In March of the Lunar New Year, the weather is getting warmer, but the dairy farming industry still seems to be shrouded in a bit of “coolness.”

Recently, leading domestic ranching companies Youran Animal Husbandry (09858) and Hyundai Animal Husbandry (01117) successively disclosed their 2023 results announcements. As a “top student” in the industry, Youran Animal Husbandry and Modern Animal Husbandry did not perform as well as expected in 2023. According to related announcements, revenue from Youran Animal Husbandry increased by 3.6% to 18.694 billion yuan last year, but net profit from mother was -1.05 billion yuan at the same time. In the same period, Hyundai Animal Husbandry also experienced an increase in revenue and no increase in profit. The company's revenue increased 9.5% to 13.458 billion yuan throughout the year, while net profit to mother shrunk sharply by 68.9% to 175 million yuan, maintaining a break-even line.

Industry leaders are also facing profit pressure. Does this indicate that the fundamentals of the entire dairy farming industry are still deteriorating? Looking forward to the future, when can leading companies look forward to a new cycle of rising profits?

The pressure on leading companies' profits is difficult to overcome

From an industry perspective, Yuran Animal Husbandry and Modern Animal Husbandry are also leaders in the upstream dairy industry. Both companies maintain a large leading edge in indicators such as cow stocks and raw milk production.

Although it is already at the top of the industry, combined with the financial reports of the two companies, it is obvious that scale is not an absolute guarantee of profit. In 2023, the dairy farming industry faced multiple challenges such as falling milk prices and high feed costs, and the difficulty for even leading companies to make a profit was skyrocketing.

Let's take a look at Youran Animal Husbandry. The company's revenue is mainly contributed by two major businesses: raw milk and systematic solutions for ruminant farming. In 2023, the company's raw milk business revenue increased 18.9% year on year to 12.903 billion yuan. In terms of volume and price performance, raw milk sales increased 26.5% year on year to 2.945 million tons, and the average unit price of raw milk fell 6.0% year on year to 4.38 yuan/kg. In the same period, the company's revenue for systematic ruminant farming solutions declined by 19.5% to 5.79 billion yuan.

In terms of profit, Youran Animal Husbandry's raw milk business achieved gross profit of 3,696 billion yuan last year, corresponding to a gross profit margin of 28.6%, a year-on-year decrease of 2.8 pcts. The decline was mainly due to the downward impact of raw milk prices. However, the gross margin of the company's systematic ruminant farming solution increased, driving the company's overall gross margin to 23.9%, an increase of 0.5 pct over the previous year.

Affected by the decline in gross margin of the raw milk business and the loss of 3.61 billion yuan in fair value of biological assets, Youran Animal Husbandry lost a large amount of net profit to mother. Excluding losses due to the fair value of biological assets and reducing sales costs, the net profit for the 2023 period was 2.16 billion yuan, an increase of 6.8% over the previous year.

Let's take a look at modern animal husbandry. The company's revenue mainly consists of three major businesses: raw milk, offline feed, and digital intelligence platforms. In 2023, the company's raw milk business revenue was 10.264 billion yuan, an increase of 3.2% over the previous year. In terms of volume and price performance, raw milk sales increased 9.4% year on year to 2.55 million tons during the period, and milk prices fell 5.6% year on year to 4.03 yuan/kg. In the same period, the new business segment recorded revenue of 3.2 billion yuan, a year-on-year increase of more than 30%. According to reports, the company's new business includes the original feed business as well as the new digital intelligence platform business. During the year, Liangyuan Technology, Cow Raising, Modern Grass Industry, Modern Feed, and Mengyuan Breeding Industry all developed rapidly.

Despite a steady increase in revenue, the profit pressure on modern animal husbandry has not been small in the past year. In terms of the raw milk business, the gross profit of this business was 2,913 billion yuan for the whole year, corresponding to a gross profit margin of 28.4%, a decrease of 2.7 pcts compared to the same period last year. According to information, this is mainly because the gross profit contributed by the increase in raw milk sales during the year could not offset the impact of the decline in average sales prices. In the same period, the gross profit of the new business was 215 million yuan, and the division's gross margin was 6.7%, which also shrunk by 0.6 pcts. Affected by this, the company's comprehensive gross margin for the whole year was 23.2%, a year-on-year decrease of 3.4 pcts.

Affected by factors such as the decline in beef market prices during the year, the decline in raw milk sales prices, and the increase in the size of livestock herds, modern animal husbandry also reduced the fair value of biological assets by as much as 1.28 billion yuan in 2023. Under the influence of multiple factors, the company's net profit to mother for the whole year was 175 million yuan, and the net profit margin to mother was only 1.3%.

The industry is not booming well and is still awaiting profit repair

After getting through 2023, can the days at the upstream ranch be any better in the new year?

The Zhitong Finance App noticed that prices of bulk raw materials and forage, such as soybean meal, corn, and imported alfalfa grass, have all shown a downward trend this year. Take soybean meal as an example. According to Tonghuashun iFind data, the spot price of soybean meal has continued to fall from a phased high of over 5,000 yuan/ton in August last year to around 3,400 yuan/ton at present, falling by more than 30% over the past few months. Coincidentally, the current spot price of corn has also dropped to around 2,300 yuan/ton. This price has been low for nearly three years. Prices of major raw materials fell simultaneously, which clearly helped ranching companies to ease cost pressure.

Despite a sharp drop in pressure on the cost side, at the same time, the weak consumption of dairy products still does not seem to improve. According to public data, the price of fresh milk (raw milk) has been declining since peaking in the third quarter of 2021. Currently, the average price of fresh milk (raw milk) in major production areas is around 3.47 yuan/kg. This price has dropped 20% from the 21-year high.

Downstream demand is weak, compounded by a relative surplus of milk sources. The downward trend in milk prices may be difficult to reverse in a short period of time due to the prominent conflict between supply and demand. Needless to say, the ranching industry has always had a vicious cycle of “milk shortage, increased breeding, milk surplus, and killing cows”. Every time biological assets are re-measured, it has a significant impact on assets. Especially during the downturn cycle, the associated negative effects will be infinitely amplified.

Although the domestic dairy industry situation is still serious, the leading companies in the industry seem to have strong confidence in the future. Earlier, at Hyundai Animal Husbandry's 2023 performance briefing, the company's president Sun Yugang said that in the future, the growth rate of domestic raw milk supply will slow down, and consumer demand for natural and less processed foods will increase the industry's promotion and use of fresh dairy products. At the same time, the revised national standard for “sterilized milk” will improve the quality of dairy products, and the “Student Drinking Milk Program” introduced by the country will benefit more than 37 million students. These all indicate that the dairy industry is moving in a more steady and sustainable direction. Moreover, from a long-term perspective, it is normal for milk prices to stabilize; every downward cycle is an opportunity for large-scale enterprises to grow. As society gradually withdraws from inefficient ranches, large-scale animal husbandry can win great development by taking advantage of scale, seizing opportunities, and increasing market share.

Up to now, the price of raw milk has yet to show signs of stopping falling. It is to be expected that upstream ranches that are fed on a regular basis will continue to face profit problems for a long period of time. During the reshuffle of the industry, for ranch companies that are still on the table, profit may not have been the highest priority; survival is the real urgent priority. In the meantime, Yuran Animal Husbandry and Modern Animal Husbandry are still actively expanding their scale in their own ways, but I just don't know when a new growth situation will occur...