope for a slight increase in milk consumption, though the effects may be temporary.
The Ministry of Agriculture and Rural Affairs, in collaboration with other departments, recently issued a “Notice on Promoting the Stable Development of Beef and Dairy Cattle Production.” This policy initiative aims to support dairy farms through credit and insurance measures, as well as consumption-stimulating efforts like school milk programs and government-issued dairy vouchers. The establishment of a whitelist system is also intended to protect farms from premature loan withdrawals by financial institutions, giving struggling producers a lifeline during this period of financial distress.
An Industry at a Crossroads
Nonetheless, the path to recovery remains complex. Song Liang, head of the Chinese Agribusiness Dairy Alliance expert team, noted that a full recovery will depend on how quickly the industry can reduce herd sizes and balance production with demand. Companies like Mengniu are already making operational adjustments, including significant inventory write-downs and targeted herd reductions, but these actions may take time to impact market prices.
As the industry heads into its second winter of financial losses, the strain on farm finances will likely intensify. Feed costs, winter stocking requirements, and the ongoing culling efforts will continue to weigh on dairy farms. Some farmers, faced with plunging cow prices and heavy debt, are opting to ride out the downturn, hoping for a rebound in milk prices. "Exiting now would only deepen our losses," said one dairy farmer. "We have to hang on, as selling off would mean financial ruin."
For China’s dairy sector, a turning point may still be on the horizon, with industry leaders and policymakers focused on addressing the persistent supply issues. Yet, until demand strengthens or production realigns with consumption, the challenges faced by the sector are unlikely to dissipate.
