CCM: Modern Dairy Loss to Reach USD60.2 million in H1 10-03-2016

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.”


About CCM:

CCM is the leading market intelligence provider for China’s agriculture, chemicals, food & ingredients and life science markets. Founded in 2001, CCM offers a range of data and content solutions, from price and trade data to industry newsletters and customized market research reports. Our clients include Monsanto, DuPont, Shell, Bayer, and Syngenta. CCM is a brand of Kcomber Inc.

 

For more information about CCM, please visit www.cnchemicals.com or get in touch with us directly by emailing econtact@cnchemicals.com or calling +86-20-37616606.


Tag: dairy, Modern Dairy

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