Open source securities: the raw milk industry is expected to enter the “right-side confirmation” stage to focus on investment opportunities throughout the industry chain under reversal signals

The Zhitong Finance App learned that Open Source Securities released a research report stating that “supply contraction, price stabilization, and profit verification” are initially in place, and signs of a reversal of raw milk are gradually showing. The industry is expected to move from “left side grinding” to the “right side confirmation” stage, and the entire industry chain is expected to benefit. Upstream is the first to benefit and performance is more flexible. Downstream is expected to see an improvement in the competitive environment and recovery of leading market share, while gross sales shortfalls and impairment losses related to raw milk are expected to narrow.

The main views of Open Source Securities are as follows:

Supply and demand side: Production capacity has cleared and entered the deep-water area, and the tail ranch is weak to fill the fence

The total number of dairy cows removed from 2024-2025 is about 550,000. By the end of the second quarter of 2026 (May monitoring), the national Holstein dairy cows had dropped further to 5.794 million heads, and the pace of capacity removal continued to accelerate; looking at the structure, the proportion of adult cows continued to rise, excess reserve cows at tail ranches were eliminated, compounded by capital and loan restrictions, and the weak supplementary column is expected to continue to clear up in the future. At the same time, the rate of increase in yield is slowing down, and the rate of increase in production is slower than the increase in demand. 2026H1 raw milk production is +2.4% year-on-year, and dairy production is +6.0% year-on-year. Promote the return of powder spray stocks to health: the average amount of powder sprayed per day will drop from 20,000 to 20,000 tons in 2024 to about 4,000 tons, and excess pressure has basically been digested.

Price side: Baby milk is leading the way, contract milk is following up, and the inflection point of dual signal resonance has arrived

(1) Baby milk prices “break through” during the off-season. Since the end of May, the purchase price of loose milk in major production regions has risen sharply. Currently, mainstream prices are 2.8-3.1 yuan/kg, and tight regions (Hebei, Xinjiang, Jiangsu, etc.) have reached 3.2-3.5 yuan/kg, indicating that immediate supply and demand are already tight. The second quarter is the traditional low season for dairy products. In the dual context of continuous improvement in supply and demand and heat stress in dairy cows, the rise exceeded expectations, injecting the first dose of strength into the industry. (2) Contract milk prices were corrected year on year. The overall price of fresh milk bottomed out at a low level of 3.02-3.03 yuan/kg in the first half of the year. On July 24, the price of fresh milk in the main domestic production areas was 3.06 yuan/kg, +0.3% month-on-month, and +1.0% year-on-year. The contract price was a reflection of downstream dairy companies' lag in judging raw milk supply and demand. The year-on-year correction showed that downstream also began to sense tightening supply, and the signs of bottoming out were obvious. (3) Trends in the second half of the year: The industry is generally tight in judging the supply and demand situation in the second half of the year, and some dairy companies have locked in milk sources ahead of schedule until the end of the year. As the double-section stocking window opens, demand from downstream dairy companies is further released, and contract milk prices are expected to continue to rise steadily.

Upstream management: 2026H1 leading animal husbandry industries have all reversed losses, and the industry is further concentrated at the top

Hyundai Animal Husbandry's 2026H1 is expected to record a profit of no less than 43 million yuan, turning the loss into profit due to: the decline in the number of cattle rushing combined with the rise in prices led to a narrowing of the losses due to changes in fair value for dairy cows; the gross margin of raw milk sales remained stable and gross profit increased compared to 2025H1; the year-on-year decline in feed costs and other operating costs and expenditure controls were effective. Youran Animal Husbandry 2026H1 is expected to record a net profit of 739-903 million yuan, turning the loss into a profit due to reduced revaluation losses caused by changes in the fair value of biological assets under the influence of narrowing milk price declines, rising cattle prices, and continued cost reduction and efficiency; the performance of raw milk and solution businesses continues to improve. Furthermore, on July 20, Hyundai Animal Husbandry's bid for China's Shengmu was officially implemented. As of July 21, Hyundai Animal Husbandry and co-actors held a total of 81.17% of China's Shengmu shares and obtained control of China Shengmu. After the acquisition was completed, Hyundai Animal Husbandry and China's Shengmu dairy cows reached 604,000 heads, accounting for 10.4% of the country's total inventory. The industry was further concentrated at the top, while preparing for a reversal in the subsequent cycle.

Risk warning: The recovery in downstream consumption falls short of expectations, the pace of capacity removal is slower than expected, the impact on the price of imported bulk powder, upward pressure on costs, etc.