Dairy supply contracts and farmgate milk prices rebound as domestic substitution in deep processing accelerates

Why are there signs of a rebound in the raw milk cycle?

In September 2026, farmgate milk prices rose markedly in many parts of Northwest and North China. The report says the joint movement of meat and milk prices is supporting an improvement in the raw milk cycle, with rising cattle prices helping upstream farms recover profitability; stabilization in milk prices could further increase farms’ profit potential.
The supply side has undergone a prolonged reduction: as of August 2026, the total dairy cow herd stood at 5.759 million head, down 726 thousand head from its peak in February 2024; live cattle imports fell from a peak of 361 thousand head in 2021 to 15.3 thousand head since the start of 2026.
The report also notes that El Niño is pushing up feed prices, which favors continued industry consolidation and an improved competitive landscape for leading liquid milk companies, but also means farms face rising feed costs.

Approximately 500 thousand replacement heifers have been culled during this cycle, and the proportion of mature cows has risen from 50.8% in 2023 to 53.8%. This means the herd has fewer replacement animals available to replenish mature cows in the future.
The report expects mature cows from the previous expansion phase to be culled in concentrated numbers in 2027–2028, while the pace of replacement heifer additions will remain limited. Raw milk supply will be relatively tight, and total output is expected to decline.

The report says dairy consumption is gradually shifting from liquid milk toward deeply processed categories such as butter, cream and cheese, which currently depend on imports for 70% of supply. Improved raw milk quality, technological advances and falling milk prices are among the factors driving domestic substitution.
Yili’s third-phase dairy deep-processing project is designed to process 600 tonnes of fresh milk per day and covers products including cream, cheese and concentrated whey. Its natural mozzarella production line, with annual capacity of 10 thousand tonnes, began production in March 2026.
Mengniu’s Milk Cube project, launched in 2024, can process 600 tonnes of raw milk per day. Its first batch of deeply processed products completed testing in December 2025, and its mascarpone cheese has been launched; Milkground’s first domestically produced natural mozzarella was also launched in November 2025.

Mengniu raised its full-year 2026 revenue growth guidance to the high single digits and expects its second-half operating margin to expand year over year from a low base. It aims for its full-year operating margin to be at least stable year over year and no lower than 8.0%.
After adjusting for the impact of inventory and impairment at Ausnutria, Yili’s core operating profit rose approximately 8% year over year in the second quarter of 2026, beating expectations. The company also announced a share repurchase of 1 billion–2 billion yuan, with all repurchased shares to be cancelled, and a 2026 dividend per share no lower than the 1.22 yuan paid in 2024.