China will continue to see a decline of raw milk prices because of a persisting supply glut that is affecting suppliers and benefiting sellers, according to analysts.

Uncertainty threatens milk supplier's margins. According to a research report by China International Capitl Corp. (CICC), prices of raw milk will continue to plummet if market oversupply is not dealt with immediately.

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The brokerage of China Modern Dairy reduced its target share price to HK$1.7 (1.4 yuan) from HK$2.1 (1.7 yuan) after its net profit dropped by more than half (56 percent) in 2015. Meanwhile, the gross margin of the company's farming business also narrowed down from 5.37 percentage points to 37.10 percent, according to South China Morning Post.

"We suggest investors exit [the company shares] due to margin uncertainty in the near term and wait for a better time for re-entry," Paul Yuan Feiyang, CICC analyst, said.

The upstream market (raw milk) has been experiencing an oversupply, and prices have fallen. Also, high price tags pushed downstream firms (milk product makers) to deal with foreign suppliers that are able to supply cheaper milk formula instead of fresh milk for production, Yuan revealed.

He further wrote that the country's self-sufficiency ratio for raw milk is at 65 percent, meaning it has to import the remaining 35 percent. Also, pure liquid milk comprises 55 percent of China's total demand for dairy.

"The high price was the result of inefficient backyard farming and surging costs in farm land, labour and feed production," he said.

China Modern Dairy's prices tumbled 12 percent at 4.43 yuan per kilogram in 2015 and is expected to further dive to 9.5 percent this year, granting less efficient farmers fail to get out of the market immediately.

Tagsfresh milk, supply glut, China Modern Dairy, dairy products, milk products, china