Summary: On 13 July, Modern Dairy predicted
a loss of >=USD60.2 million (RMB400 million) in H1, reflecting a series of
challenges which it has faced, most of which are hitting the dairy farming
sector at large.
Source: Baidu
On 13 July, China Modern Dairy Holdings
Ltd. (Modern Dairy, stock code: 1117.HK), the largest raw milk supplier in
China, issued a profit warning, predicting that in H1 its net loss will reach
>=USD60.2 million (RMB400 million). It highlights several problems:
-
Imported milk powder and resulting use of reconstituted milk have
made sales of its milk difficult
-
Cows numbers have fallen due to the lower raw milk price
-
Its contract with Success Dairy, in which it promised to maintain a
stake worth USD308 million (HKD4/share) on completion after the 3-year
contract, proved a failure: on 18 July, the value stood at HKD1/share,
requiring a compensation payment as a result
Even without the 3rd problem, clearly the
market fundamentals have been challenging. According to the Dairy Association
of China (DAC), milk powder inventories have now reached 400,000-500,000
tonnes.
In H1 2015, Modern Dairy's sales were
USD366.5 million (RMB2.4 billion). The figure in H1 this year is expected to be
10% down, around USD329.8 million (RMB2.2 billion). Its milk sales were 450,800
tonnes in H1 2015: from this 11% was processed into milk powder, about 49,600
tonnes giving about 6,000 tonnes of product.
"The crisis has escalated from individual
farmers through SME producers up to the leading dairy farming groups,' said Gao
Lina, President of Modern Dairy: "In reality, we have begun killing cows and
dumping milk. In general, the elimination rate of cows is 28% YoY. Currently
the figure in our company is 46%. Normally, a cow is priced at USD3,008-4,512
(RMB20,000-30,000), but now we are selling at USD1,053-1,203 (RMB7,000-8,000)
as beef cattle. Hundreds of tonnes of milk are not sold, so we can only resort
to drying product.'
Many other large farming companies are
similarly trapped:
-
Xinjiang Western Animal Husbandry Co., Ltd.: net loss of about
USD2.1 million (RMB14 million) in Q1, down by 1120.5% YoY
-
Xinjiang Talimu Agriculture Development Co., Ltd.: net loss of
USD2.6 million (RMB17 million) in Q1, down by 314.2% YoY
The sectors troubles are evident. According
to the Heilongjiang Dairy Industry Development Centre, the number of local milk
stations decreased from 3,062 to 1,040 in July, down by 66% from 2013. By the
end of June, the province had 2.2 million cows on farm, down by 13.1% YoY
according to the Inner Mongolia Agriculture and Animal Husbandry Department.
The continuously decreasing price of raw
milk is a key factor increasing pressure on farming businesses. According to
the Ministry of Agriculture, in July its price was down by 7.5% YoY and 0.8%
MoM to USD516/t. Regionally:
-
Inner Mongolia: purchase price for milk stations down by 3.4% YoY
and 0.3% MoM to USD465/t (RMB3.1/kg) by the end of June; the price for
collective farms down by 1.2% YoY and 0.3% MoM to USD496/t (RMB3.3/kg); for
largescale commercial farms down by 1.0% YoY and up by 0.3% MoM to USD587/t
(RMB3.9/kg)
-
Shanghai: set to be down by USD7.5/t (RMB0.05/kg) for Q3
"In March, about 51% of China's dairy
farming business was operating at a loss, up by 5.8 percentage points,' stated
Gao Hongbin, DAC's President: "Now this is spreading. Enterprises are counting
on government policies for recovery.'
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Tag: dairy, Modern Dairy