Several dairy companies listed on the Hong Kong Stock Exchange have reported losses
Source: The DairyNews
Several A-share and Hong Kong-listed dairy companies have recently released their performance forecasts for the first half of 2024, revealing a challenging landscape for the industry. While the number of companies disclosing results is limited, the majority are reporting losses or declines in net profit, providing an early indication of the current difficulties facing the dairy sector.
Industry Challenges
Key factors contributing to the performance declines include supply-demand imbalances in upstream production, a decrease in milk prices, and the varying effectiveness of marketing strategies and sales expense management. According to data from the Ministry of Agriculture and Rural Affairs, the average monthly price of raw milk in June 2024 was 3.30 yuan/kg, down 0.53% from the previous month and 13.55% year-on-year. Since September 2021, raw milk prices in China have been on a significant downward trend, driven by increased supply and weakened demand.
The "Supply and Demand Monthly Report of Fresh Agricultural Products," released by the Ministry of Agriculture and Rural Affairs in May 2024, highlighted that the domestic raw milk supply remains excessive. Raw milk purchase prices have decreased year-on-year for 27 consecutive months, marking the longest period of decline since 2010. The surplus of raw milk in 2024 is reportedly more severe than in 2023, according to insights from the "2024 China Dairy Development Strategy Seminar" held in July.
Impact on Companies
Upstream farming enterprises and downstream dairy companies have responded by implementing capacity reduction plans. For instance, the number of dairy cows in Ningxia decreased from 910,000 at the end of 2023 to 810,000 in May 2024, with major production areas such as Hebei and Shandong also seeing reductions. As a result, the reduction in raw milk production is starting to show, with nearly 4,500 tons of raw milk being reduced daily nationwide, amounting to a total reduction of 150,000 lactating cows.
Sun Yu, a food and beverage analyst at Soochow Securities, suggests that a 5% reduction in upstream capacity is necessary to alleviate overcapacity. He predicts that the supply-demand balance for raw milk could be achieved by 2025, based on feedback from the "2024 China Dairy Development Strategy Seminar" and input from dairy companies.
Currently, the profitability of listed dairy companies is concerning, particularly for those with upstream farming businesses. For example, Manor Ranch reported a net loss of 70 to 95 million yuan attributable to shareholders for the first half of 2024, compared to a loss of 20.16 million yuan in the same period last year—a significant increase in losses. The company cited continuous expansion of dairy product supply, sluggish demand, intense market competition, rising costs, and declining gross profit margins as the primary reasons for the poor performance.
Similarly, Tianrun Dairy expects to report a net loss of 26 to 31 million yuan for the first half of 2024. The company attributes the loss to weak consumer demand, an oversupply of milk, and falling prices. Tianrun Dairy has also increased its disposal of low-yield cows and bulls, leading to additional write-downs and impairments.
Hong Kong-listed AustAsia Group, which operates 11 large-scale modern dairy farms, expects a net loss of 600 to 700 million yuan for the six months ending June 30, 2024, compared to a net loss of 310 million yuan in the same period last year. The company cited oversupply, falling prices, and rising costs as the primary challenges facing China’s dairy farming industry.
Outlook and Strategic Considerations
The past three years have been particularly challenging for upstream farming operations, with rising feed costs and falling raw milk prices squeezing profits. Feed costs, which account for 60% to 70% of dairy farming expenses, have remained high due to increased prices for corn and soybean meal. Meanwhile, improved cow productivity and feed conversion efficiency have increased raw milk supply, but consumer demand has weakened, exacerbated by the impact of the pandemic.
Yi Bigui, a beverage and dairy analyst at Lianchu Securities, notes that feed prices have begun to decline since the end of 2022. Additionally, rising international milk prices and a recovery in downstream demand are expected to boost domestic raw milk prices, potentially easing the pressures on upstream farming.
Yi further analyzed the value distribution within the dairy industry chain, comparing China to developed countries. In China, dairy farmers and farms capture only 10% of the industry’s value, compared to 25% in developed countries. Over the past decade, midstream dairy companies in China have focused on upstream milk source construction and have gradually integrated forward, capturing a larger share of industry profits. As market concentration increases and brand influence expands, midstream dairy companies are expected to continue strengthening their bargaining power.
Conclusion
The first half of 2024 has been a difficult period for A-share and Hong Kong-listed dairy companies, with many reporting significant losses or declines in profitability. The challenges of supply-demand imbalances, falling milk prices, and rising costs have put immense pressure on the industry. However, as capacity reductions take effect and market conditions improve, there is cautious optimism that the supply-demand balance could stabilize by 2025, potentially paving the way for a recovery in the sector.
