A recent research report from China Securities Co., Ltd. indicates that the raw milk cycle is showing clear signs of a reversal, with spot milk prices now surpassing contracted levels and daily spray-dried fresh milk volumes hitting a two-year low. Farm-gate milk prices in major production areas have also inched upward, signaling that the prolonged downturn may finally be coming to an end.

As upstream herd reduction continues, raw milk output is expected to gradually tighten while downstream deep-processing capacity expansions add fresh demand. The brokerage forecasts a period of moderate price increases ahead, positioning leading pastoral groups for earnings upside, with YOURAN DAIRY (09858) highlighted as a top pick. During the price recovery phase, midstream dairy processors are expected to see enhanced competitiveness in liquid milk, reduced impairment losses from upstream investments, and higher returns from associate operations, all of which should support improved financial performance.

Clear Reversal Signals Emerging in the Raw Milk Cycle

Since May, factors such as foot-and-mouth disease and heat stress have driven spot milk prices higher, surpassing contract prices, while daily spray-dried fresh milk has fallen to 4,000 tonnes. After a year of price bottoming, farm-gate milk prices in major production areas have ticked up to RMB 3.06 per kilogram, turning positive year-on-year. With the peak season approaching and supply-demand dynamics moving toward balance, further price gains are anticipated around the Mid-Autumn Festival and National Day holidays.

Supply and Demand Improving in Tandem, Moderate Price Rallies Expected

On the supply side, the aging structure of the mature cow population and outdated age profiles, combined with contract prices still below full social costs, will drive continued culling of mature dairy cows. The high proportion of older cows also suggests slower gains in per-cow yields, pointing to progressively tighter raw milk output in the future. On the demand side, dairy deep-processing will contribute incremental growth, with over 70 projects planned or under construction since 2025. High-growth B-end demand and domestic substitution of high-value-added ingredients are fueling this segment, and as capacity utilization improves, it is expected to absorb approximately 4 million tonnes of fresh milk annually. With supply and demand working in concert, the brokerage sees sustainability in this price upcycle, noting that increased industry scale and deep integration between pastoral groups and major dairy enterprises will smooth out cyclical volatility, supporting a moderate upward trajectory for raw milk prices.

Beef Supply Tightening in Second Half, Price Acceleration Likely

In the first half of the year, domestic beef prices only rose modestly due to accelerated import quota usage and inventory accumulation by importers. However, with significant culling of breeding cows since 2024 and weak restocking intentions, domestic beef supply will continue to decline. Import quota systems for 2026-2028 are now taking effect, with Australia's 2026 quota already exhausted, Brazil's over 90% utilized, and Argentina's exceeding 50%. Given limited supply capacity from other countries, import quotas will become increasingly constrained starting in the second half. Looking ahead, tighter domestic supply, diminishing remaining import quotas, and ongoing inventory drawdowns point to higher meat prices during the peak consumption season.

Midstream Processors Poised for Operational Recovery as Prices Rise

Rising raw milk prices benefit leading dairy processors through reduced upstream impairments and increased investment income from pastoral associate companies. Additionally, as spot milk prices climb, smaller processors lose their cost advantage, strengthening the competitive position of industry leaders.

Risk Factors to Monitor

Capacity reduction may fall short of expectations: While industry consensus on de-stocking is established and the downward trend is expected to continue into the second half, slower-than-expected culling by major pastoral companies or social farms willing to operate at a loss while waiting for price recovery could delay the process and further pressure farm economics. Demand may underperform: Even with significant production cuts, persistently weak demand could reduce downstream raw milk requirements, postponing the price inflection point. Raw material price volatility: Raw materials account for over 70% of sales costs, with high import dependence on soybean meal, alfalfa, and oat hay. With corn prices recovering this year, any increased volatility in input costs would affect feeding expenses. Deep-processing capacity ramp-up risks: Rapid development in cheese, cream, and butter segments has attracted numerous entrants, including major dairy players, intensifying competition. If malicious price wars emerge, industry-wide profitability could suffer.