Guosheng Securities: The inflection point of the raw milk cycle is approaching, and the improvement of dairy companies is on the way

According to the Zhitong Finance APP, Guosheng Securities released a research report stating that after a four-year downward cycle, raw milk prices have recently stabilized at a certain stage. The average price of raw milk in major production areas across the country has increased from 3.02 yuan/kg in August to 3.04 yuan/kg by the end of September, while the price of loose milk in Ningxia has risen from 2.1-2.2 yuan/kg to 3.5-3.7 yuan/kg. This is driven on one hand by the demand for gifts during the Mid-Autumn Festival and National Day, and on the other hand by a natural decrease in supply during the "heat stress" phase for dairy cows from July to September. This round of milk prices is entering the end of the downward cycle, and with the accelerated reduction in stock, a turning point is expected. However, under the backdrop of an increasing proportion of large-scale farms, the fluctuations in milk prices will be significantly smoothed. For dairy companies, the narrowing decline in milk prices and reduced losses from culling cows will lead to profit recovery on the financial statements.

The main points of Guosheng Securities are as follows:

Short-term milk price increase, long-term turning point expected

Currently, during the Mid-Autumn Festival and National Day period, the demand for dairy products has reached a small peak. As supply gradually clears, raw milk prices have achieved stage stability, and beef prices have begun to rise. The subsequent stability in milk prices and reduced losses from culling cows will significantly catalyze opportunities in the dairy sector, and the balance of supply and demand for raw milk is also expected to ease competition among dairy companies, creating opportunities for dairy products.

The raw milk cycle is nearing its end, and the reduction in stock in 2025 H2 is expected to accelerate

After a four-year downward cycle, raw milk prices have recently stabilized. The average price of raw milk in major production areas across the country has increased from 3.02 yuan/kg in August to 3.04 yuan/kg by the end of September, while the price of loose milk in Ningxia has risen from 2.1-2.2 yuan/kg to 3.5-3.7 yuan/kg. This is driven on one hand by the demand for gifts during the Mid-Autumn Festival and National Day, and on the other hand by a natural decrease in supply during the "heat stress" phase for dairy cows from July to September.

Reviewing this round of raw milk cycle, the industry has experienced a four-year downward phase. From the demand perspective, the consumption of dairy products has continued to decline, creating a different demand background compared to previous raw milk cycles. Currently, opportunities on the demand side are more focused on the B-end and deep processing areas such as cheese. From the supply dimension, during the previous peak phase of milk prices, the dairy industry intensified upstream milk source construction, leading to an oversupply phenomenon. According to Professor Liu Changquan, Secretary-General of the Chinese Society of Forestry, Animal Husbandry and Fishery Economics, over 80% of the dairy industry faced losses in 2024 H1, and over 90% in 2025 H1. The dairy industry is gradually clearing, but the high proportion of large-scale farms has slowed the pace of reduction. According to the Ministry of Agriculture and Rural Affairs, the proportion of farms with over 100 heads in China reached 78% in 2024, an increase of 2 percentage points year-on-year, and it is expected that the proportion of large-scale farms will further increase.

By July 2025, the number of dairy cows is expected to be 5.983 million, a decrease of 507,000 heads compared to the peak in February 2024. It is anticipated that after the Mid-Autumn Festival, the number of cows will further decrease, with marginal catalysts being: 1) The small peak demand during the Mid-Autumn Festival and National Day will temporarily boost demand, and post-holiday demand will recover daily sales and enter a destocking phase; 2) The industry has experienced three years of losses, and the cash flow of small and medium-sized dairy companies is under significant pressure. The period from September to October enters the stage of silage feed storage, further increasing cash flow pressure in the dairy industry; 3) Current beef prices are rising, and reduced losses from culling cows are expected to enhance the enthusiasm for culling cows in farms.

Beef is entering an upward cycle, with expansion pace and import restrictions driving up beef prices On September 25, the average price of beef in China was 71.1 yuan/kg, an increase of 9.4% compared to the low point in February. The prices of cattle in provinces such as Shaanxi, Shandong, and Henan have entered an upward channel after the Spring Festival. The boost in cattle prices is attributed to two factors: on one hand, during the beef price decline phase from 2021 to 2024, the industry has experienced a reduction in stock, and cattle farming is mainly conducted by smallholders, leading to a high degree of industry reduction. By the end of June 2025, the cattle stock is expected to be 99.92 million heads, a decrease of 5.17 million heads compared to the peak in 2023; on the other hand, China has a high dependence on imported beef, with the import supply accounting for about 31% in the first half of 2024. In late 2024, the Ministry of Commerce initiated an investigation into safeguard measures for imported beef. In the first half of 2025, 1.3 million tons of beef were imported, a year-on-year decrease of 9.5%, ending an eight-year growth trend. In August 2025, the Ministry of Commerce decided to further extend the investigation period to November 26, 2025, and the narrowing of import volume will further expand the domestic beef supply-demand gap.

The cycle for expanding cattle herds is significantly longer compared to pigs, as it takes at least 2.5 years for cattle to go from pregnancy to fattening and slaughter. During the previous round of cattle reduction, breeding cows also experienced a reduction phase. According to the Ministry of Agriculture and Rural Affairs, by August 2025, the stock of breeding cows is expected to decrease by 4.2% year-on-year to 35.8 million heads. If considering the expansion of breeding cows, the expansion cycle will be further extended, and the industry is currently at the starting point of this cycle, which may lead to a long-term price increase phase.

Milk prices are expected to emerge from the downward cycle, creating opportunities for the dairy industry

Guosheng Securities predicts that the current round of milk prices is nearing the end of the downward cycle, and with the accelerated reduction in stock, a turning point is expected. However, with the increasing proportion of large-scale farms, the fluctuations in milk prices will be significantly smoothed. For livestock companies, the narrowing decline in milk prices and reduced losses from culling cattle will lead to profit recovery on the financial statements. Currently, Youran Dairy (09858) has a PB of 1.0x, Modern Dairy (01117) has a PB of 1.1x, and China Shengmu (01432) has a PB of 0.7x, with the resonance of raw milk and cattle cycles catalyzing significant changes.

For dairy companies, the improvement in the supply-demand structure of the industry will alleviate the pressure of raw milk digestion, narrow terminal promotions, and reduce the pressure of cattle impairment. However, under the backdrop of rising costs, long-term profitability improvements may come from the exploration of deep-processing products and structural upgrades on the demand side. Currently, YILI (600887.SH) has successfully demonstrated improvements in revenue, and the subsequent turning point in the raw milk cycle is expected to lead the dairy industry into a new development stage, with a current PE of 15x and a dividend yield of 4.5%, indicating significant allocation value. NHD focuses on a fresh strategy, continuously achieving excellent performance in market expansion, channel coverage, and product innovation, significantly improving net profit margins and highlighting growth attributes. TIANRUN DAIRY (600419.SH) successfully achieved profit bottom improvement in Q2 2025 after actively reducing excess cattle, and the subsequent improvement in the industry supply-demand structure is expected to narrow the company's livestock losses and realize profit improvements.

Risk Warning

The industry's reduction may not meet expectations, dairy product demand may continue to weaken, and the turning point for milk prices may be delayed