Key factors contributing to the performance declines include supply-demand imbalances in upstream production, a decrease in milk prices, and the varying effectiveness of marketing strategies and sales expense management. According to data from the Ministry of Agriculture and Rural Affairs, the average monthly price of raw milk in June 2024 was 3.30 yuan/kg, down 0.53% from the previous month and 13.55% year-on-year. Since September 2021, raw milk prices in China have been on a significant downward trend, driven by increased supply and weakened demand.
The "Supply and Demand Monthly Report of Fresh Agricultural Products," released by the Ministry of Agriculture and Rural Affairs in May 2024, highlighted that the domestic raw milk supply remains excessive. Raw milk purchase prices have decreased year-on-year for 27 consecutive months, marking the longest period of decline since 2010. The surplus of raw milk in 2024 is reportedly more severe than in 2023, according to insights from the "2024 China Dairy Development Strategy Seminar" held in July.
Impact on Companies
Upstream farming enterprises and downstream dairy companies have responded by implementing capacity reduction plans. For instance, the number of dairy cows in Ningxia decreased from 910,000 at the end of 2023 to 810,000 in May 2024, with major production areas such as Hebei and Shandong also seeing reductions. As a result, the reduction in raw milk production is starting to show, with nearly 4,500 tons of raw milk being reduced daily nationwide, amounting to a total reduction of 150,000 lactating cows.
Sun Yu, a food and beverage analyst at Soochow Securities, suggests that a 5% reduction in upstream capacity is necessary to alleviate overcapacity. He predicts that the supply-demand balance for raw milk could be achieved by 2025, based on feedback from the "2024 China Dairy Development Strategy Seminar" and input from dairy companies.
Currently, the profitability of listed dairy companies is concerning, particularly for those with upstream farming businesses. For example, Manor Ranch reported a net loss of 70 to 95 million yuan attributable to shareholders for the first half of 2024, compared to a loss of 20.16 million yuan in the same period last year—a significant increase in losses. The company cited continuous expansion of dairy product supply, sluggish demand, intense market competition, rising costs, and declining gross profit margins as the primary reasons for the poor performance.
Similarly, Tianrun Dairy expects to report a net loss of 26 to 31 million yuan for the first half of 2024. The company attributes the loss to weak consumer demand, an oversupply of milk, and falling prices. Tianrun Dairy has also increased its disposal of low-yield cows and bulls, leading to additional write-downs and impairments.
Hong Kong-listed AustAsia Group, which operates 11 large-scale modern dairy farms, expects a net loss of 600 to 700 million yuan for the six months ending June 30, 2024, compared to a net loss of 310 million yuan in the same period last year. The company cited oversupply, falling prices, and rising costs as the primary challenges facing China’s dairy farming industry.
Outlook and Strategic Considerations
The past three years have been particularly challenging for upstream farming operations, with rising feed costs and falling raw milk prices squeezing profits. Feed costs, which account for 60% to 70% of dairy farming expenses, have remained high due to increased prices for corn and soybean meal. Meanwhile, improved cow productivity and feed conversion efficiency have increased raw milk supply, but consumer demand has weakened, exacerbated by the impact of the pandemic.
Yi Bigui, a beverage and dairy analyst at Lianchu Securities, notes that feed prices have begun to decline since the end of 2022. Additionally, rising international milk prices and a recovery in downstream demand are expected to boost domestic raw milk prices, potentially easing the pressures on upstream farming.
Yi further analyzed the value distribution within the dairy industry chain, comparing China to developed countries. In China, dairy farmers and farms capture only 10% of the industry’s value, compared to 25% in developed countries. Over the past decade, midstream dairy companies in China have focused on upstream milk source construction and have gradually integrated forward, capturing a larger share of industry profits. As market concentration increases and brand influence expands, midstream dairy companies are expected to continue strengthening their bargaining power.
Conclusion
The first half of 2024 has been a difficult period for A-share and Hong Kong-listed dairy companies, with many reporting significant losses or declines in profitability. The challenges of supply-demand imbalances, falling milk prices, and rising costs have put immense pressure on the industry. However, as capacity reductions take effect and market conditions improve, there is cautious optimism that the supply-demand balance could stabilize by 2025, potentially paving the way for a recovery in the sector.
