China’s dairy industry faces a severe crisis with raw milk prices falling below production costs. Oversupply and weak demand are forcing farms to cull herds, while the government introduces financial support measures to stabilize the sector.
China’s dairy industry is grappling with a severe financial crisis, particularly in northern provinces such as Heilongjiang and Inner Mongolia, due to a prolonged oversupply of raw milk and a sharp decline in prices. This marks the second major downturn for the sector, with farms across the country being forced to cull herds to mitigate losses. Bulk milk prices have dropped as low as 1 yuan (0.14 USD) per kilogram in certain areas, significantly below the production costs, which range between 3.2 to 3.5 yuan (0.44 to 0.48 USD) per kilogram.
The crisis has been building since 2019, when companies such as Yili and Mengniu heavily invested in upstream production, expanding capacity to meet what was expected to be sustained demand growth. However, demand has slowed, and the market is now flooded with excess supply. By 2024, raw milk prices had fallen by more than 28% from a peak of 4.38 yuan (0.60 USD) per kilogram in 2021, with the average price in October standing at 2.6 yuan (0.36 USD).
Over 80% of dairy farms are now operating at a loss, and many smaller farms are struggling to survive. These farms face frequent rejections from buyers during market downturns, and companies have been forced to spray-dry up to 20,000 tons of milk daily to manage the surplus. The accumulated stockpile of powdered milk has surpassed 300,000 tons, highlighting the severity of the oversupply.
With winter approaching, the financial strain on dairy farms is expected to intensify. The need to stockpile feed and manage cattle in colder conditions will increase operating costs. Meanwhile, declining cow prices are discouraging some farmers from selling off herds, as many hope that a future recovery in milk prices will offer a path out of their financial difficulties.
The government has stepped in to offer some relief. The Ministry of Agriculture and Rural Affairs, in partnership with other departments, recently introduced measures to stabilize the sector. These include credit programs, dairy vouchers, and school milk programs aimed at stimulating demand. A whitelist system has also been established to prevent financial institutions from withdrawing loans prematurely, offering farms a financial lifeline.
Despite these efforts, industry experts caution that recovery will take time. Demand saw a temporary boost during the third quarter, driven by the Mid-Autumn Festival and National Day celebrations, but the effects are expected to be short-lived. Dairy companies are also adjusting operations, with firms like Mengniu initiating herd reductions and writing down inventories in an attempt to align supply with demand.
The road ahead remains uncertain, with policymakers and industry leaders working to restore balance in the market. The sector hopes that the oversupply will begin to ease in 2025 as herd growth slows. However, the path to recovery will largely depend on whether demand strengthens or more farms reduce their production capacity.
For now, the Chinese dairy industry faces an uphill battle, as farms brace for a difficult winter with rising costs and continued financial strain. Many operators remain reluctant to exit the market despite mounting debts, viewing it as a risk that could deepen their losses. Until market conditions improve, the challenges facing the sector are unlikely to subside.
