With the release of the latest international dairy auction prices, the prices of major products such as whole milk powder have risen for four consecutive auctions. However, First Financial reporters have learned that although the increase in the price of imported dairy products will have some impact on the supply and demand of the raw milk market in China, it remains difficult to solve the problem of the phased surplus and continuous decline in the price of raw milk in China.
The latest global dairy trade auction prices in May show that the prices of major dairy product categories have risen to varying degrees. Among them, the average winning price of whole milk powder is $3,350 per ton, a month-on-month increase of 2.4%. Over the past four auctions, the price of whole milk powder has continued to rise. After dropping to a previous low of $2,548 per ton in August 2023, the auction price of whole milk powder has quickly rebounded.
The global dairy trade auction, led by New Zealand dairy giant Fonterra, has always been a barometer of global dairy prices. The whole milk powder in the auction, also known as big bag powder, is industrial milk powder made from fresh milk spray powder, mainly used for reprocessing or production by dairy and food companies.
Reporters noted that with the continuous rise in the price of big bag powder, the price gap between imported milk powder and Chinese milk powder is widening. Coupled with the weak domestic consumption demand in China, the quantity of imported big bag powder is also continuously decreasing.
Data from the China Dairy Association shows that in the first quarter of 2024, China imported a total of 652,000 tons of various dairy products, a year-on-year decrease of 15.6%, with an import value of $2.577 billion, a year-on-year decrease of 29.7%. Among them, the import of big bag powder was 223,000 tons, a year-on-year decrease of 9.3%, with an import value of 740 million yuan, a year-on-year decrease of 24.7%, and an average price of $3,293 per ton, a year-on-year decrease of 16.9%.
Since the second half of 2022, due to the market consumption recovery not meeting expectations, coupled with the rapid growth of raw milk supply, China's raw milk industry has entered a deep adjustment phase. In 2023, the performance of major listed raw milk companies in China has seen varying degrees of decline or loss. For example, Modern Dairy (01117.HK) and China Shengmu (01432.HK) had net profit declines of 68.9% and 79.3% respectively, while YuanShengTai Dairy Farm (09858.HK) and Ausnutria (02425.HK) had net losses of 1.05 billion yuan and 490 million yuan respectively.
There is a competitive relationship between imported big bag powder and the supply of Chinese milk sources. However, industry insiders believe that although the price of big bag powder has been rising recently, it has limited help in alleviating the crisis of the phased surplus of raw milk supply in China.
Independent dairy analyst Song Liang told First Financial reporters that the recovery in global dairy auction prices also considers the supplier's strategy of reducing supply to maintain prices, which has widened the price gap between imported big bag powder and Chinese big bag powder. Recently, some food companies in southern China, which traditionally use imported big bag powder as raw material, have begun to switch to domestic big bag powder, which helps Chinese dairy companies digest inventory to a certain extent. However, for the raw milk industry, the help brought by the increase in the price of imported big bag powder is limited. Currently, it is the most difficult time for China's raw milk industry.
Reporters learned that although the number of dairy cows in China continues to decrease, the supply and demand of the raw milk industry have not yet restored balance.
In previous industry activities, Shengli Li, the chief scientist of the China National Dairy Cow Industrial Technology System and a professor at China Agricultural University, revealed that in 2024, the industry should appropriately reduce dairy cow production capacity, lowering the natural growth rate from the usual 3% to -5%, and eliminating about 300,000 adult cows, reducing raw milk production by 8,000 tons per day, which would significantly alleviate the current overcapacity in raw milk production.
However, data from the National Bureau of Statistics of China shows that in the first quarter of 2024, domestic milk production still increased by 5.1%. In some major raw milk provinces, the production increase is even more significant. For instance, data released by the Shandong Provincial Livestock Economic Research Association recently showed that in 2023, Shandong Province's raw milk production increased by 8.3% year-on-year, and in the first quarter of 2024, raw milk production continued to rise, with a year-on-year increase of 10.7%. This also led to the milk price gradually falling from 3.73 yuan/kg at the beginning of the first quarter of 2024 to 3.55 yuan/kg at the end of March, a quarterly decline of 4.8%.
Industry insiders believe that this situation is partly due to improvements in China's dairy farming technology. Additionally, several large farms built in recent years are still gradually coming into operation. Public information shows that despite the industry downturn this year, several large-scale farms with over 10,000 cows are nearing completion or have already started production in some provinces in the northeast and northwest of China.
The imbalance between supply and demand has plunged the raw milk industry into a downward spiral. Data from the Ministry of Agriculture and Rural Affairs of China shows that as of the fourth week of April 2024, the average price of raw milk in ten major producing provinces, including Inner Mongolia and Hebei, was 3.43 yuan per kilogram, down 0.6% from the previous week and down 12.1% year-on-year.
According to local dairy farmers in Hebei Province, April and May are also off-peak seasons for milk consumption. Social farms are experiencing the toughest times in recent years. By the end of 2023, small and medium-sized farms were gradually exiting the market, and currently, even medium and large social farms are culling a significant number of young cows.
First Financial reporters noticed that after preliminary industry research, the Hebei Provincial Department of Agriculture and Rural Affairs issued policies at the end of April to "rescue the market." These include providing spray-drying subsidies to qualified dairy processing enterprises (subsidies based on 10% of the amount of raw milk purchased from within the province, with municipal and county standards set at 300 yuan and provincial standards at 500 yuan), offering loan interest subsidies and guarantee fee subsidies for eligible dairy farms, and providing restructuring subsidies for mergers and acquisitions of large-scale dairy farms.
Song Liang told First Financial reporters that the inertia of the cattle farming boom from the past two years has not yet dissipated, but many medium-sized farms are currently struggling to sustain operations. He expects that the number of cattle will decline more rapidly and that the situation in the raw milk industry may become clearer in the second half of the year.
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