EB SECURITIES: From destocking cows to reducing milk, the turning point of the raw milk cycle is approaching.

EB SECURITIES released a research report stating that the combination of earlier capacity expansion in upstream dairy farming and post-pandemic weakness in downstream demand created a supply-demand gap that drove raw milk prices steadily downward. Since 2025, with the continued culling of cattle and stable demand, raw milk prices have been fluctuating at the bottom. Entering 2026, beef cattle prices have risen further, herd destocking continues, and raw milk prices are showing signs of recovery. Moreover, during this round of destocking, leading farms have demonstrated stronger risk resistance, while small and medium-sized farms have been gradually phased out, raising industry concentration. YOURAN DAIRY (09858) and CH MODERN D (01117), as leading farms backed by top dairy enterprises represented by Yili and Mengniu, have expanded their herds against the trend in recent years, and are expected to expand their competitive advantages in the subsequent period of milk price stabilization and recovery. Combined with expectations for improved biological asset impairment, the profit side is expected to release greater elasticity. The main views of EB SECURITIES are as follows: The Nature of Dairy Farms and Industry Patterns The trading boundary of raw milk is defined jointly by shelf life, transportation distance, testing conditions, and receiving networks. Perishable characteristics combined with continuous production determine that raw milk inventory cannot serve as a conventional inter-temporal adjustment mechanism. Purchase and sales contracts can stabilize daily deliveries but cannot absorb raw milk beyond capacity limits, so raw milk prices are highly sensitive to marginal supply, and adjustments typically precede adjustments in herd size and output. The lag in supply-side adjustment is also constrained by both asset specificity and breeding cycles. In the early stage of total herd contraction, structure and efficiency can still support growth in raw milk volume. The culling of replacement heifers has essentially no impact on current output, while the culling of low-yielding cows can raise the average yield of the existing herd, and yield improvement in turn drives total output growth. Only when the combined contribution of total cattle numbers, the proportion of adult cows, the magnitude of average yield improvement, and the proportion of saleable raw milk turns negative does total milk volume enter a contraction phase. Supply Expansion Outpaces Demand Absorption, Variable Cost Declines Delay Clearing At the price level, the depth and duration of this round of milk price adjustment have both exceeded the previous round, with the decline deepening by approximately 10pcts, a longer stay at low levels, and greater difficulty in supply digestion. Although milk prices began weakening in 2022, national milk production continued to increase, with supply adjustment lagging behind prices, and declining feed costs further lengthened the transmission chain. On the supply side, the incremental raw milk supply in this round is far greater than in the previous round, with the average annual expansion rate nearly six times that of the previous round, forming a supply expansion of higher intensity, more concentrated increments, and longer duration; imported dairy ingredients further amplified supply pressure in the first half of the cycle. On the demand side, 2022-2025 marked the first sustained decline period for dairy retail sales since 2001, with white milk having stronger essential attributes, showing stable volume but declining prices. Yogurt, with stronger discretionary attributes, experienced a larger decline in sales value. Fresh milk penetration continued to rise, but the price-for-volume logic contributed limitedly to sales value. Demand Stabilizing at Low Levels, Supply Contraction Determines the Cycle Turning Point The worst phase for demand may be passing. Combining the sales strategies and revenue performance of leading dairy enterprises, stabilization and recovery in terminal sales performance can be observed. Inner Mongolia Yili Industrial Group saw revenue TTM decline year-on-year in 24Q2, with the decline narrowing to 5% in 26Q2. MENGNIU DAIRY's revenue TTM turned to -4% year-on-year in 24H1, later reaching a decline of over 10%, with the year-on-year decline narrowing to 3% in 26H1. According to Euromonitor forecasts, after five consecutive years of year-on-year decline since 2022, total dairy sales value is expected to stabilize in 2027 and recover at low levels, corresponding to a 26-30 CAGR of 1.1%. The probability of further rapid demand deterioration has decreased, but subsequent incremental contribution is limited. The bank believes that demand is more likely to be a factor in stopping the industry's decline rather than a force independently driving a reversal of the raw milk cycle, and the industry turning point in the next two years still requires more forceful support from supply-side contraction. The focus of herd culling on the supply side is gradually shifting to replacement heifers. When efficiency improvements can no longer offset cattle destocking, a clearer contraction and reversal on the supply side is expected to emerge. Risk analysis: continued decline in milk prices, rising feed costs, disease risks.