China Shengmu Struggles Amid Low Raw Milk Prices
The company's 2023 performance showed early signs of decline, with annual revenue at approximately 3.52 billion RMB, a 5.5% increase, but net profit plummeted by 79.3% to 86.1 million RMB. The main issue was the faster growth in raw milk production compared to downstream demand.
The first half of 2024 continued to suffer from the raw milk price cycle and supply-demand imbalance. China Shengmu attributes its losses to three primary factors:
- Declining Raw Milk Prices: The domestic imbalance in raw milk supply and demand led to a continuous decline in raw milk prices during the reporting period, reducing sales revenue and gross profit.
- Increased Culling and Low Beef Prices: The group significantly increased the culling of inefficient cows to upgrade herd structure. Coupled with low beef market prices, this led to higher losses from changes in the fair value of biological assets.
- Weaker Demand and Falling Prices for Beef Cattle: The demand for beef cattle was weaker than expected, with sales prices falling sharply, leading to increased losses in beef cattle sales compared to the previous year.
These factors reflect the broader challenges facing the dairy farming industry, which remains in a cyclical downturn. Companies like Australia Asia Group, which reported a projected net loss of 600 to 700 million RMB for the first half of 2024, illustrate the widespread impact of this downturn.
The dairy farming industry in China experienced a peak milk price cycle from 2018 to 2021, spurring large-scale farm expansions. However, by early 2023, raw milk prices began to decline significantly. This trend was exacerbated by rising feed costs, which squeezed profit margins. For instance, raw milk prices in Zhangjiakou and other Hebei cities dropped to 3.78-3.80 RMB per kilogram, while feed costs surged.
The oversupply of milk, despite efforts to reduce production capacity, indicates that the recovery will take longer due to weak consumer demand. Data from the Ministry of Agriculture and Rural Affairs in early August 2024 showed that the average price of fresh milk in key provinces fell to 3.21 RMB per kilogram, a 14.4% year-on-year decline. Since peaking at 4.38 RMB per kilogram in August 2021, prices have dropped by 27%.
Professor Li Shengli of China Agricultural University highlighted in July that the profit margin for dairy production had entered negative territory for the first time since records began. This downturn surpasses the 2016-2017 cycle in severity, with industry losses affecting over 80% of businesses.
In response to these challenges, companies like Australia Asia Group have postponed capital-intensive projects and shifted focus to improving cow productivity and breeding. China Shengmu, despite industry-wide setbacks, has reported improvements in cow productivity and breeding efficiency, with an average annual yield per mature cow surpassing 12 tons, a 10.3% increase year-on-year.
Additionally, China Shengmu is strategically importing high-quality Holstein cows from Australia, aiming to enhance herd quality and prepare for future market recovery.
Image by www-dairy123-com
