A2 Milk has lost some of its sharemarket gloss but has become a formidable dairy player with a bright outlook

Two  encouraging signals from the  dairy industry this week underlined  its strength  as  the backbone   of the  NZ  export  economy, all the  more vital since  the  Covid-driven collapse  of the international tourist  industry.

First  came  news that prices  strengthened  at the  latest  Fonterra  global dairy  trade  auction, with  the  average price reaching  $US3157  a  tonne. Prices for other products sold were mixed, with gains for butter and skim milk powder, but falls for cheese and other products.

Analysts  said  it  was  positive  to see  good, strong  demand  from   China. The  price  of  wholemilk powder  which  strongly  influences the  level of  payout to Fonterra’s  suppliers  moved  up  1.8% to $US3037  a tonne.

 ANZ agri-economist Susan Kilsby said there had been some concerns that stocks may be building in China, so it was really positive to see good, strong demand from that market for the dairy industry.

“We do often see buying from China ease back a little bit at this time of the year, as they’ve sort of filled their buying programme for early next season when they have those tariff rate advantages.”

ASB’s Commodities Weekly report noted the result was broadly in line with what was seen at other recent auctions, with prices moving less dramatically than earlier in the year.

“The results continue to suggest a more settled market than we had earlier in the year, when sharp falls and steep lifts were the order of the day and Covid-driven uncertainty was at its peak,” the report said.

The  other  signal  came  from  a2 Milk which, at  its annual meeting, reported impressive  results  (although paradoxically  they failed  to  inspire investors  either  in the  Australian  or  NZ  sharemarkets).

A2 Milk struggled to  survive  for many  years after its launch in Dunedin 20 years  ago by scientist  Dr Corrie McLachlan and  businessman  Howard  Paterson.  Now it is sitting on a  cash  mountain of  $854m.

And  it  is  predicting its revenue  in the current 12  months will reach as  high  as  $1.9bn  this year.

But  that’s  not  enough to stir  investors.  Mark Lister, research head at brokers  Craigs  reckons the shareprice reflects caution about  what  might lie ahead.

“ The second half  will be a  tough one for  them and it  still feels like there is still a  lot of  uncertainty  in terms of getting things  back on  track.”

Lister  thinks  much  will depend on how  the daigou infant formula trade with China recovers.

“It’s been a very profitable  channel for them, but  at the  same time  they  are  reliant  on it”.

A2  Milk says trading conditions in China  remain strong,  and chairman David  Hearn  told the  annual  meeting there  have been encouraging  signs for  the channel since  Melbourne came out of lockdown three weeks ago.

Trading conditions in China remain strong. The  company says  this gives it  confidence that notwithstanding the current headwinds the fundamentals  of the business over the medium term remain strong.

The  Australian fresh  milk brand continues to go from strength to strength, with  market share rising to  11.6% at the end of October.

Key strategic priorities are to:

• Maximise growth from infant and toddler consumption in China;
• Develop a broader nutritional milk portfolio in China;
• Build meaningful scale in the USA, and;
• Continue to investigate new markets”.

 Clearly A2  Milk  has become   a  key element  in driving the expansion  of NZ’s dairy markets  to faster growth.  

It has relied on other processors  such  as Synlait  (in which it is a shareholder)  for processed product.  Now  it  is  doing  due diligence  on  buying 75% of Mataura Valley Milk  with  its state-of- the-art processing plant at Gore.  This  will  give  it  a  significant  presence   in the region which  will  please  those dairy producers  in Southland  who think Fonterra  has  not served  them well  in the past.

The   other   distinguishing  feature of  A2  Milk  is that growing scientific evidence continues to underpin the brand.

Now, on its 20th anniversary as a New Zealand company, it  has moved a long way from the early studies, with a significant increase in the number of clinical human studies that have been published over the last few years.  More recently it has sponsored studies across multiple age groups, populations and consumer benefit areas.

So  even though the  company may have lost  some of its sharemarket  gloss,  it has  become a formidable  player  in  NZ’s  dairy export industry.  And  it has set itself  equally formidable goals, including  increasing its share in the highly  competitive US $13 bn  dairy market  —where last year  it increased  revenue by 90%.

It is ambitions  like these  which  should  inspire  the rest of the industry.