The company, backed by private equity group PAG, is expected to launch the deal next week, the sources added.
A final agreement on the size of the fund-raising will be made following the initial discussions with investors, they said.
Youran Dairy did not immediately respond to a request for comment from Reuters.
The sources could not be named as the information was not yet made public.
A pre-deal term sheet seen by Reuters shows the company plans to sell 15% of its shares in the IPO which would value it at more than $5.3 billion.
It plans to use the cash raised to expand its breeding herd and ramp up feed and raw milk production, according to its filings with the Hong Kong stock exchange.
Youran Dairy's IPO was approved by the stock exchange's listing committee last week, allowing it to start the IPO process.
It purchased two farming hubs located in Ying and Yutian counties for NZ$513 million owned by New Zealand's Fonterra last year.
PAG owns 42.89% of Youran Dairy while Inner Mongolia Yili Industrial Group holds a further 40% and the filing showed PAG will not be a controlling shareholder following the deal.
PAG has held its stake in Youran Dairy since 2015.
(Reporting by Scott Murdoch in Hong Kong; Additional reporting Sophie Yu in Beijing; Editing by Muralikumar Anantharaman)
By Scott Murdoch