Summary of Key Points
Halfway through 2026, China's dairy industry has finally seen signs of a turnaround from its downturn: prices for raw milk have bottomed out and begun to rise, the price of loose milk has increased, and the number of dairy cows has decreased. Experts believe that this year marks a turning point for the industry. However, downstream dairy companies remain cautious, as price wars have not boosted consumption growth, and core issues such as an imbalanced product structure (a high proportion of liquid milk and insufficient deep processing) have not been resolved. Currently, dairy companies are collectively shifting their focus to the functional protein market—expanding cheese offerings to all age groups while investing in high-end ingredients like whey and lactoferrin. Both domestic and international firms are increasing their efforts in this area, which is becoming a new growth point for the dairy industry.
1. The Industry Has Hit Rock Bottom, but It's Not Time to Relax
Good news comes from the upstream raw milk sector: milk prices have started to rise, and the number of dairy cows capable of producing milk is decreasing (indicating that supply will not exceed demand in the future). Li Shengli, the chief scientist of the national dairy cattle industry technology system, stated that "2026 is a year of turning point for the industry." However, downstream companies are less optimistic. Gao Fei, the president of Mengniu, believes that what we are experiencing is merely a "temporary recovery," and three major problems remain unresolved:
- A limited range of products (with little beyond liquid milk to offer);
- Frequent imbalances between supply and demand (either too much milk leading to powder production or a shortage of high-end products);
- An weak supply chain (relying on imported high-end ingredients). Therefore, the industry cannot afford to relax just yet.
2. Price Cuts Haven't Increased Sales; The Problem Lies in "Too Single a Product Range"
In the past two years, dairy companies have engaged in fierce price wars to boost sales, resulting in lower milk prices, but consumer purchases have not increased. In 2025, per capita milk consumption was 41 kilograms, only 0.5 kilograms more than in 2024 and far below the 80-90 kilograms consumed in countries like Japan and South Korea. Why don't price cuts work? The root cause is a product structure that is heavily biased towards liquid milk, which accounts for 92.7% of total dairy production, with ambient-temperature milk accounting for 75%, while processed products like cheese and butter account for only 7.3% (compared to 45%-68% in Europe and the United States). This leads to a situation where excess raw milk is turned into powdered milk for storage, while high-value products like cheese and butter must be imported, resulting in profits being lost to foreign companies.
3. Functional Proteins Become a New Trend, with Dairy Companies Competing Fiercely
Contrary to the slump in liquid milk sales, the functional protein market is booming this year. Dairy companies are focusing on two main areas:
1. Expanding Cheese Offerings to All Age Groups: Previously, cheese was mainly considered a children's snack, but now companies like Melon Blue Duo are targeting a broader audience with products designed for growth nutrition, family diets, sports supplements, and elderly nutrition. In 2025, domestic cheese demand grew by 16.7%, and after Melon Blue Duo's transformation, its revenue increased by 28.7% in the first half of 2026, with profits also rising by 13.7%.
2. Domestic Production of High-End Protein Ingredients: Domestic dairy companies are starting to produce whey, lactoferrin, and casein, which were previously imported. Feihe has established deep-processing bases in Heilongjiang and Inner Mongolia with a daily processing capacity of 3,000 tons, while Yili is expanding its cheese production and improving protein ingredient supply. Mengniu has also set up a dedicated division to launch its own dairy ingredient brand. These moves aim to reduce reliance on imports and earn higher profits.
4. Why Is the Protein Market So Attractive?
There are three main reasons for this trend:
- Rising Demand: A global trend towards high-protein diets, coupled with the need for protein supplementation among users of GLP-1 weight loss drugs, has driven up the price of concentrated whey protein, and production capacity is unable to keep up, leading to further price increases.
- International Supply Shortages: European and American companies are also competing in the protein market, with products like candies, bread, and even instant noodles containing added proteins, potentially creating a long-term global supply shortage. For example, Danone acquired an Australian company specializing in functional proteins, and Friesland Foods bought a U.S. whey protein company.
- Domestic Advantages: China has matured protein extraction technology, and consumers are shifting from consuming milk for basic nutrition to consuming protein for enhanced health benefits. More importantly, these high-value products are not affected by fluctuations in raw milk prices, allowing dairy companies to stabilize their profits without relying on price wars.
In summary, China's dairy industry is finally moving from a period of hardship to one of seeking new growth opportunities. The functional protein market represents the next breakthrough. However, to truly overcome its challenges, the industry must address the long-standing issue of an imbalanced product structure by increasing the variety of high-end products and reducing excess low-end offerings.