Sealand: The signal for an "upturn in milk prices" has emerged. Liquid milk is stabilizing, and low-temperature and deep processing are expected to continue driving growth.

Sealand released a research report stating that since April, dairy prices in some areas have rebounded significantly, with the average price of fresh milk in major producing regions rising from its low point in July, indicating that the "turning point has moved upwards." In the first half of 2026, dairy product production is expected to grow by 5.8% year-on-year, confirming to some extent that demand is showing signs of recovery. It is anticipated that liquid milk will stabilize in the future, with two key growth directionslow-temperature and deep processingexpected to continue. The emphasis is on flexibility and optimization of the market structure. 1) It is recommended to focus on livestock targets that are likely to directly benefit from the reversal in dairy prices and the resonance of the beef and dairy cycles; 2) Pay attention to stable and high-dividend targets. The main viewpoints of Sealand are as follows: The current round of dairy price decline has lasted longer and deeper, but recent upward turning signals have emerged. Cows typically begin producing milk at around 24 months of age, and considering the decision-making lag in farms, a complete cycle can last 7-8 years. This round has seen a significant increase in farm scale, with the dairy price decline that started in 2021 being extended to nearly 5 years. Since April, dairy prices have surged in some areas, and the average price of fresh milk in major producing regions is beginning to recover from the bottom, providing clearer signals of a price rebound. Supply and demand structure: Production stabilizing, deep processing taking the lead 1) In terms of supply: raw milk supply is determined by "number of cows proportion of producing cows yield per cow." The herd size is expected to decline starting in 2024, falling to 5.77 million by June 2026. However, data from sample companies (YOURAN DAIRY, CH MODERN D, China Shengmu) indicates a significant increase in the proportion of producing cows, and yields are expected to rise by over 5% in both 2024 and 2025, leading to a situation where "while the herd size decreases, production does not decline." 2) In terms of demand: China's dairy product production is expected to continuously decline from 2023 to 2025, but in the first half of 2026, it is projected to grow by 5.8% year-on-year, demonstrating signs of demand recovery. It is anticipated that liquid milk will stabilize in the future, with the two major directions of low-temperature and deep processing likely to continue growing. Pathway exploration: How to assess slope and space? 1) Supply and demand balance estimation: It is expected that the supply-demand landscape will marginally improve in 2026, with a potential balance in 2027 and possibly a state of oversupply in 2028. On the supply side, the bank expects a gap in replacement heifers to gradually transmit starting in the second half of 2026, and the number of producing cows may decline from 2026 to 2028. However, due to contributions from increased yield, the estimated year-on-year growth in raw milk production for 2026 is expected to be small, with production levels in 2027 and 2028 being roughly consistent with those of 2026. On the demand side, the projected year-on-year increases in raw milk demand from 2026 to 2028 are 4.9%/4.2%/4.6%. Considering that significant declines in raw milk production are unlikely in 2027-2028, this round of dairy price increases may show a "gentle slope" rather than a "V-shape." 2) Intensive catalysts in the second half of 2026: Attention should be focused in August-September on the market conditions for stocking up during the Mid-Autumn Festival and National Day, and the impact of El Nio and extreme heat on yields; monitoring the future herd size plans reflected by the new year's silage in August-September and trends in feed costs; the early Spring Festival in 2027 may boost raw milk demand in December. Additionally, the completion of beef import quotas is expected to lead to a sustained rise in beef prices, potentially bringing resonance in the beef and dairy cycles. 3) Space estimation: The bank estimates that dairy prices may recover to above the industry-wide full cost line of 3.22 yuan/kg in 2027, with a first anchor point likely being the deep processing breakeven line at 3.50 yuan/kg; looking upward, if we calculate based on comparable scenarios from the second round of dairy price increases, this round of dairy prices could rise 30% from the bottom to 3.91 yuan/kg. Risk warnings: Over-expectation of herd replenishment, yield increases beyond expectations, renewed demand weakening, deep processing capacity construction and operational rates not meeting expectations, import shocks, pandemics and extreme weather, historical raw milk cycle relevance risks, and data estimation deviations.