- Cost of living squeeze has consumers bleating about the price of milk
- Dairy stocks have fallen ~31% on average over 2022
- China’s outsized influence set to dominate dairy for quite some time
You’d need to have been sleepwalking your way through the past six months to not have been beaten over the head with dire reports of cost of living expenses threatening to bankrupt everyone earning less than six figures a year.
We’ve seen the shocking $12 head of lettuce, and heard the bleating about how much your mid-morning coffee is going to cost for the next five years, so we’ve all had to do a bit of belt-tightening to keep things on an even keel.
“Households are trading down to private label offerings, with volume declines in grocery and foodservice channels being more evident – it looks set to be a tough year ahead for Australian consumers,” co-author Michael Harvey, senior analyst for Dairy and Consumer Foods at Rabobank, said in a recent report.
But sometimes it’s the everyday things – like a litre of milk – that have been really making a dent in the family take-home each week. And don’t even get us started on the price of cheese.
Cows cost lots to keep
Dairy farming is one of those things that looks awesome from a fair distance away. Rotund bovines grazing on rolling green hills, a farmer stoic upon the windswept landscape in a homemade cable-knit jumper, his faithful cattle dog by his side.
But up close, it’s… unpleasant. Dirty, dangerous and frequently super-gross – and that’s on a good day. When the weather goes bad, and stays bad, it’s a disaster.
Much of the angst milk-makers are experiencing can be easily blamed on Covid-19.
But mostly it’s been unprecedented weather events that have turned the otherwise simple “make the cows fat and squeeze the juice out” formula into a waterlogged nightmare of near-biblical proportions.
“A wet summer is in play across much of eastern Australia – driven by the La Nina in the tropical Pacific Ocean and a negative Indian Ocean Dipole (IOD),” Harvey said.
“And many dairy production regions on Australia’s east coast have been dealing with excessive rainfall and flooding.
“There has been significant feed and fodder losses as a result of the rain and flooding – it is one of the key challenges faced by impacted farms.
“Some supply chain/logistics issues have been reported as a result of the wet weather – including some dumping of milk – but not to the point of having a material impact on milk processing.”
It’s how much a litre?
All that adds up to rising costs at the production level, which – of course – means rising prices in supermarkets.
Around this time last year, dairy farmers were celebrating the fact they’d managed to wring the teat of Woolworths hard enough to have the supermarket giant up its price of homebrand milk to $1.30 – a rise of 10c per litre.
Woolies 2-litre and 3-litre bottles were – quelle surprise – suddenly selling at $2.60 and $3.90 respectively, because that’s how maths works.
Fast forward less than a year, and that price in the fridge was around $1.60. An udder-shuddering price hike, emblematic of the acceleration of a production slump that had been weighing on dairy farmers since as far back as 2014.
But they’ve saved more than a few dairy farmers from potential ruin, Harvey says.
“The high milk prices have mostly offset major cost headwinds – fertiliser, fuel and feed – for dairy farmers, [however] labour availability remains a major challenge for dairy farming businesses,” Harvey says.
So, clearly, 2022 has been a mixed bag for the nation’s cow touchers, and that means things have been somewhat unpredictable for the cheesier ASX-listed companies with heavy exposure to the dairy industry to labour their way through.
One thing, however, is abundantly clear – there is a palpable equivalence between milk, and coca leaves.
Milk on its own has been a somewhat troublesome product, but those with the know-how and facilities to turn it into a bolstered white powder and ship it overseas by the tonne are the ones making some very serious dough.
It has been undeniably difficult for the largest of the listed dairy mob, The A2 Milk Company (ASX:A2M). Difficult, yet wildly profitable.
Industry-wide issues around production and logistics aside, legal hassles took up a chunk of the company’s time and focus after two class actions were filed in the Supreme Court of Victoria, and another across the ditch in NZ in May 2022.
It was around that time the A2M trading price bottomed out for the year at ~$4.00 a pop, however a few unexpected factors galloped in like Milky White Knights to help A2M rise to become the market’s dairy darling for the year.
A critical shortage of infant formula in the US was the catalyst for a solid chunk of A2M’s recovery, when combined with China’s unquenchable thirst for anything white, powdery and safe for infants to guzzle, demand was running red-hot.
Riding on the back of the US Food and Drug Administration’s decision – albeit delayed to November – to allow a2 Platinum baby formula product to be sold from New Zealand into the US has helped A2M to run to the end of the year at close to $7.00 a share, a 26.9% climb YoY… far beyond the performance of pretty much everyone else.
Another dairy major Synlait Milk (ASX:SM1) has also performed well in the latter stages of the year. As well it should, as Synlait is “a very central cog” in A2M’s ability to service its Chinese buyers.
SM1 is 20%-owned by A2M, and responsible for producing all of its China labelled powdered baby formula, and official approval for the Chinese market remains tantamount for the survival of both businesses.
