Investors see promising signs of recovery in infant formula sales in China

After  a  rough  ride  since  Covid-19  struck, the New Zealand economy  is  in   better   shape   than might  have been  predicted  at the  onset  of the  pandemic.  Yet labour  shortages,  an energy crisis  in Europe  and  China, and  massive  inflationary  pressures suggest  that  the  passage  ahead   will  be  anything  but  smooth.

With  the  government abandoning  the  elimination  strategy  and  moving  towards  living  with  endemic  Covid, the  country  is adjusting  to  the  prospect  of  a  new  normal.  But  without  any  sign of  the  number of  cases  of the Delta  variant  diminishing, restrictions  may  persist  for  longer  than  might  have been  imagined  just  weeks  ago.

It’s  a  blow  to  industries  looking  to  inflows  of  workers  to ease  labour  shortages, particularly  in the  rural  regions,  which  last  season  sustained  the  economy  with  the  production of  commodities  that  were  in  relatively  tight  supply  in  world markets,  fetching excellent  returns.

Economists  have  been predicting  that prices  for  the  commodities  NZ  specialises in  could  reach  new  heights  this  season.  Only  this  week  ANZ  agri-economists  forecast  farmgate  returns for  beef  and sheepmeat  to be at  record  levels, while prices   for  dairy  are  holding at  relatively  high  levels.

And there  was  more encouragement  this  week as   investors took  heart  from  signs China  sales channels  for  infant  formula  had  improved.  That  is  particularly  important for  A2 Milk,  whose  shareprice  slumped  from  above $20 at  its  zenith  to  below $6.

Reports  from  Australia indicated  that  the daigou  channel  in  which A2 Milk had  specialised is  recovering.  A  positive  first-quarter  result from infant  formula  company Bubs  Australia  which specialises  in goat milk formula  included the news that China demand  has  strongly  rebounded.

Bubs  reported  a  156% rise in  China revenue, compared  with the  same  quarter  last year. Its  daigou sales  for infant formula surged  648%  and  cross-border e-commerce  increased 49% .

A2 Milk has achieved huge success in China, the world’s largest infant formula market, where its A2 protein infant milk powder with the  characteristic of being easier to digest than the more common A1 protein had been in  high demand.

The collapse of the daigou trade affected A2 Milk’s other sales channels as well because daigou traders were effectively like online social media influencers for A2 Milk’s products and their recommendations reached parts of China where A2 Milk didn’t have a presence.

As  recently as  August, A2  warned that the coming year would be challenging and volatile.

Greg  Smith,  head  of  research at  Fat Prophets, was  quoted  in the  NZ  Herald as  saying  A2  shareholders  have been looking for  some good news  after its  share price  has  fallen  70% since  August  last year.

“Maybe  the  worst  is  behind them  and  they  are seeing  good  growth.”

If that’s the  case  for  A2  Milk,  it   may  be  equally  good  news  for  Synlait,  the  Canterbury-based  firm   which  processes  a  significant  proportion  of  A2’s   supply…

And  for  the  country  in  these Covid  times.