(Yicai Global) March 24 -- China Modern Dairy Holdings, the country's largest unpasteurized milk producer, moved back into the black in 2019 due to rising domestic milk prices and greater production efficiency after several years of heavy losses. But recent declines in global oil and dairy product prices give the sector reason for caution.

Net profit was CNY350 million (USD49.4 million) in the 12 months ended Dec. 31, compared with a CNY506 million loss in 2018, according to the company's annual earnings report released yesterday. Revenue rose 11.2 percent to CNY5.51 billion (USD778.2 million) from a year earlier.

The Anhui province-based company had suffered huge losses in 2016 and 2018 when China's raw milk sector hit rock bottom.

The price of unpasteurized milk in China's 10 main dairy farming areas rose over the last 12 months, according to statistics from the Ministry of Agricultural and Rural Affairs. Raw milk sold for an average CNY3.82 (USD0.54) per kilogram this February, up from CNY3.50 per kilogram at the beginning of last year.

Modern Dairy, which operates 26 farms across China with 234,000 dairy cows, sold its raw milk at an average CNY4.04 (USD0.57) a kilogram last year, up 4.9 percent from 2018, and cut production costs to CNY2.32 per kg. It produced 1.39 million tons of unpasteurized milk, 8.6 percent more than the year before.

Modern Dairy's stock [HKG:1117] closed 2.8 percent higher today at HKD0.74 (10 US cents).

Other dairies also swung to profit last year as a result of higher prices. After-tax income at China Shengmu Organic Milk was at least CNY100 million (USD14 million), compared with a huge loss of CNY2.31 billion (USD326.5 million) in 2018. And Heilongjiang province-based Yuan Sheng Tai Dairy Farm expects to log a net profit after losing CNY560 million in 2018.

But there remains reason for caution. International milk product prices continue to fluctuate. Whole milk powder prices were down 15 percent from the end of last year reaching USD2,797 a ton at the most recent global auction on March 17. This is the fourth straight reduction in the price of international dairy ingredients set at bi-monthly international auctions.

Global oil prices have also been falling and they are historically linked with dairy prices. When the price of Brent crude oil fell to USD30 a barrel in late 2015, the price of whole milk powder fell below USD2,000 a ton.

Growing competition from cheaper imported milk products is also a factor. Domestically produced milk is not enough to meet demand, production costs are high and there have been some quality issues that have led to consumers preferring foreign brands.

Editors: Xu Wei, Kim Taylor