Synlait’s on track to finish the year on a monstrous boom, too. On 23 November, it was deep in the doldrums on $2.58, but at the time of writing, it’s since rocketed up $0.99 to get to the end of the year in the green.
Comparative minnow Happy Valley Nutrition (ASX:HVM) is also on track to round things out for the year on a high, thanks entirely to its own trailblazing push into the infant formula market.
A drop in the bucket
Broadly speaking, though, the ASX milk maids are heading into 2023 with serious dents in their market caps compared to the start of 2022.
Clover Corporation (ASX:CLV) performed kind-of-okay, due to its position in the production of infant formula ingredients, including an enormously bold claim that its proprietary DHA emulsion Premneo “improves IQ of children born prematurely”.
Despite being able to offer scientific proof in the form of study results from the South Australian Health and Medical Research Institute, CLV is closing in on finishing 2022 roughly 30% down for the year.
Likewise, Bubs Australia (ASX:BUB) took off mid-year, when it found itself perfectly positioned to answer US President Joe Biden’s plea for international help with the baby formula crisis in America.
Sadly for Bubs, it’s been downhill since a high of $0.67, most likely due to the industry big guns tromping their muddy gumboots into the mix and tipping staggering quantities of product into the market the instant they passed the regulatory hurdles keeping them at bay.
Despite bearing all the hallmarks of market success mid-year, Bubs is tracking for an end-of-year fall of 32.67%.
Blessed are the cheesemakers? No… not really.
On the cheesier tip of the dairy market, it’s been a largely unsuccessful year across the board in terms of performance on the bourse.
Bega Cheese (ASX:BGA) has tracked the rest of the dairy sector down, and despite hiking prices from Tasty to Bitey this year, investors have most definitely gone their own whey.
(If you thought we’d get through this without some cheesy puns, you were sadly mistaken.)
Cheese prices, of course, are massively dependent on the price of milk at the paddock gate. And when that goes up… you know the rest.
But here’s the thing – a $1.30/L hike to $1.60/L for the white liquid stuff is a bitter pill to swallow; however, retail price hikes of up to 60% for a family block of salty artery cloggers are close to impossible to fathom.
While Bega’s not alone in cranking prices up to obscene levels, the market’s not been kind to the company despite its efforts to keep profits rolling in.
That’s almost entirely down to the key difference at a consumer level: Milk is a staple, and cheese is a low-end luxury for the plastic stuff, and somewhere between a Louis Vuitton handbag and a fine Bugati automobile for those rich triple cream bries that taste like heaven, but give you really weird cheese dreams.
It might seem like a disproportionate market response – RRP goes up 60%, market cap plummets by 31% – but that’s where Bega’s landed for 2022.
And the littler names are taking a battering (sorry) as well. Maggie Beer Holdings (ASX:MBH) has been hit pretty hard by the effects of the cost of living crisis.
Purveyor of uber-tasty and completely discretionary foodstuffs, MBH has had to undergo an enormous makeover behind the scenes this year just to keep the doors open – and that includes the failed divestment of the company’s one remaining dairy asset, Paris Creek Farms.
Maggie Beer had put Paris Creek and St Davis Dairy up for sale in May, after it became clear that they were essentially a matching pair of albatross around the providore’s wobbling wattle.
Goulburn Valley Creamery snapped up St Davis in September, the Paris Creek deal fell apart, and Maggie Beer’s CEO is all set to follow investors out the door on New Years Eve, with the company on track to start 2023 with the taste of sour cumquat, lemon zest, a lashing of chili and a 63.2% slump in its mouth.
Something something Greener Pastures
It’s evident that the world of dairy has been on a long, weird ride for 2022 – and the massive price increases have made things tough for exporters – but it’s not all bad news.
“China remains conspicuously quiet on the buying front compared to last year as it digests local inventories and imported stock,” Harvey says.
“The US dollar lifted by six per cent on a broad dollar index basis at its peak during Q3, before eroding much of the gains by mid-November.
“Yet, weaker US dollar-priced dairy commodities have incentivised tier two and tier three buyers to return to the market, taking the opportunity to refill inventory pipelines as tourism returns and hospitality recovers.”
The outlook for the industry as a whole, from teat to teacup, is looking rosier, too.
“Milk production from the big seven dairy exporting regions – New Zealand, Brazil, Argentina, Uruguay, EU, US and Australia – is anticipated to grow by one per cent year-on-year, enough to offset the 0.8 per cent decrease in 2022 and remain on par with 2021’s production,” Harvey says.
But it’s China that’s likely set to dominate outcomes again for next year.
“Buying patterns [in China] will remain subdued across 1H 2023 if rolling lockdowns remain a feature, milk production continues to be set on growth mode, and consumption wavers as challenging economic conditions take hold,” Harvey says.
“China is likely to re-enter markets in Q2 with a bigger presence from Q3 2023 onward.”
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