CITIC SEC: Livestock operations continue to be under pressure, post-holiday period may see a new round of clearance.

CITIC Securities releases a research report stating that the elimination and consolidation of the livestock industry will continue in 2024, with a 6.7% decrease in inventory in the main producing areas in Q1-Q3 and a 2.8% year-on-year decrease in raw milk production for the whole year. Downstream dairy companies are relatively cautious in stocking up for the 2025 Spring Festival, and after a temporary surge in bulk milk prices in December followed by a decline, the operating pressure on livestock enterprises continues. In the off-peak season after the Spring Festival, the industry may usher in a new round of accelerated consolidation, maintaining the judgment that the industry supply-demand inflection point will occur in 2025H2. Key points from CITIC Securities: - In the first three quarters of 2024, inventory in the main producing provinces decreased by 370,000 head, with the industry consolidation process continuing and breeding losses worsening. - According to data from "Holstein", the inventory of dairy cows in the ten main producing areas such as Inner Mongolia, Hebei, Ningxia, Shandong, and Gansu decreased from 5.5 million head at the beginning of 2024 to 5.13 million head in the third quarter, a reduction of 370,000 head, a decrease of 6.7%. The elimination of low-yielding cows has significantly increased the average yield per cow in the industry. The national statistics show that the domestic raw milk production in 2024 decreased by 2.8% year-on-year, with a 9.0% year-on-year decrease in 2024Q4. - According to the dairy associations in the main producing provinces, the breeding of lactating cows has been consistently loss-making since 2024. For example, in Shandong, the quarterly breeding losses per lactating cow increased from 25 yuan in 2024Q1 to 936 yuan in Q3, indicating that the livestock industry is still in a deep loss stage. The import of whole milk powder decreased by 23% year-on-year from January to November 2024, with domestic and imported whole milk powder prices reversed, and domestic raw milk supply remained in surplus; meanwhile, imports of breeding cows/frozen semen decreased by 65%/27%, indicating that breeding activities in the industry were affected to a certain extent. - Downstream dairy companies were cautious in stocking up for the 2025 Spring Festival, with the bulk milk price dropping to below 2.5 yuan/kg in the first week of 2025, resulting in sustained pressure on the livestock industry. - According to Nielsen data, the sales of dairy products in all channels/offline channels decreased by 1.4%/-10.9% year-on-year from January to October 2024; according to the Dairy Economic Monthly Report, the production of dairy products decreased by 2.4% year-on-year from January to November 2024, indicating significant pressure on industry demand. Due to the impact of the post-Spring Festival inventory clearance, dairy companies were cautious in stocking up for the 2025 Spring Festival, coupled with weak terminal demand recovery, resulting in limited short-term increase in raw milk demand. The bulk milk price in the main producing areas reached a temporary high of 3 yuan/kg in mid-December 2024 but quickly fell, dropping to 2.3 yuan/kg in the first week of 2025, leading to continued pressure on livestock enterprises. With a backdrop of declining milk prices, social ranches were under significant pressure. - Feedback from recent investigations of social ranches in Shandong indicated that social ranches without stable downstream customers find it difficult to sustain operations. Most social ranches were experiencing continuous cash flow losses at the current stage, with accumulated profits since the peak milk prices in 2021 turning into losses and stricter bank credit regulations making it difficult to obtain loans for biological assets and operating fixed assets. Furthermore, some social ranches did not purchase enough green fodder in Q3 of the previous year, relying on the sale of raw milk to sustain cash flow. Once downstream procurement volume adjustments and cash flow disruptions occur, these ranches may face the risk of closure. - After the Spring Festival, the industry may undergo a new round of accelerated consolidation, as the overall oversupply persists and the bulk milk prices may further decline, pushing the industry into a peak consolidation period. The Ministry of Commerce began an anti-dumping investigation on imported beef on December 27, 2024, which may weaken the impact of low-cost imported beef on domestic beef, stabilize beef prices, and benefit the accelerated consolidation of the livestock industry. The inventory of dairy cows in 2025 is expected to decrease from 6.2 million head to 5.9-6 million heads, supporting the judgment that the industry supply-demand inflection point will occur in 2025H2. Investment strategy: The current sector valuation is still in the historical bottom range, in the left-side investment stage with a high success rate and high odds. Risk factors: Terminal dairy product demand remains below expectations; the progress of the original milk industry capacity elimination is slower than expected; significant increase in feed costs; substantial decline in milk prices; severe epidemic outbreak in dairy cows; sharp decline in beef prices.