Summary of Key Points
The two major dairy companies, Mengniu and Yili, have recently made significant investments in their upstream milk supply sources in a coordinated manner: Mengniu acquired shares of China Shengmu, forming a milk source matrix with Modern Agriculture; Yili increased its stake in Youran Animal Husbandry to become the largest shareholder. The rationale behind this is to address the three-year decline in raw milk prices (the longest downward cycle in a decade) and the intense price competition at the retail level. By increasing their control over milk supply, they aim to stabilize costs and ensure availability while supporting the expansion of their premium products. Currently, the industry faces an oversupply of raw milk, leading to fierce price wars for both chilled and room-temperature dairy products. In the future, raw milk prices may see a slight increase, and market share will likely become more concentrated among the leading companies, resulting in a more balanced distribution of profits along the supply chain.
1. Why are dairy giants suddenly snapping up farms?
In simple terms: Having your own milk source provides peace of mind; it allows you to withstand risks and earn higher profits from premium products.
Raw milk prices have been falling for three years, and if dairy companies rely solely on purchasing milk from others, they face significant cost fluctuations and the risk of supply disruptions. For example, Junlebao, with a 66% self-sufficiency rate (the highest in the industry), can maintain stable profits despite price volatility. Mengniu and Yili’s acquisition of farms is aimed at securing their own milk supply, ensuring that their costs remain stable regardless of external market conditions. Additionally, premium dairy products (such as organic and A2 milk) require specific types of milk, and controlling farms allows them to guarantee quality and supply while avoiding low-price competition.
2. What caused the three-year decline in raw milk prices?
The main issue is an oversupply that has lasted longer than expected.
In previous years, high milk prices led to increased production, but demand did not keep up. It was thought that the market would adjust within 18-24 months, but the downward trend has continued for three years (since the peak in 2021), setting a new record for the longest decline in a decade. Although smaller farms are starting to reduce their herd sizes, larger farms' scale efficiency means they produce more milk per cow, thus maintaining an overall oversupply.
3. How intense is the price competition at the retail level?
To put it simply: Prices have dropped to unbelievable levels.
- Chilled milk: With a short shelf life (usually around 7 days), distributors promote products within three days of production or offer buy-one-get-one-free deals when they are nearing expiration. A 950ml bottle of pasteurized fresh milk, which normally costs 12-15 yuan, is now available for 6.9-7.9 yuan at discounted stores, nearly half the regular price.
- Room-temperature milk: Basic and plain yogurt products rely on promotions to sell; only high-end options (such as high-protein and organic varieties) are seeing growth. Dealers report that basic products struggle to sell without discounts.
4. What impact will this milk supply consolidation have on us and the industry?
- Short-term: We will continue to enjoy cheaper milk, but smaller brands may disappear as larger companies with their own farms can afford to lower prices and sustain price wars.
- Long-term: Milk quality will improve, and price fluctuations will become less extreme. As inefficient farms are phased out, raw milk prices will be more stable, allowing dairy companies to invest in higher-quality products (such as organic and A2 milk). This will result in a healthier industry with better-quality dairy products for consumers.
5. Will milk prices rise in the future?
Experts predict a slight increase in the second half of the year.
Raw milk production grew by 13% in the first quarter, but the annual growth rate is expected to slow to 3%-5%, alleviating the oversupply. This could lead to a modest price increase for dairy companies, which will reduce their need for cheap promotions and help curb the vicious price wars at the retail level.
In summary, this milk supply consolidation is a strategic move by dairy companies to stabilize costs in the short term and prepare for the future by focusing on premium products. In the long run, the industry will become more concentrated among leading players, and the quality of milk we consume will improve, shifting from being primarily inexpensive to higher-quality.