Guotai Haitong: Raw milk is expected to see a reversal in 26H2, with improved performance from leading companies in the sector.

Guotai Haitong released a research report stating that the supply and demand for raw milk in China have nearly reached equilibrium, with a potential reversal expected in H2 2026. Considering that the current milk prices are at historically low levels, subsequent supply reduction is likely to drive milk prices further up. In the short term, the demand for dairy products is gradually recovering, and in the long term, the industry is expected to achieve structural upgrades by migrating towards high value-added products, leading to sustained and stable development. The raw milk cycle is expected to reach an inflection point in 2026, with a combined effect of rising milk prices and a rebalancing of market styles, resulting in improved performance for leading companies in the sector. Guotai Haitong's main points are as follows: Upstream: Gradual inflection point in the raw milk cycle Starting in 2024, factors such as supply and demand mismatches and cost inversions will drive dairy cows in China into a reduction phase, with the number of cows continuously decreasing. Although there may be setbacks due to foot-and-mouth disease in 2026, the overall trend of decreasing stock will be maintained. Looking ahead to the second half of the year, the heat stress on dairy cows in 26Q3, combined with the approaching silage period, is expected to further contract supply. From quarterly data, the supply and demand structure for raw milk will improve in 2025, though it has not completely reversed. However, in Q1 and Q2 of 2026, the growth rate of the demand side for raw milk has consistently outpaced that of the supply side (demonstrated by the YOY growth of dairy product output exceeding that of fresh milk output). The report observes that starting from Q2 2026, domestic contract milk and loose milk prices have shown positive performance, leading to tangible improvements in livestock profitability. At this current point, it is believed that the supply and demand for domestic raw milk are nearing balance, with a potential reversal expected in H2 2026. Considering that current milk prices are at historically low levels, subsequent supply reduction is likely to drive further price increases. Downstream: Gradual recovery of dairy product demand In the short term, end-consumer demand for dairy products is gradually recovering, accelerating the process of narrowing the supply-demand gap; meanwhile, the B sector is also making efforts, with the strongest short-term certainty in the growth of dairy processing. As domestic companies ramp up production capacity, domestic replacements and downstream expansions will enhance the capacity to digest raw milk. In the medium to long term, increased consumer purchasing power and the health concept are expected to drive growth in the dairy industry, with improved penetration rates and category expansion providing opportunities for volume growth. There is also the potential for structural upgrades through the shift towards high value-added products, achieving sustained and stable development. The cycle entering the right side will benefit leading players On one hand, the rise in milk prices directly benefits leading players in the upstream dairy sector, positively impacting revenue, and as supply and demand gradually balance with the upward adjustment of beef price averages, the number and losses from culling cows are expected to decrease. Current low feed prices and ongoing cost reductions and efficiency gains in farms benefit the cost side; thus, dairy companies with strong management capabilities are expected to increase their market share and improve performance during this upward cycle of raw milk. On the other hand, leading dairy companies in the downstream indirectly benefit from this trend. Historically, an upward cycle is favorable for leading dairy enterprises, as the contraction in the scale of the industry reduces the write-down losses for dairy companies. Furthermore, the contraction in low-priced raw milk supply forces the exit of marginal production capacities, improving the competitive landscape of the industry, allowing leading companies to enhance their market share through supply chain capabilities and brand strength. Risk warnings: Supply-side reduction may be less than expected, downturn in downstream conditions, food safety issues.