Summary of Key Points
After more than three years of a prolonged downturn, the raw milk industry is finally showing signs of recovery: milk prices have begun to rise slightly (with bulk milk increasing in price more rapidly), and the supply-demand balance is improving. Leading dairy companies are starting to strengthen their control over upstream milk sources, which bodes well for a stable upward trend in the industry, avoiding the previous fluctuations of sharp rises and falls.
1. Milk Prices Have Finally Increased! Bulk Milk Is More “Sensitive”
Dairy farmers have finally breathed a sigh of relief as raw milk purchase prices have started to rise. Li Xin from Hebei Qiantou Farm mentioned that the price of bulk milk (uncontracted milk without long-term agreements) has increased from 2.5 yuan/kg to 3.3 yuan/kg, a more significant increase than that of contract milk sold by dairy companies. Data from the Shandong Dairy Association shows that the raw milk purchase price in early June was 3.07 yuan/kg, a year-on-year increase of 1.3%, and it has remained stable for five consecutive weeks. The Ministry of Agriculture and Rural Affairs also reported a 0.3% month-on-month increase in milk prices in ten major producing provinces in May.
Why is the price of bulk milk more responsive? It lacks contractual constraints and directly reflects market supply and demand. During the industry’s downturn, bulk milk prices dropped to as low as 1.2-1.5 yuan/kg. Now that demand is picking up, bulk milk prices have risen first, acting as a kind of “barometer” for the market.
2. The Price Increase Is Not Accidental: Both Supply and Demand Are Contributing
The rise in milk prices is primarily the result of adjustments on both sides of the supply-demand equation:
- On the Supply Side: Farms are actively reducing their operations. During the industry’s low period, farms had to eliminate unprofitable cows and reduce the number of heifers (cows that have not yet started producing milk) to survive. They also switched to using local feed to cut costs, which gradually decreased the supply of milk.
- On the Demand Side: Summer has boosted demand for dairy products. Hot weather has led to increased sales of cold drinks and milk tea, which require a large amount of milk, thus driving up the demand for raw milk. For example, the rise in sales of ice cream and pearl milk tea means dairy companies need to purchase more milk for production.
The Shandong Dairy Association believes that these two factors combined have led to the stabilization and recovery of milk prices.
3. A Three-Year Downturn: Farms Have Had to Make Hard Choices
This downturn was the longest in nearly a decade, lasting over three years. At its worst, bulk milk prices in northern regions dropped to 1.2-1.5 yuan/kg in May and June 2024, causing many farms significant losses. To survive, they took various measures:
- Reduced the number of heifers to save on feed costs.
- Eliminated old and weak cows to keep only those that produce more milk and lower breeding costs.
- Switched to using local feed (corn and soybean meal) instead of expensive imported feed to save expenses.
Although prices have risen, farm owners still feel that they are relatively low, and the pressure remains. However, the situation is much better than in the previous two years.
4. Leading Dairy Companies Are Busy Acquiring Upstream Milk Sources
Recently, Mengniu and Yili have been making significant investments in upstream farms:
- Mengniu’s Modern Agriculture acquired a 31.26% stake in China Shengmu, triggering a mandatory offer to buy the remaining shares.
- Yili subscribed for new shares in Youran Animal Husbandry through its overseas subsidiary.
Why are they doing this? Because upstream milk sources are crucial for dairy companies’ operations. The top 40 dairy groups now account for half of the national production. By controlling these sources, companies can avoid extreme situations such as intense competition for milk or even dumping of surplus milk. Independent analyst Song Liang believes that this will result in more stable milk prices in the future, with less fluctuation.
5. Future Trends: Avoid Hasty Expansion; Stability Is Key
Experts advise farm owners to be cautious about expanding their herd sizes. Li Shengli from China Agricultural University suggests focusing on matching production to consumer demand accurately; otherwise, an oversupply could lead to another price drop.
According to previous forecasts, the industry will not enter a true upward cycle until the end of 2026-2027. This current recovery is just the beginning. Therefore, farms need to proceed with caution and avoid repeating past mistakes.
In summary, the raw milk industry is finally seeing light at the end of the tunnel, but the recovery process will be gradual. Although prices have risen, they are not yet at the ideal level for profitability. Dairy companies’ control over upstream sources aims to stabilize the industry. For consumers, this means that milk prices are unlikely to experience sudden large fluctuations in the future, which is good news.