An opening-day dall was not the start that Chinese raw milk producer YuanShengTai Dairy Farm (01431.HK) was aiming for on its Hong Kong debut on Tuesday. It came under selling pressure moments after it launched, dipping as much as 4.4 percent and staying below its listing price since then.
The trading movements parallel those of rival China Huishan Dairy (06863.HK), which went public in September and slumped 6 percent in the two days after its initial public offering. But the counter soon recovered to trade about 9 percent above its offer price.
Despite the lackluster initial performance, prospects for these upstream raw milk producers are quite bright.
Mainland milk producers are usually vertically integrated, with operations ranging from buying cattle feed to maintaining herds. They have the highest profit margin in the industry, generally creaming off over 30 percent while mid-stream integrated producers like China Mengniu Dairy (02319.HK) have to settle for around 3.7 percent. Those margins are what give raw milk producers bargaining strength, especially when there’s a milk supply crunch.
And a supply crunch is just what China is experiencing. Industry watcher Song Liang said less-efficient individual dairy farmers have gone out of businesses in last few years amid industry consolidation, according to Yicai.com. But large dairy firms have not been nimble enough to raise output quickly to cover this supply gap. Song expects the supply crunch to run for another two years.
Rising beef prices have also prompted some farmers to get out of the dairy business and sell their cows for meat. According to some estimates, a cow can sell for as much as its milk can bring in a year. There are 2 million fewer dairy cows in China compared with the same time last year, and production capacity has fallen 20 percent.
As a result, raw milk prices are on the rise, forcing dairy product makers like Bright Dairy & Food (600597.CN), Beijing Sanyuan Foods (600429.CN) and Mengniu to announce increases in their retail prices as early as next month.
Heilongjiang Longdan Dairy general manager Gao Fuliang told Yicai.com that raw milk prices have risen nearly 24 percent to as much as 5,200 yuan (US$853) per metric ton in the last month.
Song said we should say goodbye to the low milk price era.
The outlook for demand is encouraging but there are still a few major risks raw milk producers have to manage to translate the potential into profit. Contaminated feed and poor weather, for example, can seriously affect milk production, which can in turn mean huge losses for these firms.
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