GTHT has released a research report indicating that China's raw milk supply and demand are nearing equilibrium, with a reversal expected by the second half of 2026. Given that milk prices are currently near historic lows, further supply reduction could drive a rebound.
Short-term dairy demand is gradually recovering, and over the long term, the industry is expected to achieve sustainable and stable growth by shifting toward high-value-added products, enabling structural upgrades. The raw milk cycle is anticipated to hit a turning point in 2026, with milk price catalysts and market style rebalancing boosting profit improvements for sector leaders.
Key Insights from GTHT:
Upstream: Approaching a Turning Point in the Raw Milk Cycle
Since 2024, factors such as supply-demand mismatches and cost inversions have driven the culling of dairy cows in China, leading to a continuous decline in herd numbers. In 2026, despite challenges like foot-and-mouth disease, the overall trend of herd reduction remains. Looking ahead to the second half of the year, supply is expected to contract further in Q3 due to heat stress in cows and the upcoming silage season.
Quarterly data shows that while raw milk supply-demand dynamics improved in 2025, they were not fully reversed. In the first two quarters of 2026, demand growth for raw milk has consistently outpaced supply growth (as evidenced by dairy product output growth outpacing fresh milk output growth). The bank has observed positive price movements in both contract milk and spot milk since Q2 2026, with tangible improvements in livestock farming profitability. At this juncture, the bank believes domestic raw milk supply and demand are nearing balance, with a reversal likely by H2 2026. Given current milk prices at historic lows, continued supply reduction is expected to drive prices higher.
Downstream: Gradual Recovery in Dairy Demand
In the short term, demand for dairy products on the consumer side is gradually recovering, accelerating the narrowing of the supply-demand gap. Simultaneously, the business-to-business sector is also gaining momentum, with the near-term volume growth most certain in deep-processed dairy products. As domestic enterprises ramp up production capacity, import substitution and downstream expansion are increasing the capacity to absorb raw milk. Over the medium to long term, rising consumer spending power and health trends are expected to drive dairy industry growth. Increased penetration and category expansion offer volume growth opportunities, while the shift toward high-value-added products supports structural upgrades for sustainable, stable development.
Cycle Shifts to Favor Industry Leaders
On one hand, rising milk prices directly benefit upstream livestock farming leaders. This not only boosts revenue but also, as supply-demand gradually balances and beef prices move higher, reduces the number and losses from culling cows. With current feed prices low and farms continuing to improve efficiency, cost sides are relatively advantaged. As a result, well-managed livestock enterprises are poised to gain market share and improve profitability during this raw milk upcycle.
On the other hand, downstream dairy leaders benefit indirectly. Historical patterns show that rising milk prices are favorable for top dairy companies. Industry spray-drying activity shrinks, reducing impairment losses for dairy firms. Meanwhile, the contraction of low-priced raw milk supply forces weaker players out of the market, improving the competitive landscape. Leading companies, leveraging their supply chain capabilities and brand strength, are set to increase their market share.
Risk Factors: Supply-side reduction falls short of expectations, downstream demand deteriorates, food safety incidents.
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