Modern Dairy squeezes profits from tough milk market

The company swung to the black in the first half of the year by banking on rebounding cattle prices and lower costs, even as milk prices remained stuck in the doldrums

Key Takeaways:

• Modern Dairy turned a profit in the first half of 2026, though the average selling price for its raw milk still slipped 2.4%
• The company completed its acquisition of China Shengmu during the period, securing a scarce source of desert-based organic milk

By Lee Shih Ta

For upstream dairy companies, profitability is never dictated solely by the price of milk. A dairy cow is a production asset during its lactating years, but later enters the beef supply market once it’s culled. Consequently, prices for milk and culled cows, as well as feed costs and herd demographics, all tug at a company’s bottom line. That dynamic explains why dairy farming enterprises have already begun to swing back to the black this year even as milk prices remain stuck in the doldrums.

The latest midyear results from China Modern Dairy Holdings Ltd. (1117.HK), released last week, offer a perfect viewing window into this cyclical disconnect. The company’s revenue reached 6.59 billion yuan ($981 million) in the first half of the year, up 8.6% year-over-year. Even better, it pulled off a return to the black with a profit of 15.29 million yuan for the period, reversing a net loss of 913 million yuan a year earlier. Meanwhile, Modern Dairy’s net cash generated from operating activities surged 56.8% to 769 million yuan.

But the turnaround hardly owed to the company’s raw milk segment, as the average selling price for Modern Dairy’s core product during the latest six-month period slipped to 3.21 yuan per kilogram from 3.29 yuan, down 2.4% year-over-year. Actual raw milk revenue still logged a 6.5% gain to 5.4 billion yuan, but that was only because of an 8.9% jump in sales volume to 1.68 million tons.

Instead, the company’s reversal of fortune came from its cows themselves. During the first half, paper losses from the revaluation of dairy cow assets narrowed by more than half to 760 million yuan from 1.82 billion yuan in the same period last year — representing a reduction in losses of more than 1 billion yuan. That tracks closely with the company’s roughly 1.03 billion yuan earnings swing during the period. Modern Dairy explained that it largely completed its strategic herd culling in the previous fiscal year. The combination of a lower culling volume this year and firmer prices for culled cows translated into a notably narrower loss in the fair value of its biological assets.

Cyclical disconnect

This is precisely where cattle and milk price cycles begin to diverge. When milk prices slump, dairy farms historically accelerated their elimination of low-yielding cows. But with the recent round of concentrated culling largely in the rearview mirror, Modern Dairy’s own culling volume has dwindled. Helping matters, a domestic rebound in live cattle prices bolstered the value of its culled cows. Data from China’s Ministry of Agriculture and Rural Affairs shows the national average price for live cattle in July was 28.72 yuan per kilogram, up 6.13% year-over-year, while the average price for beef rose by a similar 5.65% to 73.71 yuan per kilogram. That contrasted sharply with languishing raw milk prices.

At the same time, pinning Modern Dairy’s return to profitability entirely on accounting valuations wouldn’t be completely fair. While the company’s herd size shrank by 2.5%, the proportion of milkable cows rose to 60.1% and the average annualized yield per cow increased to 13.3 tons, driving a 7.1% increase in total raw milk production to 1.78 million tons. Moreover, the company’s cost per kilogram of raw milk declined to 2.29 yuan from 2.32 yuan. In short, the company’s smaller herd is churning out more milk at a lower cost. Despite that, Modern Dairy’s gross margin for raw milk still retreated to 29.5% this year from 30.2% in the first half of 2025, thanks to weak milk prices.

Modern Dairy isn’t the only one benefitting from earlier herd downsizing. Industry peer Youran Dairy (9858.HK) swung to an 806 million yuan profit in the first half of 2026 from a 297 million yuan loss a year earlier, as its fair value loss on biological assets narrowed to 1.32 billion yuan from 2.23 billion yuan over that period. Similarly, AustAsia Group (2425.HK) reported a profit of 108 million yuan in the first half of this year, bouncing back from a 378 million yuan net loss a year earlier. This sector-wide rebound shows the nascent recovery for upstream milk producers is largely coming from lower costs and rebounding cattle prices, rather than a broad-based milk price recovery.

Waiting for a rebound

Notably, signals are pointing to a potential recovery in milk prices in the second half of the year. According to the Agriculture Ministry, the average price of raw milk in 10 major producing provinces edged up 1% year-over-year to 3.06 yuan per kilogram in the fourth week of July. By the end of July, China’s national dairy herd stood at 5.77 million heads, shrinking by 4,000 sequentially. As culling of the herd continues, the price spread between spot milk and contract milk is also narrowing.

During the latest six-month period, Modern Dairy also completed its acquisition of a majority 53.53% stake in China Shengmu Organic Milk (1432.HK), providing a scarce supplier for desert-based organic milk. Shengmu also achieved its own turnaround in the first half of this year, posting a profit of 64.01 million yuan. The financial consolidation and anticipated synergies between Modern Dairy and Shengmu are expected to materialize starting in the second half of the year.

However, expanding at the bottom of the milk cycle doesn’t come without a cost. Modern Dairy’s bank borrowings grew to 12.93 billion yuan at the end of June from 10.58 billion yuan at the close of last year, pushing its financing costs up to 354 million yuan in the first half from 292 million yuan a year earlier. That means the burden of newly added assets and steeper borrowing costs could dial up pressure on Modern Dairy’s bottom line if milk prices fail to recover in line with expectations.

Modern Dairy’s stock has rallied roughly 10% over the last month, which includes a positive profit alert before the official results announcement, as well as finalization of the Shengmu acquisition. The stock gave up some ground in the two trading sessions after the official earnings release, likely reflecting profit-taking as the good news was already priced in.

On the valuation front, Modern Dairy trades at a price-to-sales (P/S) ratio of about 0.79 times, eclipsing Youran Dairy’s 0.65 times and AustAsia’s 0.3 times. That premium suggests that some recovery expectations are already included in Modern Dairy’s share price. Moving forward, the next catalysts that could lift the stock will include milk prices, specifically whether they can mount a comeback, and whether raw milk gross margins can expand. Investors will also be watching to see if the Shengmu acquisition can lift Modern Dairy’s overall profitability and asset returns.

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